Free stuff makes us irrational
thehustle.co
thehustle.co
Free Chocolate? Sure.
13¢ chocolate? I've gotta try to make change? An awkward amount no less. 3 pennies? They are getting hard to come by. I didn't even want a chocolate. I don't have any cash on me. Do you take card?
For instance, when I'm buying something off Facebook marketplace, if the items not a multiple of $20 bills and $50 bills, the denominations I can get from the ATM, I'm far less likely to buy it because I have to stop somewhere else on my way to the seller and try and make change. It's a pain in the butt.
I have literally overpaid for things from marketplace by a dollar or two to avoid making change.
But if my only options are 1¢ chocolate versus 13¢ chocolate, those are on way closer footing because either way I have to dig my wallet out.
I'd still take the Hershey kiss though because it tastes better.
Is this for real? We can request 5s and 10s from the atm, along with 20s and 50s.
Some people will want cash for in person transactions but it's more rare. In the US you run into a lot of people who don't trust phones, technology, tech companies, the government, or any other number of reasons to demand physical payments.
No, it's because majority of digital payment systems can be abused. Stolen accounts, payment disputes and more can cause a seller to lose the item and the money.
Cash is very, very hard to counterfeit, and there's inexpensive devices[1] to virtually guarantee a bill is genuine. There's no post-transaction fraud scheme that works once cash had exchanged hands.
[1] https://www.walmart.com/ip/PG-MONEY-TESTER-PEN/5487005062
Yes but it is vulnerable to other fraud schemes, like misrepresentation or theft.
But yeah, when faced with the possibility of fraud many people instinctively retreat from the unknown (technology) to the easily understood realities of cold hard cash. Its biggest advantage is ease of understanding.
Yes, someone can steal your cash - but they can also steal your item.
Setting aside theft - cash is simply the most secure way to ensure you keep your money post-transaction. There is no fraud mechanism to abuse, and no way to reclaim cash once in-hand.
For anything of value, the "old school" rules of meeting in a very public place and only accepting cash are still really sound.
People are still getting scammed with cash every day with fake/locked/misrepresented/stolen items being sold on marketplace sites.
All of the legitimate reasons to reverse a reversible transaction is a fraud vector that cash is vulnerable to. That’s why reversible transactions exist.
100% of the risks you mention are still true with digital transactions. The difference is with cash, you close the door on literal fraudulent transaction claims or stolen accounts. It's vastly safer than digital transactions for in-person sales.
To be blunt - with cash, the buyer can't go home and file an unauthorized/fraud complaint with anyone - the seller has cash-in-hand, is anonymous, and the transaction is non-reversible. That's a benefit for these types of transactions, and one you seem to be overlooking.
If you're selling your couch on Facebook Marketplace - cash is king.
I am disputing your repeated and false claim that there are no fraud vectors with cash.
No payment method prevents fraud.
The closest thing here is probably Zelle, but at least with my bank's app, the interface is a bit of a pain. This basically is just another form of what the parent commenter said; how much do I value my own time and convenience compared to what I'd be getting?
Since the government and corporations aggressively spy on everyone, and since government programs are often incompetent or overfunded or underfunded or corrupted or evil, there is (justly) little faith in the government.
Cash works fine. It can't be censored easily, it can't be tracked easily. ATMs have it.
When I trust the phones, I'll use phone payments.
They’re easy if the one you use is the same one the other person is using. If you’re a Venmo person and you want to transact with a CashApp person, well one of you have to download and set up a new payment app or pay cash.
Most people do nothing with their time. You're not being paid to watch TV or play video games. Learning is perhaps the only thing that pays, and it's not cash nor immediate.
But that doesn't extend into all hours of your life. Your employer will not pay your hourly rate for your personal hours just to live.
You can of course then say "oh but I value my time," but value is subjective while the dollar amount isn't. If you truly believe that, then you also believe that people's personal time has different worth based on how much they're paid, which is a fundamentally wrong way to look at the world imo.
In reality, every hour of any life is invaluable since you'll never get that back, no matter how much you're willing to pay for it.
But capitalism forces you to think in terms of your employer and bypass that basic humanity, and think of opportunity costs. There is more to life than just work and being "useless" is part of that life again in my personal opinion.
Not every second of your life has to be productive or have a dollar value attached to it. Yes, you can assign that dollar value to any hour of your life by choosing to forgo that free hour and serve your employer (opportunity cost). But the actual value of that free hour is still $0.
BTW, behavior economics people like DAN ARIELY in this article got bad reputation after being found fabricating data on the research about honesty https://www.npr.org/transcripts/1190568472
Modeling humans as rational agents simplifies the economic reasoning and the equation a lot so it's not entirely worthless, but we must always keep in mind that this model is very far from the reality even if it's sometimes useful.
How rational is the endeavor of creating rational models? At some point, people act on a mix of empirical and acculturated faiths. What's valuable, worthless or taboo depends on each unique situation.
The Lindt packaging is ugly as sin, while the Kiss looks sleek and cool.
And unless you're constantly jingling around with a bunch of coins, using a common dollar means you're going to be jingling around with 87 cents of dirty coins, after pulling out your wallet.
Fail to consider the transaction cost of paying the 13 cents for the Lindt, compared to the free Hersheys.
Plus Lindt sucks.
People give it me all the time as gifts. I give then give it away to random people like couriers.
Godiva on the other hand...
Certainly everyone makes irrational decisions, from this or that perspective. Everybody judge by the light of the scope their mind can handle at the moment they have to. When situation is that one got education integrating many tools of rationalization and all the idle time to practice it in stable virtually riskless social position, they most likely will do that. When one lakes sophisticated conceptual tools, time or budget or network to apply them, then they most likely won't bet on the long time most beneficial outcome after considering everything that rationality can ingurgite.
Some for sure, but I wouldn’t count on it for interpreting price elasticity.
I still believe in the premise because of the action on Facebook buy nothing groups.
In AI products especially, it's very easy to mistake “engagement” for “real demand” — because when things are free, people try everything. You get signals, but many of them are noisy or even misleading.
I’ve been thinking about this a lot in the context of marketing tools: instead of optimizing for more exposure or more content, maybe the harder problem is filtering out false positives — figuring out where genuine demand actually exists.
Otherwise, we might just be scaling irrational behavior on both sides: users consuming free stuff, and builders chasing the wrong signals.
What ad-supported services did is zero out the price of anything that costs less to provide than the amount of ad revenue it generates. But the amount of ad revenue companies get per-user is already pretty small and companies are demonstrably willing to provide the existing services for that amount of money, so we know the upper bound and it's not that high.
Yes, surplus is a thing, I agree. But that doesn't materially change what I said. The thing still has to be worth at least as much as it costs for users to be willing to pay for it, so what users will pay at least sets a lower bound on what the thing is worth to users. (Note that it can be worth different amounts to different users; the more precise way of stating it would be that in a competitive market, price equals marginal cost equals marginal value, i.e., value to the marginal user, the user who just breaks even paying that price for it.)
> What ad-supported services did is zero out the price of anything that costs less to provide than the amount of ad revenue it generates.
Which also uncouples the price from any measure of value to the user. The price is now measuring the marginal value to the ad purchasers. The value to the users can be anything greater than zero--the fact that they're using it at all means (or should mean, if the users are rational) that the value to them is positive. But it could still be less than the cost to produce. And the worse the user experience gets, the more likely it is that the value to users is less than the cost to produce, even if that cost is small.
Plus, there's a whole other piece of this that the analysis we've just done doesn't even capture: externalities. One simple way of stating what many people think is wrong with the ad-supported business model is that it creates large negative externalities that, on net, mean that the value to users is negative--but the users don't see the externalities so they don't realize this, and the tech companies have offloaded the costs of the externalities onto others, so they don't see them either.
In a competitive market the price only depends on the value to users in the sense that it's required to be lower than that to make any sales. If something costs $1 to produce in a highly competitive market then the price is either going to be ~$1 completely regardless of how much more value people get from it than that, or no one will value it at even $1 and then no one will produce it. This is why farmers are always on the edge of bankruptcy even though their product is "without this you will die". Actual competitive market.
> Which also uncouples the price from any measure of value to the user.
It uncouples the lower bound. If the production cost is $1 but the user only values it at $0.50, now it still gets produced as long as the advertiser is willing to pay $1 to show the user the ads. But depending on how much you value not having ads, that could still be good. You got $0.50 worth of value without paying anything.
> And the worse the user experience gets, the more likely it is that the value to users is less than the cost to produce, even if that cost is small.
The real problem here is, they can do something you value at negative $10, but the advertiser will pay them an extra $0.05 to do it, and then they do it because "you're not the customer, you're the product".
In an idealized market this doesn't happen because then you just pay them the incremental $0.05 instead of the advertiser, but we've been screwed by the regulatory environment on both ends. For the seller it's hard to accept small amounts of money from arbitrary users without doing business with a fickle payment intermediary that wants to take a huge cut for small transactions and can shut down your business on a whim with no recourse, and for the customer it's hard to make a tiny digital payment to a service without linking it to your identity, which is often the exact thing you were trying to pay something to prevent.
But that seems like more of a problem caused by not having a good anonymous digital payments system than one caused by advertising. The advertising is just the infelicitous workaround.
> but the users don't see the externalities so they don't realize this
Externalities are when the costs are imposed on someone who isn't a party to the transaction. What you're describing is an information asymmetry.
In theory those can be solved just by providing the information to the users so they can make a better decision, but that's assuming the market is actually competitive. If e.g. you like Android and have one but don't like Google spying on you, are there viable alternatives to Google Play and the other Google services? Judging by how many people actually use them instead of the Google ones, big no. But then we're back to this really being a different problem again, this time antitrust.
That's a restatement of what I said: price equals marginal cost equals marginal value--the value to the marginal user, who just breaks even by making the trade.
> It uncouples the lower bound.
Which you've already agreed is the only connection. So again you're just restating what I said.
> You got $0.50 worth of value without paying anything.
First, this is irrelevant now because the advertiser got at least $1 of value (or perceived value) in exchange for $1. The user wasn't a party to that exchange at all.
Second, the user didn't pay any money, but they did pay with their data. But they don't see that cost; it's a negative externality. And it's turned out to be a pretty large one.
> The real problem here is, they can do something you value at negative $10, but the advertiser will pay them an extra $0.05 to do it, and then they do it because "you're not the customer, you're the product".
If I actually assign negative value to using the service, I won't use it at all. They can't mine my data if I don't give it to them. I personally am in this exact position with respect to, for example, Facebook.
If the negative $10 is the net of all externalities, then yes, I can end up using a service that actually makes me worse off, because I don't see the negative externalities.
> Externalities are when the costs are imposed on someone who isn't a party to the transaction.
Yes; in this case the costs of having their data monetized using ads are imposed on users, who aren't a party to the ad transaction.
> What you're describing is an information asymmetry.
I suppose it could be viewed this way, in the sense that the services don't share with users all the relevant information about how their data is used. In many cases they share practically none of it.
> that's assuming the market is actually competitive
In the sense that there are massive thumbs on the scale, yes, I agree the markets in this area are not competitive.
The thing you're saying is backwards; the consequence rather than the cause. If the price is $1 and it can't be lower than that because that's the production cost then the user who is only willing to pay $0.90 doesn't buy it, but that has no effect on the price one way or the other.
If that user doesn't exist and the user who values it the least values it at $100, there is no user who is only breaking even. Every user has a surplus of at least $99 vs. not having it and the price is still $1 because there are a dozen companies willing to sell it for $1 who don't want to lose business by charging more than the others.
> Which you've already agreed is the only connection. So again you're just restating what I said.
It's the only connection in a competitive market. Not all of them are competitive.
> First, this is irrelevant now because the advertiser got at least $1 of value (or perceived value) in exchange for $1. The user wasn't a party to that exchange at all.
They are party to it though. They didn't pay money, but they paid in attention and have the option to patronize a different service if the market is competitive. And if it isn't then it's that rather than the ads which is the problem.
> Second, the user didn't pay any money, but they did pay with their data. But they don't see that cost; it's a negative externality. And it's turned out to be a pretty large one.
There are forms of advertising where this isn't required, e.g. you can be pretty effective with search advertising by basing the ads entirely on the search query while knowing nothing whatsoever about the user.
Obviously they then collect the data too because it makes the advertising marginally more effective, but that's the thing where you'd like to pay a nickel to have them not.
> If I actually assign negative value to using the service, I won't use it at all.
The service doesn't have to end up underwater for something stupid to be happening. You could have valued it at $15 originally and then the advertiser pays an extra $0.05 to reduce your $15 value to $5. It's still a positive number but you would much prefer to pay the extra $0.05 yourself than to lose $10 in value, except that's currently unreasonably hard to do.
In a competitive market, which is the case being talked about in what you responded to, that's impossible. If the production cost is $1, more users will keep buying the product until the marginal user values it at $1. If there are no users who value it between $100 and $1, then you don't have a competitive market; either the product or service is too specialized to permit real competition (which is highly implausible for the kinds of services we're talking about), or someone has their thumb on the scale.
> Not all of them are competitive.
The market not being competitive doesn't create any connection that isn't there in a competitive market. So it doesn't change what I said.
> They are party to it though. They didn't pay money, but they paid in attention
The transaction in which the users pay with attention is not the same as the transaction where the advertisers pay the tech company to get their ads shown. The latter transaction is the one I was talking about in what you responded to. The user is not a party to that transaction.
> you can be pretty effective with search advertising by basing the ads entirely on the search query while knowing nothing whatsoever about the user.
Yes, you do know something about the user: what search query they entered. True, it's not as much information about the user as they collect in other ways, but it's still information about the user. If I enter a search query for Depends, Google knows something about me that's of value to advertisers.
> The service doesn't have to end up underwater for something stupid to be happening
True, but irrelevant to what I was saying, or what you were saying that I responded to.
The users are the product. They sell their attention to the advertisers. And they know exactly how much that attention is worth, because they use auctions to set the price.
They also basically don't care what their services are worth to users, except in the very weak sense that the services have to be sufficient to get users to use them. But that's an extremely low bar.
Because the users won't pay a penny for them.
They just need to get people used to something and steal their data or brain wash them with ads, there is no point in creating something that makes extra value.