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Nov. 13 2009 - 10:15 am | 82 views | 1 recommendation | 5 comments

Taxi Cab Confessions

Coco Taxi

Image by MattJP via Flickr

My latest column on Money & Your Mind over at SmartMoney.com:

When New York City started requiring taxi drivers to accept credit-card payments two years ago, cabbies hit the roof. Some went on strike. Many lied to passengers for months, saying the new credit-card machines weren’t working. The New York Taxi Workers Alliance still calls the system the “5% heist,” referring to the fees drivers pay on each electronic transaction.

But one thing is clear two years later: The drivers who complained so vehemently about the credit-card machines are now making more money because of them. New York City’s Taxi and Limousine Commission reports that revenues are up 13% from the end of last year, despite a recession which is hitting the taxi industry hard in other cities. Tips, meanwhile, have risen to an average of 22% on credit-card transactions, up from around 10% under the old, cash-only system.

How did the folks in the front seat — the people whose very livelihoods depend on taxi cab revenue — get things so wrong? Because they gave into their most basic cognitive biases, and because they didn’t recognize how passengers’ cognitive biases would put more money on their meters.

The story boils down to loss aversion blinding the cabbies to two salient facts about credit cards: 1) They make people spend more, 2) They can be programmed with “default” tip amounts much higher than what drivers were typically receiving with cash.

The effect of credit cards on our spending is particularly striking. I think we all have an intuition that plastic makes us spend more. This study (PDF) shows that people will bid more than twice as much for an item (in the experiment, NBA tickets) when allowed to pay with credit card instead of being restricted to cash — far more than even I would have guessed.

As you can see from this New York Times story, even another cognitive bias is at work here: cognitive dissonance, as the cabbies have a hard time accepting they were wrong about the credit card system.


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  1. collapse expand

    So, credit card users [prompted by an inflated default suggested tip percentage] are more generous than those paying with cash.

    Are there any other studies concerning tipping practices of discrete demographic groups?

  2. collapse expand

    Your coin toss example is ambiguous. If I had to guess I would interpret the winning outcome as a net $10 win, after you subtract the $10 you put into the bet, and with $10 loss your expected value would be exactly $0. In other words, you would win absolutely nothing on average and it would be a waste of time. Although it’s possible you might get “lucky”, you have an equal chance of getting unlucky. Furthermore, if you had a limited bankroll (say 3 dollars) you could run a risk of financial ruin…

    It all depends on how you define the win. Obviously if you actually net 20 dollars when you win, then the expected value of each bet is $10. In other words, you would on average double your bet each time you play. You would be stupid not to play as much as possible if you could afford some risk and had a decent bankroll…

    I certainly believe that many people might not understand the mathematics behind bets of this nature (see: lottery) or might be excessively risk averse, but I would be interested to actually see how these experiments were constructed.

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    About Me

    I'm a freelance writer and blogger based in Brooklyn, NY. My background is mostly in politics. I've worked on the editorial boards of the New York Sun and New York Post. In 2006, I wrote a book, "The Elephant in the Room: Evangelicals, Libertarians, and the Battle to Control the Republican Party" (Wiley). I've also done my share of freelancing, for places like the Atlantic Monthly, The New York Times, Reason, and RealClearPolitics.

    These days, I'm interested in humanity's ever-expanding understanding of its own irrationality. Hence, this blog.

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