Identity Economics and Social Norms at Zero Price. Fiona Wilkie Advised by Professor Kirk Doran

Transcription

1 Identity Economics and Social Norms at Zero Price Fiona Wilkie Advised by Professor Kirk Doran This paper is a culmination of my research in behavioral economics for a Directed Readings course under the direction of Professor Kirk Doran. Through my study of behavioral economics, I found the most compelling aspects of the field to be the research on behavior around free or zero price, and identity economics. I decided to explore the connection between these two areas further by conducting an experiment that measures the effect of visible observation on individuals behavior at zero price. 1

2 Introduction In Dan Ariely s book Predictably Irrational, he asserts that there are both monetary norms and social norms that interact and can produce results that differ from what we would typically expect from the perspective of traditional economics. The most relevant experiments described in Predictably Irrational, carried out by Dan Ariely, Uri Gneezy and Ernan Haruvy, involved Starbursts sold at a price of 1 cent and offered for free. Ariely, Gneezy, and Haruvy measured the demand for Starbursts, and found that more people stopped by and took candies in the free condition, but they took fewer candies on average, resulting in a decrease in total demand. Ariely, Gneezy and Haruvy then repeated this experiment using Lindt truffles and reducing the price from 10 cents, to 5 cents, to free. Ariely comes to the conclusion that what these results mean is that when price is not a part of the exchange, we become less selfish maximizers and start caring more about the welfare of others (Ariely, 108). In this experiment I seek to challenge Ariely s argument that the reduction in total demand for starbursts when the price was reduced from 1 cent to free is due to people starting to care more about the welfare of others in the absence of monetary norms. I instead propose that the reason people take fewer free candies is because of identity economics- they are concerned about what others watching them will think of them, and they want to avoid actions that conflict with their concept of self. Background My research was inspired by Ariely, Gneezy and Haruvy s Lindt truffle experiment as described in Ariely s book, Predictably Irrational. I found their truffle experiment to be fascinating, yet incomplete. Ariely presents the theory of social norms as implying that only when price is not a part of an exchange do we start thinking about social consequences of our actions. He decides to test this hypothesis by performing an experiment at MIT in which Lindt truffles are offered 2

3 to passing students at a price of 10 cents, then 5 cents, then 1 cent, and finally, free. The results indicated that when the price dropped from 10 cents to 5 cents, demand increased by about 240 percent. Similarly, when the price went from 5 cents to 1 cent, demand increased by about 400 percent. When they reduced the price from 1 cent to free, they found that total demand actually decreased by about 50 percent. In their free condition, more people stopped for chocolate, but people took less chocolate per person on average, violating the second law of demand and resulting in a backward sloping demand curve. The problems I find with this conclusion are twofold. First, I find it interesting that Ariely concludes that what these results mean is that the theory of demand is a solid one- except when we re dealing with the price of zero (Ariely, 112). This seems like a very bold conclusion to make based on one experiment, and I immediately wondered whether this would hold true if the experiment were to be repeated. The second and more important problem I find with the analysis of this experiment s results is that the experiment fails to take into account the presence of an observer on people s behavior at zero price. Ariely jumps to the conclusion that at zero price, because price is not a part of the exchange, social norms enter the exchange and cause people to consider the welfare of others. Therefore, people limit consumption to a level that does not place too much of a burden on the available resource when prices are zero and social norms are a part of the equation, people look at the world as a communal good. (Ariely, 112). I decided to conduct an experiment that replicates Ariely et. al s truffle experiment, but controls for the presence of an observer at zero price. My hypothesis, which offers an alternative explanation for what Ariely proposes in Predictably Irrational, is that social norms at the price of zero may only operate when other people are watching. This would suggest that we do not begin to care more about others in the absence of monetary norms, but rather, we begin to care about others perceiving us as conforming to the established social norms surrounding free. On the other hand, maybe Dr. Ariely and his colleagues are right, and people took less candies when they are free because while the (free) product was more attractive to people, it also made people think more about others, care 3

4 about them, and sacrifice their own desires for the benefit of others (Ariely, 109). There is no doubt that social norms are at play in this situation, but from Ariely et. al s experiments, it is not apparent whether people would behave differently if they did not think anyone was watching and enforcing those social norms. I intend to perform this experiment to see if my proposed hypothesis regarding social norms and the zero price effect is true. The results will either support Ariely s theory as described in Predictably Irrational, or suggest an alternative explanation of Ariely et al. s results. Methods and Experiment Design Experiment Structure The experiment had 4 trials: 1. Truffles are 10 cents, an observer is at the booth watching 2. Truffles are 5 cents, an observer is at the booth watching 3. Truffles are free, an observer is at the booth watching 4. Truffles are free, no one is at the booth watching In order to measure the effect of an observer on the number of people who take free truffles and the average amount they take, I ran an experiment with 4 trials. The experiment involved observing demand for truffles under 2 different monetary conditions and 2 free conditions, one of which involved no observer. For this experiment, I set up a table at the Hesburgh Library at Notre Dame. The table had a sign that read Chocolates 10 cents, Chocolates 5 cents, or Free Chocolates, according to each trial. I ran the trials in the order 1,2,3,4 on a weekday evening, for 30 minutes each (2 hours total). The location and time of the experiment was structured to ensure a steady flow of traffic past the booth, while also keeping the table out of the way. It was important to place the table in a visible, yet relatively secluded location so that for trial 4, I could truly measure the effect of no observers. While a few people were sitting at tables nearby, they were not close 4

5 enough or numerous enough to cause the participant to feel as if they were being watched. A picture of the experiment set- up is included in Appendix B. Confederates For each trial, there was a confederate sitting in a strategic location across from the table, measuring the amount of traffic that passed by the table. This allowed me to measure the percentage of people who stopped at the booth across the 4 trials, and account for any significant differences in traffic flow across the trials. Traffic flow remained largely consistent across the 4 trials, so no adjustment was needed. For each trial, there were also 2 confederates watching from a distance to count how many people stopped at the booth and how many truffles each individual took. These confederates were sitting across the room from the table, seemingly working on homework with a textbook out, but actually collecting data on the people taking truffles. It was important to have observers here during every trial, because I could account for any difference in how people count truffle taking from a distance versus at close proximity. This enhances the accuracy of our measurements in Trial 4, when no attendant was at the table, because the number of people who took truffles was determined from a short distance (rather than by a person directly behind the table), which may have affected the measurements. For trials 1-3, the measurements of the confederates counting truffle- taking from a distance were consistent with my measurements from directly behind the table, so no adjustment was needed. For trials 1-3, there was a confederate sitting directly behind the table, observing participants. This confederate was responsible for counting the number of truffles taken by each individual. This confederate made friendly conversation with people who came up to the booth, but did not talk to people unless they approached the table. When participants asked what the truffle sale or giveaway was for, the confederate gave a vague but friendly answer that it was associated with the Economics Club, and was not a fundraiser in any way, but just a way to 5

6 brighten people s day as finals week approached. Almost all participants happily accepted this response and walked away smiling with their free or very cheap truffles. Only one participant seemed suspicious of the response and asked the confederate if it was really an experiment. Truffles I used identical Lindt Milk Chocolate truffles in every trial to avoid risks from having different flavor combinations in each trial. Each truffle is worth 23 cents at a bulk price, so the monetary conditions offered a significant discount from retail value. I had the truffles laid out on the table in lines so that it was easier to count how many each participant took. The truffles were replenished as needed by the attendant at the booth during Trials 1-3. During trial 4, when truffles needed to be replenished, a confederate would quickly place more truffles on the table and then leave the area. Limitations A significant difficulty that I encountered during the experiment was the difficulty of counting truffle taking from a distance. Even though I carefully planned out how I would lay the truffles out on the table in organized rows, and trained the confederates in how to observe participants taking truffles, unforeseen challenges arose. Some participants grabbed handfuls of truffles hastily, disrupting the rows and making it difficult to observe exactly how many truffles had been taken. The confederates counting truffle taking during Trial 4, when there was no observer behind the table, were not able to accurately record data on how many truffles each individual took. I did not want to compromise the integrity of the data by instructing the confederates to make their observations more obvious. This was an important decision, because if participants had noticed that they were being watched, they may have altered their behavior. 6

7 The confederates were able to accurately record how many people stopped by to take a truffle in Trial 4. I knew the total truffle count at the beginning of Trial 4, so I was able to compute an accurate measurement for mean truffles taken per person. For data analysis, I computed a two sample t- test assuming that the free conditions (Trial 3 and Trial 4) had equal variances. Table 1 below shows the results of the two- sample t- test based on the variance from Trial 3 (free with observer). I also performed additional two sample t- tests using the variances from Trial 1 and Trial 2 to demonstrate that even when I assume higher variances, the jump in mean truffles taken per person from the observer condition in Trial 3 to the no observer condition in Trial 4 is significant. The results from these additional T- Tests are included in Appendix C. While it would be ideal to have exact data on the number of truffles taken per participant in Trial 4, given the nature of the experiment and the importance of the lack of a visible observer, it would have been extremely difficult to accurately measure this without filming participants. Filming participants would have increased the risk factor of the experiment. Another limitation of the experiment is that many people did not have cash with them to purchase truffles in the monetary condition. It is becoming more rare for people to carry cash with them at all times due to the increasing prevalence and use of credit and debit cards. Additionally, because the experiment was undertaken on a college campus, some underclassmen may be used to paying for items with a student ID card, decreasing the likelihood that they would be carrying cash. I had a large bag of change available so that participants could buy any desired number of truffles and receive exact change for their purchase. While having change available helped, some people did not have any cash at all, which resulted in a small sample size for Trials 1 and 2. During Trials 1 and 2, multiple people noted that they would have purchased truffles if they had been carrying cash. Results The most important result is whether there is a difference in means between the free condition with an observer and the free condition without an observer. I 7

8 test for differences in the means of the distributions by calculating a two sample t- test. My null hypothesis is that the difference in means is zero. Null hypothesis: μ1 - μ2 = 0 Alternative hypothesis: μ1 - μ2 0 Table 1: Differences in the Means of the Distributions for Free Truffles With and Without a Visible Observer Two Sample T- Test Trial 3 (Observer) Trial 4 (No Observer) Mean Truffles Taken per Person Standard Deviation Variance Observations (n) Hypothesized Mean Difference 0 Degrees of Freedom (df) 187 T- statistic P- value 2.347*10-32 The results in Table 1 show that there is a statistically significant difference in how many free truffles people take when there is a visible observer versus when there is not. The p- value of 2.347*10-32 is extremely small. At a significance level of.05, we can easily reject the null hypothesis that the difference between the means is 0. This confirms my hypothesis that social norms of being polite and considerate at the price of zero may only operate when other people are watching. Contrary to Ariely s conclusion that we begin to care more about others in the absence of monetary norms, my results support the idea that in the absence of monetary 8

9 norms, we care about how others perceive our actions as conforming to the established social norms surrounding free. Table 2: Average Truffles Taken Per Person Number of Average Truffles People Who Taken Per Trial Description Took Truffles Person 1 10 cents, observer cents, observer Free, observer Free, no observer Table 3: Total Demand for Truffles Total Demand Percent Increase Trial Description for Truffles in Total Demand 1 10 cents, observer cents, observer % 3 Free, observer 143 5% 4 Free, no observer % Tables 2 and 3 show demand for truffles in each trial. Table 2 displays the number of people who took truffles during each trial and the average number of truffles taken per person. About the same number of people stopped by the table in each free condition, but when there was no observer, the average truffles taken per person jumped from 1.5 to Table 3 shows the total demand for truffles during the 4 trials and the percent increase in demand between the trials. Demand 9

10 increases dramatically as the price drops from 10 cents to 5 cents, but only slightly increases when the price drops from 5 cents to free. This may be because when monetary norms are eliminated, social norms at zero price in the presence of an observer cause people to only take a polite number of truffles, so while the number of people who stopped at the booth increased from 17 to 95, total demand only increased by 5%. As in Ariely et. al s experiments, more people took candies on average in both of the free conditions compared to both of the monetary conditions. However, contrary to Ariely et. al s results, my results show that when the price was reduced from 5 cents to free, total demand increased. Table 4: Percentage of Individuals Who Took a Truffle Compared to Total Traffic 1 Trial Description Percentage 1 10 cents, observer 3.10% 2 5 cents, observer 5.92% 3 Free, observer 46.12% 4 Free, no observer 44.34% Table 4 shows the percentage of individuals who took a truffle compared to total traffic. There was a huge increase in the percentage of people who stopped by the table to take truffles under the free condition. It is interesting that a slightly smaller percentage of people stopped to take truffles in the free with no observer condition. This could be explained by a number of factors, such as people being 1 Total Traffic : defined as the total number of people who passed by the table in the library lobby area during the time the experiment was live. These people passed through the lobby such that it is reasonable to assume that they saw the table. 10

11 unsure if it was really okay to take the free truffles, or people not noticing the table as much without someone sitting behind it. The data from the truffle experiment allowed me to test both the law of demand (my first concern with Ariely s experiments) and the presence of an observer at zero price (my second and more important concern with his experiments). My results are inconsistent with Ariely s claim that the theory of demand is a solid one- except when we re dealing with the price of zero (Ariely, 112), because according to my results, total demand increased each time the price of truffles were reduced. The remainder of the paper will focus on my finding that the presence of an observer has a significant effect on people s behavior at zero price. Discussion Ariely s theory in Predictably Irrational states that at zero price, people are socially conscious, and once money is introduced into the exchange, you stop thinking about what s socially right or wrong. My results confirm that including money in the exchange causes people to maximize their own benefit in the traditional economic sense, and people will take what they pay for. In other words, people think that if they paid 25 cents for 5 truffles, they deserve those 5 truffles, even if 5 cents per truffle is far below the retail price for a Lindt truffle. However, my results also suggest that it is not just the introduction of monetary norms, but also the absence of a visible observer, that may cause people to stop thinking about what s socially right or wrong. In order to explain these results, I will incorporate many elements of identity economics, especially focusing on George Akerlof s work in this area. In order to fully evaluate how social norms operate at zero price, one must consider the huge body of work on identity economics, an important and emerging field in behavioral economics. Identity economics experiments involve both real monetary stakes and placing subjects in different social situations. George Akerlof, a leading academic in behavioral economics, has several theories that may be at play here, and could offer some explanation of the difference between my results and 11

12 Ariely et. al s results in our respective truffle experiments. This truffle experiment is an example of how social context matters. By varying the social context in which the free truffles were offered, we were able to observe that people s behavior around zero price changes significantly when they are being watched. According to Ariely's theory, in terms of pricing strategy and rational choices, zero is a different place altogether. Zero is also a different place when it comes to social norms and how we identify with "free". If we paid for something, we feel like we are entitled to more. If we did not, we are aware that we should be polite, therefore if someone is watching, we will take fewer truffles. As George Akerlof describes in Identity Economics, an older kid may enjoy a Merry- go- round secretly but not in front of others, because he is aware that he is too old for it and should not be enjoying it at his age (Akerlof, 11). That awareness of social norms diminishes when we think no one is watching, and our utility function changes. When no one is watching we get more utility from taking more free truffles. The most relevant aspect of identity economics at play in this experiment is the preservation of social image or reputation. People care very much about the opinion others have of them, and this affects the identity utility associated with certain actions. Roland Bénabou and Jean Tirole describe how social pressure and norms frequently influence people to perform good deeds and refrain from selfish ones in order to appear honorable and avoid feelings of shame. The preservation of one s image as viewed by others can significantly effect economic outcomes, as people may be motivated to make certain economic decisions because of how the action will appear to others. For example, charitable and nonprofit institutions make ample use of donors desire to demonstrate their generosity and selflessness (or at least the appearance thereof), with displays ranging from lapel pins and T- shirts to plaques in opera houses or hospitals, and buildings named after large contributors, (Bénabou and Tirole, 2006). Bénabou and Tirole also note that anonymous donations are both extremely rare and widely considered to be very admirable, indicating that the presence of a social signaling motive largely influences giving behavior. 12

13 Even without a significant chance for ongoing interactions with an individual, following a norm is also seen as a way to prove something important about yourself to others (Akerlof, 2010). In my truffle experiment, most participants had a small chance for ongoing interactions with me, as most of the participants were strangers walking through the Hesburgh library 2. However, these participants still took a polite 1.5 truffles each on average. A likely explanation based on identity economics would be that this polite refusal to take more truffles was an attempt to prove their observance of social norms to me, even though they would probably not be interacting with me directly in the future. In explaining the results from trial 4, where there was no direct obvious observer at the truffle table, it is important to address another element of identity utility- the preservation of self- image. We have discussed the reasons why people did not take more truffles in the observer condition in Trial 3, because the presence of an observer introduced concern for social norms surrounding free items and participants preservation of their social reputation according to those norms. However, we also need to discuss the results from trial 4, in which individuals took an average of 4.47 truffles. While this is a significant increase from the observer condition, it is important to explain why people did not take even more than 4.47 truffles on average. Identity economics also offers an explanation for why participants refused transactions that seemed to be in their best economic interest. If there is no observer, and therefore seemingly no risk of harming one s social reputation (no direct social cost), and no monetary cost, why did participants not take entire boxes full of Lindt truffles? Aside from the possible logistical difficulties of carrying hundreds of truffles out of the library, utility maximization in this case may also concern the preservation of self- image, and avoiding a discrepancy between one s actions and one s self- perception of moral fortitude. The preservation of self- image is defined as the need to maintain conformity between one s actions 2 The only exception to this would be a small number of my friends that happened to be passing through the library lobby at the time of my experiment. While friends were unaware that my truffle booth was an experiment, they could reasonably assume ongoing future interactions with me were likely to occur. 13

14 and feelings, and certain values, goals, or identities they seek to uphold (Bénabou and Tirole, 2006). It is likely that you might take several more truffles than you would have if you knew someone was watching you, without feeling too guilty about it. However, taking the whole box of truffles may cause dissonance between your actions and your image of yourself as a moral and considerate person. B. Douglas Bernheim s paper A Theory of Conformity presents an interesting lens through which to view the full picture of identity and social norms at zero price. Individuals care about status as well as the utility derived directly from consumption. Bernheim notes that status is assumed to depend on public perceptions about an individual s predispositions rather than on the individual s actions... however, since predispositions are unobservable, actions signal predispositions and therefore affect status (Bernheim, 1994). In the case of the truffle experiment, taking free truffles while someone is watching acts as a signal of predispositions and therefore could theoretically affect status. Bernheim also finds that individuals recognize that even small departures from social norms can seriously affect their status. This is a relevant point in the context of my experiment, because participants let a behavior that is seemingly inconsequential to social status- taking free truffles- affect their economic decisions. Conclusion After conducting an experiment and a thorough review of possible explanations of the results through the lens of identity economics, I conclude that without market norms, social norms govern an exchange, but only when you are aware that someone is watching. In the presence of an observer, people will take fewer free items, as they are concerned about how they appear to others. The concept of identity utility and the preservation of social image or reputation play a large part in decisions people make at zero price. An important point to make is that Ariely does not rule out the consequences of appearing greedy as a factor influencing demand at zero price. However, he places enormous emphasis on people thinking more about social 14

15 justice and caring about others as a reason for people taking fewer candies on average in a free condition compared to a monetary condition. There is no doubt that social norms are at play in this situation, but from Ariely et. al s experiments, it is not apparent whether people would behave differently if they did not think anyone was watching and enforcing those social norms. Surely, there are some people who truly consider social justice and the benefits for others when it comes to free items. However, my results show that on average, there is a statistically significant difference in the mean demand for free truffles in the presence of an observer versus without an observer. Most people are concerned about appearing greedy, but are not concerned about actually being greedy if no one is looking. 15

16 References Akerlof, G. and R. Kranton, "Economics and Identity," Quarterly Journal of Economics CVX (3), August 2000, pp Akerlof, George A., and Rachel E. Kranton. Identity Economics: How Our Identities Shape Our Work, Wages, and Well- being. Princeton: Princeton UP, Print. Ariely, Dan. Predictably Irrational: The Hidden Forces That Shape Our Decisions. New York, NY: HarperCollins, Print. Ariely, Dan, Uri Gneezy, and Ernan Haruvy (2008),"On the Discontinuity of Demand Curves Around Zero: Charging More and Selling More", working paper. Bénabou, Roland, and Jean Tirole. "Incentives and Prosocial Behavior. "American Economic Review 96.5 (2006): Web. Bernheim, B. Douglas. "A Theory of Conformity." Journal of Political Economy (1994): n. pag. Web. Shampanier, K., N. Mazar, and D. Ariely. "Zero as a Special Price: The True Value of Free Products." Marketing Science 26.6 (2007): Web. 16

17 Appendix A- Letter of Institutional Review Board Approval University of Notre Dame 317 Main Building Notre Dame, IN TEL: (574) FAX: (574) NOTICE OF APPROVAL FOR HUMAN RESEARCH DATE: April 20, 2015 TO: FROM: PROTOCOL TITLE: FUNDING SOURCE: Wilkie, Fiona, BBA Doran, Kirk, PhD Mueller, Kate, Associate Director, Exempt Review Identity Economics, Social Norms and The Zero Price Effect Internally Funded PROTOCOL NUMBER: APPROVAL PERIOD: Approval Date: April 20, 2015 Expiration Date: March 31, 2016 The Institutional Review Board (IRB) for the protection of human subjects has reviewed the protocol entitled: Identity Economics, Social Norms and The Zero Price Effect. The project has been approved for the procedures and subjects described in the protocol. This protocol must be reviewed for renewal on a yearly basis for as long as the research remains active. Should the protocol not be renewed before expiration, all activities must cease until the protocol has been re-reviewed. If approval did not accompany a proposal when it was submitted to a sponsor, it is the PI's responsibility to provide the sponsor with the approval notice. This approval is issued under University of Notre Dame's Federal Wide Assurance with the Office for Human Research Protections (OHRP). If you have any questions regarding your obligations under Committee's Assurance, please do not hesitate to contact us. Please direct any questions about the IRB's actions on this project to: Mueller, Kate Office of Research Compliance Approval Period: April 20, 2015 through March 31, 2016 Review Type: Full Review IRB Number: FWA exp 5/28/2018 University of Notre Dame Page: 1 17

18 Appendix B- Photo of Experiment Set- Up 18

19 Appendix C- Two Sample T- Tests with Different Variance Assumptions Table 5: Differences in the Means of the Distributions for Free Truffles With and Without a Visible Observer Assuming variance in Trial 4 is equal to variance in Trial 1 Two Sample T- Test Trial 3 (Observer) Trial 4 (No Observer) Mean Truffles Taken per Person Standard Deviation Variance Observations (n) Hypothesized Mean Difference 0 Degrees of Freedom (df) 187 T- statistic P- value Table 6: Differences in the Means of the Distributions for Free Truffles With and Without a Visible Observer Assuming variance in Trial 4 is equal to variance in Trial 2 Two Sample T- Test Trial 3 (Observer) Trial 4 (No Observer) Mean Truffles Taken per Person Standard Deviation Variance Observations (n) Hypothesized Mean Difference 0 Degrees of Freedom (df) 187 T- statistic P- value 1.336*

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