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The Cost Of Free Doughnuts

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AMANDA ARONCZYK, HOST:

Quick note - this episode originally aired in 2012.

CHANA JOFFE-WALT, HOST:

In 1996, British Airways started offering direct flights from my hometown, Philadelphia, to London. And as a promotion, they said the first 100 people to show up at the airport on a Tuesday at 11 a.m. would get a free ticket to London. My brother, Benjamin, was 15 years old.

BENJAMIN: I remember the problem was the car. I needed someone with a car to take me from the school 45 minutes to the airport to get the ticket and come back, you know, within two hours or so. So I could only miss one or two classes and not get in trouble.

JOFFE-WALT: Or he thought he could take public transportation, but that would take a while.

BENJAMIN: I'd have to cut school for the entire day, and mom would've killed me if I did that. That was the problem. So I went to the assistant principal's office, and I said, there's this deal. They're going to give a free ticket to London for $100. All we have to do is get there at 11 a.m. this coming Tuesday. And at first...

JOFFE-WALT: A school day.

BENJAMIN: In the middle of the school day.

JOFFE-WALT: You said to the assistant principal.

BENJAMIN: Yeah (laughter).

JOFFE-WALT: I should say Benjamin was not asking for permission to miss school to get a deal on a plane ticket. Ben was asking for a ride. Now I didn't know this particular story until last week, but it is completely consistent with who my brother is. He is a person who buys the extra-large soda at the movies every single time because there are free refills, and he doesn't even like soda. He buys a ticket to one movie, and he'll stay in the theater to see two more even if the movies are terrible. He's a person who loves getting stuff for free. So I wasn't surprised to hear that Ben brought the airline deal to his assistant principal nor was I surprised to hear that Ben tells this story even now like it was a completely logical move, that there he was sharing an amazing opportunity instead of making a completely inappropriate request to an authority figure. What did surprise me about this story is that the assistant principal said yes.

BENJAMIN: Oh, yeah, he thought it was great. I mean, he got a free ticket. He liked golf. He went on, like - he took his wife to Scotland, and they went golfing or something like that.

JOFFE-WALT: So you convinced the assistant principal to take you to the airport in the middle of a school day to get a free trip to London.

BENJAMIN: Yes. Why would you not want something that's free?

JOFFE-WALT: I wrote Ben's assistant principal, and he confirmed this story, although he said there was a small fee for the ticket at the airport. He also wrote me, I put a lot of time and work into kids like your brother, and this time, that work paid off. Hello, and welcome to PLANET MONEY. I'm Chana Joffe-Walt.

ALEX BLUMBERG, HOST:

And I'm Alex Blumberg. Today on the show, the power of free.

JOFFE-WALT: If you think about it, every other price in the world - $1, 12.99, a million dollars - free kind of stands out. Free has the power to make us do completely irrational things. It can drive us to break rules, to take risks we never thought possible. Free can make us feel savvy and smug and exhilarated.

BLUMBERG: But free can also backfire, as it does in our story today. Today's show is sort of the flip side of your brother's airline deal. It's what happens when you take something that was free and you give it a price. That, turns out, is a highly risky move.

(SOUNDBITE OF MUSIC)

(SOUNDBITE OF SONG, "GENERALS")

THE MYNABIRDS: (Singing) Haven't I paid my dues? Haven't I paid my dues? Haven't I paid my dues?

JOFFE-WALT: So a while back, Russ Roberts mentioned something to me that I keep thinking about. Russ is an economist, friend of the show. He teaches at George Mason University, and he hosts the EconTalk podcast. So anyway, Russ mentioned that he heard veterans don't like the Red Cross, really, really just don't like the organization. And he thought that was curious.

RUSS ROBERTS: I think I heard it first from a Red Cross employee that there was hostility to the Red Cross. And I think most of us think of the Red Cross as a pretty mom-and-apple-pie organization, and I wondered, well, what could possibly create hostility about the Red Cross? And this person said, well, the donuts. And I said, the donuts?

JOFFE-WALT: So, Russ spent the next few years sort of casually asking around about this.

ROBERTS: I started to ask veterans what they thought of the Red Cross. And anytime I'd meet them, either it was a relative or somebody I'd encounter in some other setting, and I'd say, what do you think the Red Cross? Don't like them. Why not? The donuts. (Laughter) It was - it became a sort of a weird rallying cry. Evidently, in those circles, the donuts is a well-known reference.

JOFFE-WALT: Russ said, I swear, you could go to any VFW hall today 70 years later and mention the Red Cross, they will bring up the donuts.

So the story that I'm working on has to do with the Red Cross.

TOM KAINE: Roosevelt?

HOWARD DUNN: Red Cross.

DUNN: Oh.

JOFFE-WALT: So of course, I went to a VFW hall in Brooklyn under the highway, and the very first guys I saw standing at the side of the bar closest to the door were Howard Dunn, U.S. Navy, served in the '40s, and Tom Kaine. He was an Army guy in the '40s. And as I sat down, 13 seconds after mentioning the Red Cross, here's Howard Dunn.

DUNN: Very seldom seen them, but they...

KAINE: But they were here in this place.

DUNN: But they always gave out their donuts and coffee.

KAINE: Yeah.

DUNN: But I feel they shouldn't charge the service people.

JOFFE-WALT: Shouldn't charge the service people - veterans do not like the Red Cross because the Red Cross charged them for donuts. So basically, everybody in this VFW hall knows some version of the story. It goes back to World War II. In the 1940s, the Red Cross had set up service stations all across Europe during the war, and if you were a soldier, you could go there, get a haircut or a coffee or some doughnuts for free until 1942. In 1942, the Red Cross suddenly started charging servicemen for the doughnuts. And this was a betrayal that you do not forget.

WILLIAM HARRIS: I didn't think it was correct. I think they should've been giving them free. If you were a GI soldier, we all felt the same. It was a shame. It was a disgrace.

JOFFE-WALT: That's William B. Harris. He's a retired Air Force guy.

HARRIS: We felt it was a disgrace. To charge GIs, it soured me.

JOFFE-WALT: It soured you on the Red Cross?

HARRIS: Oh, yeah, I still remember very vividly even though I'm 93 years old.

JOFFE-WALT: William B. Harris occasionally forgets how to get home, but the doughnuts is something he will always remember. And I should say that Harris, like everyone else I talked to at the VFW hall, never personally experienced this. He was never charged for doughnuts. He just heard that other people were. So I wondered, did this actually happen? Is this just, like, one of those small rumors that ended up turning an entire nation's veterans against what is typically thought of as one of the most benevolent organizations out there? I called the Red Cross, and they directed me to Susan Watson, the archivist.

SUSAN WATSON: Well, we have (laughter) - funny you should ask that. Before I even came to work for the Red Cross, I heard about it (laughter) so it's never quite gone away (laughter). It keeps coming up that they were charged for coffee and doughnuts.

JOFFE-WALT: And Watson told me it is true. In 1942, the Red Cross did briefly charge for doughnuts that were previously free. But she quickly adds they did this only because the U.S. government asked them to.

Here's this story. The U.S. soldiers went over to Europe to fight in the war, and the British were already there fighting. The Americans came with lots of resources. They were well-equipped. They had these nice comfort stations that the Red Cross set up with free doughnuts, and the allies were resentful. You know, the allies had stations where they could get food and coffee, but they had to buy it. And they'd been there fighting for a long time. They were worn out. They weren't getting free doughnuts. So this was literally becoming an international issue. The U.S. secretary of war sat down and wrote the Red Cross a letter, asking the organization to help ease this tension and charge for the doughnuts just a little bit just to even things out.

WATSON: Yes, the secretary of war. And we actually have documentation of that. We have the letter that he sent out.

JOFFE-WALT: The letter, I checked, it is posted on the Red Cross website where you can also find an FAQ section that explains that the Red Cross was, quote, "adamantly opposed to charging for doughnuts and protested vehemently, but the Red Cross lost the fight when it received this letter" The website continues, "the organization has been living with the ramifications ever since."

Well, so why do you think it keeps coming up?

WATSON: I think it's just - it's one of those things. You know, sometimes, things take on a life of their own, and this is one of the stories that's just kind of done that.

JOFFE-WALT: The Red Cross has been around for about 130 years, and over those 130 years, they've made some mistakes, Susan Watson told me. They've managed to fix most of the mistakes they've made, except this one. She says the doughnuts is the one persistent thorn that does not go away. So, Alex, I keep wondering about this. Like, why is this thing such a huge, long-lasting insult? Why can't people get over it?

BLUMBERG: And we actually got two solid theories to explain why from a guy named Uri Simonsohn. He is a business professor at the University of Pennsylvania. And he said the first theory is something in economics called reference dependence. He described it sort of like an optical illusion.

URI SIMONSOHN: If you see gray and you're surrounded with white, the gray will seem darker to you.

BLUMBERG: What's true with colors is also true with prices, says Simonsohn. If you're used to one price, then any increase from that one price seems dramatic, more dramatic than it actually is. After all, two cents is not very much money to pay for a doughnut unless you're used to getting that doughnut for free.

JOFFE-WALT: Which is about what the Red Cross said they think they charge for doughnuts back in 1942. And, you know, it's the same phenomenon you see when people get really up in arms about gas prices. You see the price posted there for 4.25 for a couple weeks. You keep driving by - 4.25 becomes your reference price, so that when it changes to 4.50, that seems outrageous to you. Or - just talk to my brother about the airline baggage fees.

BENJAMIN: Every single time I get on a flight and they charge me $35 for a bag, I hate them more and more and more and I want to fly less and less. I hate it. I can't stand them. I hate every airline that does it to me.

JOFFE-WALT: Which Ben recognizes is only because his reference price is zero, free.

BENJAMIN: If I had grown up my whole life and you always had to pay $25 to check a bag, that would make perfect sense to me. But since they once offered it for free, now it's like really annoying.

JOFFE-WALT: Uri Simonsohn, the business professor, says at first glance the situation the Red Cross finds himself in with the doughnuts - it seems like the same thing. The reference price was free, and the veterans are just angry that it changed.

BLUMBERG: But this theory doesn't really explain why it's taken them so long to get over it. I mean, I was angry about the baggage fees, too, at first, but now I've just come to expect it. I've adjusted my reference price from free to $25. And now if an airline doesn't charge me for bags, I'm pleasantly surprised.

JOFFE-WALT: Just how they wanted it.

BLUMBERG: Yeah, people get used to gas prices. So what was it about these doughnuts?

JOFFE-WALT: Well, Simonsohn's second theory is that the Red Cross actually made a different mistake and a mistake that is much harder to correct, a mistake that can lead to irreparable harm. And he says this theory would argue that what happened wasn't about the price of doughnuts. It wasn't about price at all actually. It was that charging changed the way soldiers viewed the Red Cross entirely as an entire organization. And he calls this change a categorical change.

SIMONSOHN: Just imagine for Thanksgiving you go to your parents' for dinner. And after a nice dinner, they say that's going to be $10 per person. You would be upset. You wouldn't be upset because $10 seems too expensive, but you would be upset because we don't charge friends or family. So it changes the nature of the relationship.

JOFFE-WALT: And this is what the Red Cross did with the servicemen in 1942. They went from being, you know, your mom to being your corner store. This was radically disorienting. For the soldiers, it was the same kind of betrayal you'd feel from your mom if she started charging you for meals even if she gave you a really good price.

BLUMBERG: Because after all, she is your mom. What's upsetting is that this relationship that you thought you understood - it changes on you. So if your mom charges you for food, you start to think, well, what else is she going to charge you for? Is she going to be like 10 cents a minute to listen to your problems or 40 bucks for a ride to the airport? A hundred bucks to be there when no one else will?

JOFFE-WALT: That would be cheap probably. This is basically what happened with the servicemen. Their minds started running. And they started thinking well, if they're charging for doughnuts, that throws everything into question. And during the war, there were all these rumors flying around that the Red Cross also charges for cigarettes that tobacco companies donated for free and for sweaters that were knit by volunteers in the U.S. and for blood that had been collected for free in blood drives. None, I should say - none of these rumors were true, yet I heard them repeated to me as fact 70 years later at that VFW Hall in Brooklyn.

BLUMBERG: And Simonsohn says you see businesses and people making this mistake occasionally, making this categorical shift, and it's almost always really damaging. They do it when they start charging for things that people don't think of as part of business. Like, you know - you understand that the corner store is going to charge you for the gum that you buy or whatever, but what if they charge you to talk to the store clerk as well? That's essentially what Delta Airlines did in the 1990s. They thought listen, it costs money for us to have all these agents ready on the phone to take your reservation. We're going to charge for that. And people freaked out. Within weeks, Delta had to reverse that policy because it made people so furious.

JOFFE-WALT: But why is an airline charging for a bag a reference price change that, you know, the airline can basically get away with when charging to talk to a human being is a categorical shift that customers just will not stand for? This is because of the unusual nature of free.

BLUMBERG: And you can think about it this way. The idea that you might have to pay someone to move your bag from one place to another - that just makes intuitive sense. But the idea that you would have to pay someone to have a conversation with them - that just doesn't make sense.

JOFFE-WALT: I think of it like there's two different kinds of free things. You know, there are free things that you would name as free. You would give them that label. And there are things that we get for free all the time, but we would never describe them as things that we got for free. Like, you know, we breathe air. That's free, but you'd never walk around saying, I'm breathing all this air, and it's free. And while I'm walking in the park, the air is free. And also I'm looking at a beautiful tree, and looking at that tree is free.

BLUMBERG: All for free.

SIMONSOHN: I wouldn't tell my wife, you know, I'm changing this diaper for free tonight. I wouldn't say that. Just saying free would imply that non-free was a possibility.

BLUMBERG: I love this idea of just sort of like every single thing that you do for free or that you receive for free - that you would start thinking of it as, I'm getting this for free, you know?

JOFFE-WALT: Or telling other people that you're doing it for free.

BLUMBERG: Every time I kiss my son - kissed you for free, no charge for that. (Laughter).

JOFFE-WALT: It seems like a good way to think about it is basically anything that is free that you wouldn't describe as free, you'd be upset if it ceases to be free. If Calvin could talk, he would tell you that he was upset that you were charging him for the kiss.

BLUMBERG: Right. So if you're a business or a husband, you know, avoid charging for things that people would never describe as - hey, I got this for free, because that mistake - it can be incredibly hard to fix.

JOFFE-WALT: And when you think about it, it's an issue that many companies are actually wrestling with right now very publicly on the Internet because companies are trying to figure out how to make money on the Internet. And the question they have is if we charge people for this service we're providing, are they going to react like they would with a reference-dependent scenario? Are they going to get used to it? You know, The New York Times is hoping that that's basically what's going to happen with their pay law. People will just say, that's how it is now. Or are people going to treat that charge like a categorical change? Like, imagine if Google started charging you for every single search? People probably wouldn't tolerate that.

BLUMBERG: So with The New York Times online, it's tricky a little bit because people can think of The New York Times online as a newspaper that they're used to buying, or they can think of it like they think about the Internet in general which is, information, man. It wants to be free. You can't charge us for information. And once you're in the information-that-wants-to-be-free category, it's really hard to leave. Switching categories is not easy. Just ask the Red Cross. The Red Cross has been trying for decades to get back to the free category, and it's really hard.

WATSON: You know, we just try to explain it - we're required to do it - and hope that, you know, takes care of it.

JOFFE-WALT: Do you guys ever show up at events with, like, dozens of donuts and just say, here, these are free, and make up for - we're making up for past times?

WATSON: Yes, actually we have done that.

JOFFE-WALT: Really?

WATSON: (Laughter) We have, yes. We did an event a few years ago on Veterans Day down close to the Vietnam Memorial. And we had donuts there. But I know there's other times they've done that as well where they've, you know, shown up with coffee and donuts and said, here. They're free. (Laughter). You know, let's get past this. (Laughter) Yeah.

JOFFE-WALT: So far, though, it doesn't seem to be working. I mentioned this to the veterans at the VFW Hall.

I heard from the Red Cross that they feel so bad about what happened then that every time they do anything with veterans they always bring donuts to make up for the donuts that they charged for.

ARONCZYK: (Laughter) Stale donuts probably, too.

BLUMBERG: 70 years later, the Red Cross still has their work cut out for them. Once you've gone into that other category, it's hard to get back. But Chana I want to tell you, you did a really good job with this program, and I think you did a really nice job doing all this reporting.

JOFFE-WALT: Thank you.

BLUMBERG: And that compliment?

JOFFE-WALT: (Laughter) $25.

BLUMBERG: On the house.

(SOUNDBITE OF SONG, "GENERALS")

ARONCZYK: That was Chana Joffe-Walt and Alex Blumberg back in 2012. If you have any questions about weird human behavior, prices and the economy, email us at planetmoney@npr.org. You can also find us on Twitter, Facebook and Instagram @PlanetMoney. Our supervising producer is Alex Goldmark, and Bryant Urstadt edits the show. I’m Amanda Aronczyk. This is NPR. Thanks for listening.

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