My uncle's taxi: irrational decision making?

When I was growing up, my uncle, who was a taxi driver used to take me for a ride on his taxi. He would drive around the city, while I would sleep on the back seat for most of the time. On busy days, when he made more profit quickly we would end up on the beach eating ice-cream. If he kept counting the income he had gained, I knew it would be a long day in the taxi while if he smiled and yawned along the way I knew that he was close to making his daily target, which of course meant, ice cream. Given my uncle’s massive amounts of debt (to which I was oblivious back then) I wonder why he’d rather have ice cream with a 10 year old than work more to make more money. Indeed one would expect that my uncle would work more hours on a busy day when his wage rate was higher. I don’t know if he regrets such working patterns now that he is retired but as we had the opportunity to find out in the context of this module, research shows that my uncle was not the only ‘lazy’ taxi driver. Indeed many New York taxi drivers finish work when they reach a target that has been pre-set. That is, they typically work fewer hours on busy days than on slower days, as on busy days they reach the income target faster (Hardman, 2009).

Nonetheless, such a working pattern seems somewhat irrational. Indeed rational labour-market theory proposes that those taxi drivers would work longer hours on busy days, when their hourly wage-rate is higher. Nonetheless such a seemingly irrational behaviour has been explained in terms of prospect theory (Kahneman & Tversky, 1979), which describes how people make decisions between alternatives that involve risk by evaluating potential losses and gains. Prospect theory that claims that people are generally ‘loss averse’ i.e. they get less utility for say gaining £1000 than they would lose if they lost the same amount. People set a reference point and evaluate outcomes as gains or losses relative to that point. This idea can explain the working patterns of taxi drivers described above: achieving the set daily target (reference point) is seen as a win minimising incentive to keep working. On the other hand, failing to achieve the daily income target is seen as loss, and the loss aversion tendency makes taxi drivers work longer to avoid loss altogether.
I can’t help but think that for my uncle who is still swimming in debt, trying not to drown, this will be great news. After all, he was not the only one...

Hardman, D (2009). Judgement and Decision Making: Psychological perspectives. Chichester: Backwell.

Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47 , 263-291.