The Point of No Return: The Subtle Psychology and the Economy of Taxi Fares

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From 2009 to 2013, Kwabena Donkor drove a taxi in the heart of New York City to pay for her education. It was a perfect stint while in school, he recalls, as it wasn’t tied to a 9 to 5 that might prevent him from taking an economics exam. It was during these trips that a seed for her recent purse was planted. “Personal experience has helped me ask questions beyond what one might just sit and think about in an abstract way,” he says.

It always fascinated Donkor that even an uncomfortable or negative interaction with a passenger didn’t seem to affect if and how much they tipped him. Why was that? He also started to wonder: why do people even tip to start?

“The behavior of tipping in New York taxis is not rational according to traditional business models,” says Donkor, now an assistant professor of marketing at the Stanford Graduate School of Business. Classical economics assumes that customers are rational and interested. Yet the choice to pay for a service and give something extra to the service provider is not exactly that. Some studies indicate that people engage in tipping to increase the likelihood of better service in the future. But in New York, where there were more than 11,000 yellow taxis before the pandemic, the chances of having the same driver twice are very low.

In search of another way to explain passengers’ decision to tip, Donkor turned to behavioral economics and its emphasis on social norms. “Tipping is not compulsory but discretionary. But because this standard exists, people don’t avoid it, ”says Donkor. In a recent working paper, Donkor uses theoretical and empirical analysis to quantify the economic value of tipping in New York City yellow cabs. “We know standards matter, but how much? How do we determine how restrictive it is? ” he asks.

A share of the price

This resulted in a data set of a billion New York cab rides paid for with credit cards, allowing Donkor to track how far passengers went and how much they gave. tip in a single year. He observed that 97% of customers left a tip, which strongly suggests the presence of a standard. The “social norm tip” was about 20% of the total price.

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Onscreen advice menus, says Donkor, can “actually increase workers’ wages without necessarily making life terrible for consumers or taking money away from them.”

Donkor added another layer of analysis by examining how passengers interacted with touchscreen payment devices in taxis. The screens presented passengers with a menu of tip options: 20%, 25% or 30%. There was also a button to turn off the default tip menu and enter a custom amount. Donkor found that about 60% of people chose a tip from the menu, indicating that most passengers preferred not to have to calculate a tip in their heads.

The most popular tip menu option was 20%. However, as taxi fares increased, passengers moved away from the usual fare. “Twenty percent of five dollars isn’t that much. But then when the rate is $ 50, it’s like, “Oh, I don’t want to stick with 20%. Now I’m going to step away from the menu. Because it’s worth doing a math, versus giving the driver 20% of $ 50, ”says Donkor.

He found that the share of people who opted for the default menus decreased as prices increased. And over 80% of passengers who skipped the menu tipped less than 20%.

To better understand how people tip, Donkor devised a model suggesting that when a passenger tips they don’t just pay the driver, but also avoid the psychological cost of leaving a small tip or not. tip at all. “You have something in mind that you think is the norm or the right thing to do. And straying from it leads to a feeling of shame or guilt. And so I call that a deviation cost, ”he says. This cost increases as passengers deviate from the norm: when a customer tips 10% instead of 20%, that cost is around $ 1.30.

“There is a compromise to be made,” says Donkor. “How much will I save compared to meeting this standard?” So it is this context that allowed me to quantify these unobservable behavioral fundamentals that we know matter but which are really difficult to measure.

His model also quantifies the cost of a passenger who does not respect menu suggestions and calculates his own tip. “It’s the cognitive cost of your own exercise,” says Donkor. The average cost for this calculation – aka the cost of deactivating the menu – is around 90 cents. “People would rather avoid calculating 17% of $ 13.75 and would rather pay $ 1 to avoid this situation,” says Donkor.

Tips for better advice

These results demonstrate the benefits of on-screen advice menus for drivers and customers. As Donkor explains, “If you don’t give them any menu options, you can force the passenger to do the math on their own. But then, if you give them the right options, it will increase the tips, so it will increase the profits that the drivers are going to make. And it also increases the well-being of the customers, because they don’t have to do the math.

And it adds up quickly. In New York City, there were more than 250,000 cab rides a day before the pandemic. If the cost of calculating an acceptable tip is around a dollar, then the amount saved by passengers who choose a default tip plus the increase in average driver tips is substantial. Donkor calculates that before COVID, the tip menu increased the welfare of taxi drivers and horse riders by over $ 200,000 per day compared to no menu at all.

While payment screens have replaced tip pots and outstretched palms, Donkor’s findings have implications for cafes, restaurants, delivery services, or any industry where workers rely on tips to supplement their income. Suggested advice menus can “actually increase workers ‘wages without necessarily making consumers’ lives terrible or taking money away from them,” says Donkor. “In fact, they don’t have to do as many calculations; we make it easy for them to do those calculations. So it’s a win-win situation.

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