Is Loss Aversion Causing "FREE!" to Flourish?

Abstract: “Buy one – get one free!” is one of hundreds of commercial messages you see every day. Recent research has concluded what salespeople have known for decades; there is something peculiar about offers involving the concept of free. Suddenly people start to behave irrationally and make choices far from the predictable safe havens of classical economic theory. This thesis test the existence of a zero-price effect and examines if a person’s level of loss aversion is a possible cause for the effect. 291 respondents participated in two experiments conducted through an online survey. In each experiment the respondent took a loss aversion test and answered one of three randomized questions. The randomized questions differed between the two experiments; the loss aversion test did not. The results suggest that there is a significant zero-price effect when choosing between precise options. The effect is stronger amongst those with a higher level of loss aversion. Hence, people afraid of loss seem to be more receptive to free offers.