‘Phantom costs’ explain why some deals seem too good to be true

‘Phantom costs‘ Explain why some offers seem too good to be true

By Simon Makin

If a stranger offers you a free cookie, you might eat it. But what if he offered it to you? Also Should I give you $2? You could politely decline and walk away thinking, “Something is fishy.”

In a study published in Personality and Social Psychology Bulletin, Researchers have found that people tend to reject offers of “free money” (as well as unusually high salaries or surprisingly cheap services) because they seem “too good to be true.” This study links economics and psychology to explain why financial incentives can backfire.

In the initial experiment, about 40 percent of participants ate a free cookie, compared with about 20 percent of those who were offered an extra $2. “People typically imagine things like someone did something gross to the cookie,” says the study’s lead author, Andrew J. Vonasch, a psychologist at the University of Canterbury in New Zealand.

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Nine other experiments, involving more than 4,000 participants, used online questionnaires to present alternative scenarios. These included being offered money for taking a ride home, outrageously high construction wages, and surprisingly cheap flights. In each case, beyond a certain threshold, a higher potential monetary gain made participants less likely to accept the offer.

Vonasch says the study shows that, unlike the “standard economic model,” which assumes that humans always seek to maximize their gains, transactions should be understood as social interactions between people trying to understand each other’s minds.

If someone appears to violate accepted norms such as self-interest without explanation, we assume that they have hidden motives and infer that there will be “phantom costs”: imagined consequences that reduce what Vonasch calls the “psychological value” of an offer.

Factors outside the present moment may be at play. “Understanding that the excessive generosity of others can make us feel indebted to them may also help explain people’s reluctance,” says Rachel McCloy, a psychologist and decision-making researcher at the University of Reading in England. “The old adage that ‘nothing comes for free’ is clearly still relevant.”

Another experiment showed that people who scored high on measures of distrust induced more phantom costs. The researchers also showed how to mitigate this effect: Simply provide a reason for the offer. The “cheap flights” experiment included a condition in which the seats were revealed to be very uncomfortable. “Uncomfortable seats are not usually a selling point,” Vonasch says. “But telling people that the seats were uncomfortable made them more willing to take them, because that was a sufficient explanation.”

The team is currently studying whether autistic people, whose ability to infer the motivations of others may be impaired, incur phantom costs. The scientists are also experimenting with interactions with robots and artificial intelligence. “If AI is too generous, will people imagine phantom costs?” Vonasch says. “People tend to anthropomorphize and treat[AI agents]as if they have minds, when it’s obvious that they don’t.”