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Behavioural Decision MakingWeek 36
Article 1: Effort for payment: A Tale of Two Markets by Heyman, J. & Ariely,
D.
Abstract: Standard model of labor individuals trade their time and energy in return for
monetary rewards.
Fiske’s relational theory (1992) two types of markets that determine relationships between effort
& payment: monetary-market & social-market. Article focuses on the relationship between forms of
compensation, levels of payment and the resulting effort expended. Proposed there is a distinction
between monetary and social markets (social market = no monetary reward or gift).
Fiske’s four basic types of social relationships (CS) CS) ) communal sharing: high level of
cooperation and ‘we-ness’
(AR) authority ranking: clear superior-subordinate relation
(EM) equality matching: between CS & AR, structured but equality.
(MP) market pricing: payments based on wage rate.
MP is in the economic-exchange category, while CS, AR & EM are in the social-exchange category.
In money-market relationships effort will be exerted (=uitgeoefend) based on reciprocity (=
wisselwerking) and the amount of compensation influences individuals’ level of effort.
Compensation Level of effort
No payment Lowest effort
Low payment Higher effort
Medium payment Still higher effort
In the social-market relationships, effort is shaped by the altruism (= gedrag waar je mensen helpt
zonder eigen belang), market compensation is irrelevant here. Altruism results in a constant & high
level of performance.
Hypotheses: 1. The relationship between compensation level and effort will be different in social
versus money market. 1A. In money-market relationships, effort will increase with payment level. 1B.
In social-market relationships, effort will be at a high level and incentive to payment level. 2. Including
both monetary patments and signals of social exchanges will cause individuals to perceive an exchange
as a money-market echange.
Experiment 1: based on the compensation, how likely is it that fellow students help
another student moving a sofa? (using a survey). Results: 1) the willingness to help in a money-
market increases when the payment level increases. 2) the willingness to help in a social-market was
incentive to the increase of payment level. 3) assumed was that the willingness is higher is social-
market than in a low-level payment however, the willingness in the low-level payment is higher (than in
the social market). 4) the relationship between the compensation level & effort is significantly different
is money-market as in social-market. (CS) experiment 2 shows the same results in a real life experiment).
Control condition: no payment, effort
constantly.
Candy: almost the same effort as with control
condition
$Candy: lower effort but higher than money
Money: lowest effort in low payment,
increases when payment increases.
,Experiment 2: Tests participants actual effort under a variety of payment levels and
across monetary and candy forms of payment. Results: 1) Effort in the cash condition increases
when the payment level increases from low to medium. 2) effort in candy condition was incentive to the
increase in payment level from low to medium. 3) effort under low-payment level of the cash condition
was below that of the no-payment control condition but effort in the low-payment level of candy
condition was not. 4) The different in the effort in the two markets was significant.
Control condition: no payment, effort
constantly.
Money: effort is lower in low-condition than
control condition. Increases when payment
increases
Candy: effort is constant and similar to the
effort in the control condition
Experiment 3: mental effort of solving arithmetic puzzles by cash or monetized candy.
Prediction: once the retail value of candy was mentioned, the resulting effort would be
similar to that in the cash payment. Results: 1) in cash & monetized candy the effort increased
when payment increased. 2) effort was lower in the low-payment than no-payment control condition for
both cash and monetized candy. 3) effort in no payment was 40 seconds longer than in medium cash
control & 35 seconds longer in the medium-payment-monetized-candy condition but not significant. 4)
monetized candy as compensation can act as a strong signal invoking norms of money market instead
of social-market relations, thus when individuals face both markets; individuals seem to favour money-
markets.
When involving monetized candy (mixed
markets), it will act the same as in monetary
markets: as payment increases, the level of
effort increases as well
General Discussion: Research has demonstrated that rewards can decrease motivation and
attitudes, alter self-perception, increase overjustification, and turn feelings of competence into feelings
of being controlled. The debate over these finding has generally shifted to the question of what specific
circumstances give rise to these counterintuitive effects: this article shows that the type of market in
which the exchange takes place is one of the factors. Further investigation into these two markets to
find out what specific markets change attitudes.
Mixed markets both social & money markets appear as in the case of money & monetized candy.
Research has shown that rewards can decrease motivation, attitudes, alter self-perception,
increase overjustification & turn feelings of competence into feelings of being controlled.
Article 2: Zero as a Special Price: The True Value of Free Products by
Shampanier, K., Mazar, N., Ariely, D.
Introduction When choosing a product, people choose the option with the highest cost-benefit
difference.
, The most central objection of the early Greeks to zero was based on religious beliefs; they argued
that god was infinite, and therefore void (zero) was not possible.
The concept of zero as a number was first accepted in India, found its way into Arabia and later
immigrated to Europe.
Cognitive dissonance theory (Festinger and Carlsmith, 1959) shows getting a zero reward can
increase liking for a task compared with receiving a small positive reward. Subsequent work reveals
that changing a reward from something to nothing can influence motivation, switch it from intrinsic to
extrinsic, alter self-perception and affect feelings of competence and control.
Referring to article 2: When it comes to gambles, people perceive zero probability (and
certainty) substantially differently than they do small positive probabilities. That is, whereas the values
of the latter are perceived as higher than they actually are, perceptions of zero probability are
accurate.
Measuring Reaction / Overreaction to Zero Price
- Intuition and anecdotal evidence suggest that people value free things too much. Of course, demand
increases when price decreases but in some cases, the demand is too large to be explained by this
simple economic argument.
Formal Account of Standard Economic and Zero-Price Models
people must choose between 2 products at certain price (or nothing)
prices are reduced by the same amount, people have to choose again.
hypotheses: when a product becomes free, its intrinsic value for customers increases.
outcome: consumers that originally choose X (€1,-), keep choosing X. consumers that originally
choose Y (€14,-), keep choosing Y. consumers who originally buy nothing, switch to either X or Y. So
when prices decrease by the same amount, the benefits remain the same. Therefore this experiments
predicts that when the prices of both products drop by the same amount, both demands increase
weakly.
Zero-price model
the price reduction, equals the original smaller price so the prices drops from [Px, Py] to [0, Py – Px].
Both costs decrease by the same amount whereas Px = €1,-
the zero-price model assumes that when a product becomes free, consumers attach a special value
to it, their intrinsic valuations of the good increases. The net benefits increase therefore more.
Experiments
Experiment 1: Survey
60 participants can choose a Hershey, a Ferrero Rocher or nothing.
cost condition: Hershey €1,- and Ferrero €26,-
free condition: Hershey €0,- and Ferrero €25,- (decrease both by €1,-)
additional cost condition: Hershey €2,- and Ferrero €27,- (increase €1,-)
Results:
> as the prices decrease from €1/€26 to €0/€25, the demand for Hershey’s increases substantially
while the demand for Ferrero decreases substantially.
> the demand for the €1/€26 condition and the €2/€27 condition is imperceptible (minimaal); when
prices are positive, a €1,- change does not have a significant effect on the demand. Only when the
prices becomes zero, the shift in demand appears.
> participants reacted to the free Hershey’s as if it had additional value.
Experiment 1:
Left is ‘control condition’
In 1&26 condition, nothing changes
In the 0&25 condition, demand for Hershey’s increases
substantially and Ferrero decreases substantially.
, Experiment 2: Real Purchases
398 participants can choose Hershey’s, Lindt or nothing.
free condition: Hershey’s €0,- and Lindt €14,-
cost condition: Hershey’s €1,- and Lindt €15,-
second free condition: Hershey’s €0,- and Lindt €10,-
Results:
> As prices decrease from €1/€15 to €0/€14, demand for Hershey’s increases substantially while
demand for Lindt decreases substantially.
> No significant difference between the demand for Lindt between the €0/€14 and €0/€10 condition.
> A price reduction to zero is more powerful than a five-times-larger price reduction with positive
prices.
Experiment 2:
Left is ‘control condition’
- As prices decrease from the 1&15 condition to the 0&14
condition, demand for Hershey’s increases substantially
while demand for Lindt decreases. - No significant different
between the demand of Hershey in the 0&14 and 0&10
condition. However Lindt demand decreased while the price
decreases which could be due to the fact that there were
more participants choosing nothing.
Experiment 3: Cafeteria
Adding the cost of the chocolate to their bill as if it were any other purchase.
Hershey’s and Lindt next to the cassier. One time: €1/€14 and one time: €0/€13.
Results
> demand for Hershey’s increases substantially, while demand for Lindt decreases substantially.
> the zero-price effect is not eliminated when transaction costs are the same for all options and in both
conditions. The zero-price effect is not produced solely by a difference in transaction costs.
Experiment 3:
In free condition, demand for Hershey’s increases and Lindt
decreases.
Thus the zero-price effect is not eliminated when transaction
costs are the same for all option and in both conditions,
which provides strong evidence that the zero-price effect is
not produced solely by a different in transaction cost.
Summary of the Initial Experiments
concave a function that is zero at zero and then ‘jumps’ and is upward sloping and linear.
Why is Zero Price Special?
1. Social Norms
> costly options invoke market exchange norms, whereas free products invoke social exchange norms;
When prices are mentioned, people apply market norms but when prices are not mentioned (f.e. price
is zero), social norms are applied to determine their choice and effort.
> People apply the same norms to all choices when both market and social norms are applicable.
2. Mapping Difficulty
> people have difficulty mapping the utility (= nut, bruikbaarheid) they expect to receive from hedonic
consumption (= products by individuals for experiencing happiness after satisfying basic needs of food,
clothing and shelter).
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