Chicago cab drivers petitioned the city to let them charge $50 when passengers vomit in their cab, in addition to other rate hikes.  But according to Something Awful this isn’t a rate hike, it’s a premium service:

I’m a vomit-bucket-half-full sort of guy. I don’t think these cabbies are trying to charge you for puking, I think they are offering you the premium service of vomiting in their taxi.

America was built on the idea of premium services. This is how the wealthy are able to have so much more fun than everyone else. They can behave however they want as long as they have the money to cover the premiums!

The $70 currently in my wallet entitles me to a good three blocks on Michigan Avenue and a nice half-digested deep dish pizza projectile vomited all over the headrest.

The best part?  This was through The Economist.  How else could you get a comment like this on an Economist article:

Sir-

I don’t always vomit. But when I do, I probably drank Dos Equis.

Categories: America, Behavioral Economics, Chicago, Funny, Incentive Centered Design
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An article in Monday’s New York Times questions the real world applicability of many behavioral economics experiments:

The researchers don’t deny that consumers can be swayed by variations in sticker prices in laboratory experiments. But they question how significant that factor is in real-world settings where prices can’t be inflated so extremely, like the Tel Aviv restaurant. “Size is everything,” Dr. Heffetz says. “Our findings remind us that knowing that ‘A has a positive effect on B’ is not enough. The effect may simply be too small to matter.”

Categories: Behavioral Economics, Business and Economics, Incentive Centered Design
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You began by saying that it is an exciting time to be an economist. I agree—not because economics is about to be replaced by psychology, but because of the big questions we are now struggling to answer. What are the fundamental causes of poverty? Are there solutions? How do ideas, habits and information spread across social networks? What makes innovation happen? Can governments help? Can anything improve the awful record of economic forecasting? How do economic clusters develop? What kills them off? How does competition work in the face of fallible consumers?

Behavioural economics is already making the running on the subject of consumer decision-making, but in other areas it has little to offer. That is no surprise, because there is so much more to economics than a theory of individual decisions.

Read the debate over behavioral economics that spawned this conclusion from Tim Harford.

It also contains an interesting sub-discussion on the literature around pay performance schemes which may be of interest to some of the management or info-econ wonks out there.

Categories: Behavioral Economics, Business and Economics, Information Economics, Managing
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My roommates and I do a decent job of keeping our apartment clean, but there’s definitely room for improvement in our systems.  The problem is that cleaning our apartment is a public good, and like any public good, there’s tons of room for free-riding.  Anyone who has ever had roommates has most likely dealt with dirty dishes in the sink, or papers on the table, or piles of unread mail.  Unfortunately,  my brilliant idea, described below, is something only an economist could love, and I live with lawyers.

The solution to our problem, of course, is to attach a price to the various household chores we want done and compensate the person who accomplishes the task by having the other two roommates pay him.  I struggled with how to set the optimum level of payment for each task.  We could have each person decide how much they’d pay for the task, but what if nobody wanted to work at that level?  An alternative is to say how much each person wants to charge, but what if nobody pays it?

Co-op housing attempts to solve this problem through a system of fines and penalties, but if the fines are too low, then it will be seen as a charge for the service and not a penalty (thanks behavioral economics!).  You can force compliance by making the charges too high, but then there’s an opportunity for trade – between people who want to clean or need money and those who don’t – that’s being missed.

The optimal solution goes back to game theory – which teaches us how to incent both action and truth-telling.  There’s a classic problem in game theory where two business partners are trying to split a pie, or their company, or something.  Anyways, two people are trying to split something – and the best way to find an equitable split is to have the first player propose how much the pie/company is worth to them, and the second player decides whether to buy them out at that price, or sell to them at that price.  Because Player One doesn’t know which option Player Two will choose, they want to be as honest as possible about their true value of the pie/company/something, and will be indifferent between the two options.

The same goes for cleaning the apartment.  Give one roommate the option of saying what they value the chore at.  The other roommate has the option of either completing the chore at that price, or they can pay to have it done.  Running through the register of household cleaning tasks should create an equitable outcome, or give one roommate some supplemental income as a maid.  Either way, everyone wins – we all get to live in a clean apartment.

How’s this for a long post, Mom?

Categories: Behavioral Economics, Crazy Theories, Governance, Incentive Centered Design, Information Economics, Strategy
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American Express recently sent me an e-mail with this offer:

From June 2-12, 2008, there will be one U.S. destination on sale each weekday, with some packages retailing below $3,500. Once on sale, the price of each package drops every 20 minutes. So when the price seems right, you better grab yours before it’s gone. Visit the website now to check out in-depth trip details and photos, and to sign up to receive an e-mail reminder for when the trips you want go on sale.

It looks like they’re selling the vacation packages using an Open Descending Bid Auction, also known as a Dutch Auction.  If we think back to our Auction Theory, this should give us the same result as a Sealed-Bid First Price auction, but American Express has an excellent opportunity to test whether or not that holds in a real world environment.  From a behavioral perspective, in the real world and not a laboratory, will bidders react the same way in both situations?  My hunch is no, but I don’t have data to back it up – could my readers who still have unfettered access to academic journals find some?

Dutch Auctions are currently used by the Federal Reserve Bank of New York, Dutch Flower Merchants, and a variant was used for Google’s original IPO.

Categories: Behavioral Economics, Business and Economics, Incentive Centered Design, Information Economics, Matching Mechanisms, Travel
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If you offer free nights and weekends, and then you offer anytime minutes, aren’t those just daytime minutes with a different name?  Just a thought.

Categories: Behavioral Economics, Business and Economics, Technology
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According to the scientists at Predictably Irrational:

Finally, we wondered how less attractive individuals rationalized to themselves, their selection of less attractive others. Using a speed-dating study we found that more attractive people placed more weight on physical attractiveness in selecting their dates, while less attractive people placed more weight on other qualities e.g. sense of humor. Much like the famous line from Crosby, Stills, Nash, and Young, people find a way to love the ones they can be with.

My takeaway – ugly people have the same definition of attractive as hot people. They know they can’t get hot people, so they value hotness less, and therefore say they care about personality more. In other words, people care about personality because they have to, or at least because they think they have to.

Categories: Behavioral Economics, Dating, Information Asymmetries, Matching Mechanisms
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The Wall Street Journal has a front page article on transplant matching mechanisms along with this cool diagram. It also covers the debate between economists over whether markets or trading cycles are the most efficient and morally palatable method to get the right kidneys to the right people.

Via MR

Categories: Behavioral Economics, Business and Economics, Distribution, Incentive Centered Design, Matching Mechanisms
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It used to be macho to go for it on the 4th down, now it’s what scientists tell you to do:

You don’t have to be particularly interested in sports to find Romer’s conclusion intriguing: His hunch about human behavior in general was that although people say they have a certain goal and are willing to do everything they can to achieve it, their actual behavior regularly departs from the optimal path to reach that goal.

From this Washington Post article.

Categories: Behavioral Economics, Business and Economics, Strategy
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