Dollars and Sense

The sender is given some money—say, $10. He or she then decides how much of that cash to give to the receiver, while keeping the rest for him- or herself.

The sender is given some money—say, $10. He or she then decides how much of that cash to give to the receiver, while keeping the rest for him- or herself. The sender can give any amount—$5, $1, $3.26. If the receiver accepts the offered amount, they both get their allotted cash,

Receivers routinely reject offers that they consider unfair. When the sender offers less than a third of the total amount, the receiver most often rejects the offer and they both go home with nothing.

People actually refuse free money in order to punish someone—someone they don’t know and probably won’t deal with ever again—just for making an unfair offer.

If we were running a marathon and someone handed us a cup of water, would we toss it aside because there was a table full of cups we were not getting? No, that would be insane.

The supply-demand pricing strategy was logical, perhaps even rational, but people perceived the idea as unfair.

When our sense of fairness is engaged, we don’t care if there are legitimate reasons for a higher price.

In 2011, Netflix announced, in a blog post, that it would soon change its pricing structure. It would split its combined streaming and DVD rental services, at the time costing $9.99 per month, into two separate services, each of which would cost $7.99 per month.

Because people felt that Netflix was profiting at their expense, they rejected a service that still had a tremendous value to them—a value of at least $9.99 for which they’d only have to pay $7.99. Netflix customers wanted to punish the unfairness, and they were willing to hurt themselves financially by doing so.

When a premium is large, sudden, and opportunistic, it feels unfair.

It was only because Uber raised its rate right when people needed transportation the most that they thought it unfair.

These price increases don’t seem to match the extra effort, and without any increase in the cost of production, we believe that the price hike is unfair.

He noticed, however, that as he became proficient and opened a lock quickly, without breaking the old lock (and without the consequent need to replace it and charge his clients for the extra parts), customers not only didn’t tip, but they also argued about his fee.

when he started his career, he took forever to open a lock, and in the process, he often broke it, taking even more time and money to get one properly installed and finish the job. He charged for the parts to replace the broken lock as well as his standard fee for opening a locked door. People were happy to pay all this, and they tipped him well.

It’s easy to pay for conspicuous effort. It’s harder to pay for someone who is really good at what they are doing—someone who performs the job effortlessly, because their expertise allows them to be efficient. It’s hard to pay more for the speedy but highly skilled person, simply because there’s less effort being shown, less effort being observed, less effort being valued.

They were willing to pay more for the slower service with the same outcome.

Ultimately the problem is that we have a hard time paying for knowledge and acquired skills. It’s hard for us to account for the years spent learning and honing those skills and factor them into what we’re willing to pay. All we see is that we’re paying a lot for a task that didn’t seem too difficult.

To eat at a restaurant and simply walk out without paying seems not only dishonest, but unfair. This scenario also shows that fairness works both ways.

We are willing to pay more when we see the costs of production, people running around, the effort involved.

Transparency—revealing the work that goes into a product or service—allows a company to show us that they’re working hard, earning our money.