When Shakespeare’s Juliet famously mused that a rose would smell just as sweet regardless of the name attached to it, little did she know that she was subscribing to the concept of the rational agent—a notion that lies at the heart of our more simplistic economic models of human behavior. Essentially, the idea is that people should respond to real experiences more than to the labels attached to those experiences. The concept feels so intuitively obvious that generations of undergrads getting their first dose of microeconomics simply nod in agreement as this assumption is laid out.

Yet in practice, it simply isn’t true. Labels do matter, and they matter a lot. Marketing and branding professionals have always appreciated the power of labels (you are unlikely to see a major auto manufacturer name their next SUV the “Ford Feeble”). Corporations also grasp the clout of labels when they give employees promotions in rank but leave their compensation unchanged.

Even economists acknowledge it when they discuss the concept of money illusion—people care about nominal prices, even though logically they really shouldn’t. Studies have shown that people are more upset by a 20% increase in the price of their favorite meal at a restaurant than they are by a 20% reduction in the amount of the food on the plate in front of them. Wendy’s fast-food restaurants rediscovered this truth a few weeks ago when they proposed using “surge” or “dynamic” pricing for their food—charging more during the busiest hours of the day (lunch).

We’re all acquainted with surge pricing even if the term is unfamiliar. Airlines do it when they charge more for travel in the week before and after Thanksgiving than they do in mid-January. Hotels do it when they charge more on weekends. Some cities charge a special toll for cars and trucks entering downtown roads during prime working hours. Paying more for an Uber or Lyft ride during periods of high-demand is a given. All of this makes sense in a market where there is fixed capacity and variable demand. Surge pricing is a way of shifting consumers from high-capacity utilization periods to low-capacity utilization periods, reducing costs for everyone. Even in restaurants there is nothing new about surge pricing—albeit the labeling is different—after all, who doesn’t love a good happy hour?

Despite the commonness of surge pricing, the backlash to Wendy’s announcement was immediate. Consumers took to social media to vent and rage at the company’s decision and ‘#BoycottWendys’ hashtags trended across platforms. Rival company Burger King quickly took advantage of the situation with a “No urge to surge” promotion, offering free Whoppers and Impossible Whoppers for a few days to any customer who purchased $3 or more on the company’s mobile app. At first Wendy’s attempted to divert the anger by claiming they were engaged in dynamic pricing, not surge pricing—which is silly, as surge pricing is just a subset of dynamic pricing. In the end, Wendy’s quickly backed down and has been heavily advertising $1 burgers and free fries in order to push the debacle out of the headlines.

Why all the shock and fury following Wendy’s announcement? Well, we think there are several behavioral economic phenomena at play. We first have to consider reference points and interconnectedly, framing effects. People are loss averse. There is no arguing this. Daniel Kahneman and Amos Tversky started studying loss aversion in the late 1970s and early 1980s, conducting pioneering research on decision making in the context of risk and uncertainty. What they found is that people are loss averse—they would much rather avoid a loss of $100 than experience an equivalent gain of $100 (Kahneman & Tversky, 1979). They found that this ratio is about 2:1, meaning it would take a gain of $200 to offset a loss of $100 (Kahneman & Tversky, 1992).[1]

When Wendy’s CEO announced in the company’s earnings call in February that they are investing $20 million in new digital menu boards and will “begin testing more enhanced features like dynamic pricing and day-part offerings along with AI-enabled menu changes and suggestive selling,” what they essentially (inadvertently) did was to change people’s reference point so that they perceived the pricing model through a loss frame. Although the CEO didn’t use the term surge pricing, consumers are so accustomed to experiencing dynamic pricing in the context of surges (where prices increase during peak hours) that our thinking automatically shifts to the loss frame. We rarely think of prices being discounted during off-peak hour, even though these are really two sides of the same coin.

By modifying the wording of the change, Wendy’s, or any company, could shift a consumer’s reference point to perceive the same pricing model through a gain frame. And that’s exactly what Wendy’s tried to do. After the public uproar, the company clarified the intent of their new proposal: their new digital menu boards would “offer discounts” during “slower times of the day” rather than raising prices during peak hours. This is really an equivalent pricing strategy in quantitative terms, especially if the new “discounted” prices are the same as the current prices. For example, if they are offering a meal for $10 now, they can later show the $10 price as being discounted, while showing a higher “regular” price. Nonetheless, this modification in wording could have profound effects on consumer psychology and in turn, spending.

The core of this whole kerfuffle is that people inherently care about perceptions of fairness, as any parent of young siblings can attest to.[2] Consumers are known to have a difficult time accepting price increases for products whose value they don’t see as increasing in line with the price. This can be perceived as inequitable—it’s not fair that I have to pay more for my Frosty, just because it is lunchtime. On the other hand, it is perfectly reasonable to get a discount on my Frosty at 4pm when business is slow. As irrational as it seems, this is exactly why Wendy’s ended up in such a hot mess.

The moral of the story is that businesses need to announce price breaks loudly and price increases as quietly as possible… and justify those increases as much as possible. Or better yet, don’t increase prices at all, instead shrink the serving size since that seems to have less of a negative impact on consumer psychology. Of course, this inevitably leads to other competitive issues, one which long ago launched a little old lady and Wendy’s Restaurants into the spotlight with one simple statement, “Where’s the Beef!?”