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.

Luna

Aspects of endowment or the double standards of selling and buying precious stones...

Back in the good times of being better off financially, I used to deal gem stones mainly because I’ve always had a passion for jewellery which led me to study jewellery design in the past. I remember always grappling with the high prices I had to pay for precious and semi-precious stones and also the prices I would get for my designs that I perceived to be lower than the value that I had judged for my own designs. Even though the stones I bought and sold were certifies as equal according to the international grading standards, I often thought that the ones I had had more attractive colours, or more clarity or just looked ‘more polished’. At least they looked more polished to me therefore I estimated a higher value for them than other stones that I would buy that were of the same quality. Not surprisingly, cognitive theorists have picked up on this, and the class discussion on endowment theory came to shatter my illusion that I had the best gemstones ever, that should have sold for a lot more than they were sold for…

Endowment refers exactly to how we judge the monetary value of objects and how such judgement predicts subsequent decisions made. More specifically a value of an item can be judged in two ways: how much we are willing to accept loss of an object for (i.e. to sell the object) and how much we are willing to buy it for. At some level the idea that we value objects that we own more than those that we don’t seems commonsensical perhaps due to emotional influences (we get attached to objects that we own). Research suggests that even when an item has recently come into our possession, we still value it higher as we are averse to the idea of giving things up.
Francis, Haubel & Keinian (2007) have proposed an account of endowment drawing upon memory concepts. This memory based account suggests that while buyers of items produce more value-decreasing aspects (i.e. negative thought about the item), sellers produce more value-increasing aspects (i.e. positive thought about the items). In effect, when I was selling diamonds I might have been producing more positive thought about the diamonds that I sold, arriving at higher valuations while following the opposite procedure when buying diamonds.

Such endowment effects readily branch out to many real life situations. For instance in the current recession climate, a house seller might be unwilling to accept a lower price, even though the price is still higher than they paid for to buy the house at the first place. In such cases eliminating endowment effects, i.e. by framing losses as potential gains, would overcome such rigidity. Indeed when the market seemed to recover for a while, sellers revaluated such losses as potential gains on the new house they were now (hypothetically) able to buy, hence accepting lower prices.

I wonder how much emotion plays a role in this, and if endowment could be extended to situations that monetary value and emotions are in interplay and situations were ‘on-objects’ are involved. As a person who is probably obsessed with English bulldogs, as with many other English concepts, I have been actively involved in breeding and rescuing dogs for the last 3 years seeking to better the breed standards. When I deal dogs both in the UK and abroad I often think that the ones that I have bred are in many aspects better than the ones that I buy off other breeders. I am not suggesting that bulldogs are in any way object-like but I found the discussion on endowment very interesting as it made me think that there is a difference in valuing my own dogs and those I buy from others. For instance I always ask for higher prices for my dogs sold to kennels abroad than the ones I buy with very similar pedigrees and bloodlines. I thought that mine always just ‘looked cuter’ and were in some mysterious way an improvement to the breed standard. To have endowment theory elucidate such cognitive patterns is very interesting. Nevertheless, the possibility that such thought are exactly that, patterns, that can be sussed out in relation to whether one in a buyer of a seller, doesn’t make my very special bulldog, Luna (pictured here) any less special!!

References

Johnson, E.J., Haubl, G. & Keinan, A. (2007) Aspects of Endowment: A query Theory of Value Construction. Journal Of Experimental Psychology, 33(3), pp.461-474.