Blog 55: Power of Free by Xavier Lo, FIA, FRM, MBA

There is a very interesting phenomenon [現象] that I think all of you have observed. It doesn’t matter where in the world you are, as long as you see the word “FREE!”, your eyes will be instantly drawn to it and you will very likely go ahead with whatever transaction it is. Today’s topic will be able the Power of Free [免費嘅吸引力], and how it affects us.

There is a behavioural economist [行為經濟學家] called Dan Ariely who carried out an experiment of people’s preferences on chocolate. He gave people the option to buy a very expensive chocolate at 15 cents (which is good value), and a cheaper chocolate at 1 cent. As expected, most people chose the expensive chocolate. However, after he reduced the prices of both chocolates by 1 cent, in other words the cheaper chocolate is now free, he found that more people chose to take the cheaper chocolate instead. This effect also happens sometimes when you’re doing online shopping [網購]. Imagine you were buying something online and was about to make the payment. You then find out that shipping was a few cents. Would this make you think again? What you’ll find is that when shipping was offered for free for some items (which actually is not much cheaper than a few cents!), it boosted sales of that item considerably.

Why is this the case? Perhaps its because when something is free, your brain generally just thinks that you should take it first and think about it later [無損失]. You can sometimes see this in the insurance industry as well. You might buy a home insurance product, and get FREE financial advice from a consultant. This also explains why the Freemium [免費增值] concept (a lot of your smartphone apps) is so popular nowadays – try out something first, and buy it if you really like it.

The Power of Free really is indeed powerful. Think about it, when have you ever turned something down if it was given for free? Something to think about when you are involved in a marketing brainstorm meeting!

Qualified fellow actuary (in UK and Hong Kong), Financial Risk Manager, and MBA graduate (listed on the Dean's List) with a passion for insurance, data science, and analytics. Experienced in a broad range of insurance roles (pricing, capital modelling, reserving, ERM), along with a touch of knowledge in banking. Member of the General Insurance Committee (2021), Actuarial Innovation Committee (2019 - 2021) in ASHK.

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