If you might be offered a free cookie, you might accept. But should you were paid to eat a free cookie, would your response be the identical?
in ours new researchtwice as many people were willing to eat the cookie once they weren’t offered payment compared to once they were offered the chance.
From a purely economic perspective, our findings reflect irrational decision-making. Objectively speaking, a cookie plus money is best than an everyday cookie.
But people are usually not purely economic. They are social animals that tend to search for hidden reasons for other people’s behavior.
When offers are too generous, people expect a “phantom cost” – hidden in the unique offer. And this expectation influences their decision to accept something or not.
Study participants who were offered a free cookie and payment thought that perhaps the cookies had been poisoned. Or perhaps someone spat on them. Or they expected that after eating the cookie, they’d owe a favor to the person handing out the treats.
Too good to be true
Our cookie study was only one of ten experiments involving 4,205 participants from the United States and Iran.
We examined how phantom costs influence people’s decisions to accept or reject overly generous economic offers.
Each study gave people a suggestion. They had to resolve whether to agree or not and then explain why.
In one study, participants were asked to imagine that they were a truck driver and were on the lookout for a job on the Internet. All job positions were described in the identical way, but we varied the remuneration. Those offered the conventional $15 an hour were perfectly willing to take the job.
Others were offered higher wages than normal. Participants on this group imagined phantom costs. And the upper the wage they were offered, the upper the costs they imagined.
When offered $20 or $25 an hour, participants imagined the role would involve more responsibilities or harder work. However, they decided it was price it. Most people preferred a job that is barely dearer than normal, despite expectations of phantom costs.
But after we offered way an excessive amount of money – over $900 an hour – most people turned down jobs they’d be willing to do for $15.
Why? They imagined much worse phantom costs: driving for the group, transporting hazardous radioactive waste, smuggling drugs across the border. A suspiciously high hourly rate or wage may discourage employees.
Anne del Socorro/Getty Images
The suspicion is global
We repeated this experiment with different jobs, different normal wages, and in numerous countries.
In each the US and Iran, despite very differing types of economies, people showed the identical pattern of suspicion and rejection of very high wages. The only difference was that in Iran expected wages were lower, so wages didn’t have to be high by American standards to arouse suspicion.
Another experiment examined how phantom costs might influence the acquisition of airline tickets involving a hypothetical alternative between three flights.
One cost $235, the opposite $275. When the third option was $205, most people selected it. However, if the third option was $15, few people selected the most cost effective flight. They rejected it because they imagined terrible phantom costs like terrorists and plane crashes.
However, after we gave the rationale for the low price – very uncomfortable seats – most people preferred the $15 flight. Uncomfortable seats are often not a bonus. But they explained the low price, so people didn’t search for other, dangerous explanations.
Sufficient explanations that something could be very large eliminate the tendency for people to imagine phantom costs.
A good deal, not a shady one
Businesses need to strike a balance when it comes to offering customers a good deal.
On the one hand, waiting for phantom costs reduces interest within the offer. On the opposite hand, price-sensitive consumers often look for methods to get one of the best deal.
To avoid the pitfalls of phantom costs, firms must provide the reason why they’re offering a very good deal. For example, “holiday sale” or “end of season sale” may explain why products are discounted.
In the labor market, pointing to “good performance” as the rationale for an worker’s raise may discount expectations of hidden disadvantages – resembling increased workload.
It is obvious that humans are usually not merely selfish economic beings. We are astute psychological creatures, able to read the motivations of others to protect ourselves from offers that seem too good to be true.