Overview of Behavioral Economics & Behavioral Nudges

Overview of
Behavioral Economics
&
Behavioral Nudges
AE 6307
(C) Yohanes E. Riyanto 1

Introduction
 Economics:
Given:
Opportunities &
Constraints (scare
resources) Choices
maximize Well-Being
(goods to
consume or (utility)
actions to
take.
Homo Oeconomicus
(rational, consistent, Our mind is easily
and selfish man). tricked, leading us to
CONTRADICT make mistake and bias
judgment in a systematic
 Psychology: and predictable way
Given:
psychological Choices
limitations (goods to
consume or
e.g. perception, actions to
cognition, take.
attention,
emotion
mental functions and behaviors (C) Yohanes E. Riyanto 2
Introduction

Introduction

Introduction

Economics + Psychology = Behavioral Economics
scientific study on
the nervous system and
how the brain function
Neuroscience
Neuroeconomics mental functions

and behaviors
Economics Psychology
How psychological limitations affect
economic decision makings
Key Figures
Daniel Kahneman Amos Tversky Richard Thaler

BEHAVIORAL ECONOMICS
 It studies how psychological limitations affect

economic decision makings.
 Economics  assumes that individuals have stable
and coherent preferences  preferences are
represented by utility function  they maximize the
expected value of this utility function  leading to
rational choice.
 Behavioral economics attempts to provide more
realistic foundations and to explain why people might
make seemingly irrational choice.
 Behavioral economics aims to increase the
explanatory power of economics.
Three Broad Topics to be Discussed:
 Bounded Rationality:
People make choices that are seemingly irrational
(from the viewpoint of standard economics models)  due
to cognitive limitations, inability to process complex
information, and the use of simple heuristics, etc.
 Bounded Self-Control:
Economics model of inter-temporal decision people
maximize the present discounted sum of the
instantaneous utilities obtained from their decision
taken at every time period (e.g. how much to consume now
and in the future)  time consistent preferences  in
reality is NOT  that is why we procrastinate (doing it later
than now), unable to commit, and get into addiction.

Three Broad Topics to be Discussed in AE 6307:
 Bounded Self-Interests:
Standard economic model assumes people maximize utility
derived from own material wealth. In reality, people may not
only care about own material interests  may also care for
others  social preferences.
Behavioral Economics Methodologies:

1. Theory  mathematical modeling of individual decision
making individual maximizes an objective function (e.g.
utility) that incorporate behavioral aspects  subject to
constraints  get theoretical predictions.
2. Empirics  estimate regressions, run simulations and (or)
calibration using empirical data (on individual behavior).
3. Experiment  design and run experimental treatments in the
lab or in the field  e.g. subjects are students.
Choice and Framing
 People face risky decisions all the time  how do

people evaluate risky prospects?
 Economic Theory: people evaluate risky prospects on
the basis of the overall (net) wealth, the probability
of occurance and the expected ‘utility’ derived from
this net wealth.
 In reality  not true  people don’t look at the
overall wealth, but instead at gains and losses and
respond to them differently.

Choice and Framing
 Kahneman and Tversky (1984).
Imagine that the U.S. is preparing for the outbreak of

an unusual Asian disease, which is expected to kill 600
people. Two alternative programs to combat the
disease have been proposed. Assume that the exact
scientific estimates of the consequences of the
programs are as follows:
If program A is adopted 200 people will be 72%

saved.
If program B is adopted, there is a 1/3

probability that 600 people will be saved and a 28%
2/3 probability that no people will be saved.
framed as gain
Choice and Framing
Imagine that the U.S. is preparing for the outbreak of

an unusual Asian disease, which is expected to kill 600
people. Two alternative programs to combat the
disease have been proposed. Assume that the exact
scientific estimates of the consequences of the
programs are as follows:
If program A is adopted 400 people will die. 22%
If program B is adopted, there is a 1/3

probability that nobody will die and a 2/3 78%
probability that 600 people will die.
framed as loss
Choice and Framing

 Suppose you are asked to choose between the
followings:
 In addition to whatever you own, you have been

given 1000. You are now asked to choose between:
A: (1000, prob.=0.5) and B: (500)
N=70 [16] [84]
 In addition to whatever you own, you have been
given 2000. You are now asked to choose between:
C: (-1000, prob.=0.5)and D: (-500)
N=68 [69] [31]

Choice and Framing
 People treat gains differently from losses.

Standard economic theory says that the
choice has to be consistent as they are
identical problems (framed differently).
 People are risk-averse in gains and risk-

seeking in losses.
 Loss aversion: the disutility of losing is larger

than the utility of gaining  people want to
overturn losses  this explains why people
are risk seeking in losses  more willing to
gamble.
Loss Aversion
• Putler (1992):
• Conducted a study on egg sales in California.
• He wanted to know how people react to price

changes. Do people behave differently towards
price increase and price decrease?
• Result: People cut back egg consumption sharply
when the price increases, and increase
consumption by only a bit when the price
decreases.
• Thus, there is asymmetric response  a price

increase is registered as a loss and a price
decrease is registered as a gain  a loss has
stronger impact than a gain  loss aversion.

Loss Aversion
• Babcock, Loewenstein and Thaler (1997):
• Conducted a study on cab drivers in NY city.
• Cabdrivers rent the cab from taxi companies.
• The rent is paid in advance (for 12 hours).
• Drivers can keep the fares they collect and quit for the day
before the 12 hours are up.
• Passengers typically hail cruising cabs.
• Rains, Snow, Holidays, and Convention days are good days.
• Weekends and when few business people are around are

bad days.
• How does the amount of hours a driver works vary with the
day’s average hourly earnings?  How does the supply look
like?
Loss Aversion
• The law of supply: people should supply more
when the price is high.
W
S
• BUT what they found:

W
Contrary to the law of supply
How is it possible?

Loss Aversion
• It turns out that:
• Cab drivers use “daily income targeting”

strategy  they decide how long to work by
setting themselves an income target every day.
• Drivers have loss aversion  they dislike losing money

a lot more than they like winning money (with the same
amount).
• As a result: drivers do not want to quit before they

reach their daily target, but when they do reach the
target, they are not so enthusiastic to go higher even in
good days.
• Chou (2002) found similar results using data of

Singapore cab drivers.

Loss Aversion and Bounded Rationality
• Bazerman (1983).
• Lab experiment based on the Dollar

Auction Game (Shubik, 1971).
• $50 bill for auction, bidding starts at $1

and goes up in $1 increments.
• The winner pay his (her) bid and gets $50.
• 2nd highest bidder also has to pay his (her) bid, but gets
nothing in return.
• Participants open the bidding  but very soon bidders

exit the auction until there are only 2 bidders.
• 2nd highest bidder not willing to lose decides to outbid

the highest bidder  to avoid losing the highest bidder
will increase the bid further  escalate futher…

• Loss aversion induce them to outbid each other  if both
players are stubborn, bids could go much higher than $50.
• They should have quitted much earlier  sunk cost fallacy

prevented them from doing so.
• But, more importantly, bidders failed to see this eventuality

when deciding whether or not to participate  bounded
rationality.
• By the way, this auction format is used in a real online

auction site (http://www.swoopo.com)
• Swoopo  a legitimate auction format or a scam?

• Each bid point costs $1. You place bid points to bid for the
item and all items have a time limit. But an extra 15
seconds are added if there is someone outbid the highest
bidder.
 The losers spend bid
points and did not get
the item.
 Swoopo went bankrupt,
but thereafter the
domain name was
acquired by DealDash.


More on Bounded Rationality
• A baseball and bat together cost $11.
• The bat costs $10 more than the ball.
• How much does the ball cost?
• Write down your answer.
• Answer:
50 cents: $10.50-$.50 = $10.00.

People tend to use “intuitive thinking”
or rules of thumb, and arrive at $1 as
the answer.

Loss Aversion  Sunk Cost Fallacy
• Loss aversion leads to sunk cost (already been
incurred and cannot be recovered) fallacy (“throwing
good money after bad”).
• What will you do in this occasion?
 You recently bought a new pair of non-returnable

running shoes for $75. They were comfortable
when you tried on in the store, but after a long
run, you discover a painful defect in the arch
support. Do you ever run in the shoes again?

Loss Aversion  Sunk Cost Fallacy
• What will you do?

 You have purchased a non-refundable and non-
transferable movie ticket in advance. When the night
of the show comes, you notice that you don't
actually feel like going out anymore, and would
actually enjoy yourself more at home. Do you go to
the movie anyway?
 You have already purchased a movie ticket in

advance. It costs you $7. You attached a value of $9
from watching that movie. On the way to the
theatre, you notice that you have lost your ticket. A
new ticket will cost you $7 at the ticket booth. Will
you buy a new ticket?

Loss Aversion  Endowment Effect
• Endowment effect  reluctant to part with the thing you
own  WTA > WTP.
• Kahneman, Knetsch and Thaler (1984):
• A lab (class) experiment.
• Half of the class is randomly given mugs.
• Those who received the mugs are asked to value
them.
• Those who did not receive the mugs are asked to bid
for them.
• Then, allow them to trade.
• If no loss aversion (endowment effect)  half of the
mugs should be traded.
• Few mugs changed hands (10%)  the median WTP
is $2.50 and the median WTA is $5.25.
Loss Aversion  Endowment Effect
We are willing to pay (WTP) less for something

(an item) we don’t own than we are willing to
accept (WTA) payment for an identical item we
own.

“Money” Illusion  Failure to Understand the
Difference between Real Value and Nominal Value
• Difficulty level of an exam  is a useful tool to
‘distinguish’ students’ ability (stars; average, below
average) when ability follows normal distribution.
• Suppose that the exam is difficult!

“Money” Illusion  Failure to Understand the
Difference between Real Value and Nominal Value
• The highest score is only 72 (72%) out of 100 
what do you think students’ reaction?
• But they forget that they are graded on curve!

Difficulty level does not matter!!  they confuse
the distinction between real with nominal value.
• Solutions?  Raise the maximum score from 100
to, for example, 137  you make the average close
to 100!  not easy to convert it to % in their head.
Loss Aversion  Status Quo Bias
• People have a strong tendency to remain at the
status quo (default option)  reluctant to change.
• Even when the decision is important and the
stakes are large.
• Example: ORGAN DONATION
• Countries differ in their method of soliciting
organ donation.
• OPT-OUT: By default, people are donating their organs 
must check box to opt-out of donating.
• OPT-IN: By default, people are not donating their organs 
must check box to opt-in of donating.

The Power of Default
• ORGAN DONATION
Please, check the box below if you want to

participate in the organ donation program.
Please, check the box below if you do not want to


Singapore  HOTA (Human Organ Transplant Act) 

the law that covers the removal of any organ from the
body of a dead person into the body a living person.
When does the act kick in?  when a person

has died in hospital. Death may mean cardiac
death (heart stops beating), or brain death
(heart is still beating, but brain does not
function)
Singapore: OPT-OUT system.

Organ donation rate in different countries:
Johnson and Goldstein (2003)

• ORGAN DONATION
Please, check the box below if you want to

do not check, and do not join!
Please, check the box below if you do not want to

do not check, and join!

• Madrian and Shea (2001)  401K Plan in the US
• What is 401K Plan?  saving for retirement  in
Singapore it is equivalent to SRS scheme
(tax-incentive saving for retirement).
• Contributions taken out of each paycheck,

and some firms match employee contributions.
• Contributions invested in mutual funds.
• Penalties for early withdrawal.
• Employees have a hard time carrying out the actions they say
they want to take.
• From a survey, out of 100 employees, 68 report saving too

little, and 24 out of 68 plan to raise 401K contribution rate
in the next 2 months  but only 3 actually do so in the
next 4 months.
• Standard enrollment  most companies require
employees to initiate 401K enrollment themselves
(opt-in).
• In contrast  automatic enrollment (opt-out).
• Automatic enrollment dramatically increases participation

• Employees enrolled under the automatic enrollment cluster at

the default contribution rate.

Anchoring Effect
• People often make estimates by starting from an initial
value that is adjusted to draw the final answer.
• Kahneman and Tversky (1974):
• Conducted a study  participants were asked an arbitrary
question  “what percentage of African Nations part of the
UN?
• Then, before they gave their answer, they were given a

random anchor number (x)  from a spinning wheel
with numbers from 0-100.
• They were then asked whether the number was higher or

lower then the value of the percentage they have in mind.
• They were then asked to re-estimate the value of the quantity

upward of downward from the given number.
• Those who got a larger number gave a higher estimate.

Anchoring Effect  Influencing WTP
• Ariely, Loewenstein and Prelec (2003).
• 55 MIT students, shown 6 products.
• They were asked for their last 2 digits of their social

security number (IC).
• Then, they were asked whether they would pay for the
products for the dollar equivalent amount of the last 2
digits SSN  e.g. 45 = $45.
• After giving yes/ no answer, they were asked the max.

amount WTP for each of the products.

Anchoring Effect
• Students with large 2 digits number are willing to pay more

 WTP is sensitive to the anchor.

Mental Accounting & The Power of Comparison
• Thaler (1985) :
• Imagine you are shopping for a calculator and a
jacket, and you find them both at the same
department store.
• The calculator costs $25, and the jacket costs
$120.
• You are told that a store across town has both
items, but the calculator is $15 cheaper at that
store.
• Do you buy the items at that store or do you go
across town?

• Thaler (1985):
• Imagine you are shopping for a calculator and a
jacket, and you find them both at the same
department store.
• The calculator costs $25, and the jacket costs
$120.
• You are told that a store across town has both
items, but the jacket is $15 cheaper at that store.
• Do you buy the items at that store or do you go
across town?
• In theory  whether the $15 will be saved from $25
or $120 should be irrelevant  $15 is $15 no matter
what. (C) Yohanes E. Riyanto 43
• What will you do?
 You have already purchased a movie ticket in

advance. It cost you $7. On the way to the cinema,
you lost your ticket. You can of course buy another
ticket that will cost you $7 at the ticket booth. Will
you do this?
 You plan to watch a movie. A movie ticket will cost

you $7. On the way to the cinema, you lost your
money $7 that you will use to buy the ticket. You
can of course buy another ticket that will cost you
$7 at the ticket booth. Will you do this?

The Power of Comparison
• Ariely (2008)
• 100 students at MIT’s Sloan School of Management.
68
32

• Ariely (2008)
• 100 students at MIT’s Sloan School of Management.
16
0
84
• Option 2 (print subscription)  inferior option compared to

option 3  used as a ‘decoy’  preference reversal.
• Ayres, Raseman, and Shih (2009)
• How to encourage people to

reduce electricity and gas
usage (conserve energy)?
• Field experiments (with 85000 households  random

assignments) conducted by utility companies in
Sacramento California.
• The idea: can we induce customers to conserve energy

by providing feedback to customers on their home
electricity and natural gas usage to allow for peer
comparisons.
• Samples of the feedback.


• Ayres, Raseman, and Shih (2009)
• Significant impact on energy

usage reductions in energy consumption with the
decrease sustained over time.

• Singapore  old PUB Bill  there is comparison, but could
be made more salient to better facilitate comparison.

• Singapore  new PUB Bill  better!

• Shampanier, Mazar and Ariely (2007).
• They ran field experiments selling 2 brands of
chocolates (Lindt ‘Truffle’ and Hershey ‘Kiss’).
Lindt Truffle is known as an exquisite quality chocolate,
while Hershey Kiss is known as a rather ordinary
chocolate. They set the following prices:
Lindt Truffle 15 cents 73%
Hershey Kiss 1 cents 27%

• Shampanier, Mazar and Ariely (2007).
• They ran field experiments selling 2 brands of
chocolates (Lindt ‘Truffle’ and Hershey ‘Kiss’).
Lindt Truffle is known as an exquisite quality chocolate,
while Hershey Kiss is known as a rather ordinary
chocolate. They set the following prices:
Lindt Truffle 14 cents 31%
Hershey Kiss 0 cents 64%

Paradox of Choice
• Too many choices can be demotivating (Iyengar and Lepper
(2000)
Choice of Marmalades No. of Shoppers No. of Buyers
Visiting
40% of shoppers 30% of shoppers

Stand 1 2 flavors sampled on (e.g. 12)
average
(e.g. 40)
60% of shoppers
2 flavors sampled on 3.33% of shoppers
Stand 2 average (e.g. 2)
(e.g. 60)

The Intertemporal Choice
 We often have to make a choice between
doing something now or later at some
future time.
What We Often Say:
 Intertemporal choice  decision involving trade-offs

between costs and benefits occurring in different time
periods.
The Intertemporal Choice: Resisting Temptation
 Immediate (now) benefits and delayed (future) costs

 can we fight temptation to pursue immediate
gratification?
 E.g. consuming addictive substances (cigarettes
and alcohol), gambling
 Immediate (now) costs and delayed (future) benefits
 can we force ourselves to do it now?
 E.g. exercising (going to gym), doing your
homework.
 Walter Mischel’s delayed gratification
experiment with kids.
[Play Video Clip]
The Intertemporal Choice: Resisting Temptation
The Marshmallow Test
Walter Mischel’s Study 
The 4-year-olds who
waited for two
marshmallows  less
likely to abuse drugs,
had higher self-esteem,
had better relationships,
were better at handling
stress, obtained higher
degrees and earned more
money.

 Read and Van Leeuwen (1998).

 Food choice experiment (when hungry).
Choosing Today For Next Week
If you were deciding today,

would you choose
fruit or chocolate for 74%
next week.
“healthy”
26%
“unhealthy”

Choosing and Eating Today
If you were deciding today,

would you choose
fruit or chocolate for
today.
30%
“healthy”
70%
“unhealthy”
 Results:
 People are ‘patient’ (choosing healthy food

that has long term benefit) when making
decision for the future, but,
 People are ‘impatient’ (choosing unhealthy

food that has instant benefit) when making
decision for today.
 Time inconsistent preference.

Time Inconsistent Preferences
• Implications:
• People are not internally consistent decision makers 
dynamic inconsistency.
• This explain why people keep making promises and finding

hard times to deliver them  think of new year resolutions:
• I’ll quit smoking next week…

• I’ll stop procrastinating on my term paper and do it early, so I
won’t need to work in a rush approaching the deadline…
• I’ll go to sleep now, but will get up early to prepare for

tomorrow exam….
• I’ll exercise this weekend…

• I’ll start studying for my finals at the beginning of reading
period….…
• Solution: COMMITMENT (C) Yohanes E. Riyanto 62

How Do You Commit – http://www.stickk.com

(C) Yohanes Eko Riyanto 64



Bounded Self-Interest
• Gneezy and Rustichini (2000).

• Study on the effect of imposing monetary fine on parents
who arrived late to pick up their children in a day care
centre in Israel.
• Before the fine was imposed:
• A social unspoken contract (social norms) between
parents and teachers  so when parents were late
they would feel guilty.
• Late pick-ups were rare.
• Subsequently, after the fine was imposed:
• Late pick-ups became common.

• The reason: paying fine for being late effectively replaces

social norms with market norms.
• Market norms  the fine is a price to pay  parents can

decide whether to pick up their kids late or not.
• Few weeks later the day care centre removed the fine 
the centre was back with social norms.
• Parents did not change their behavior  late pick ups

were still common  the guilt feeling disappeared.
• Social norms can be eroded by market norms.
• Frey and Oberholzer-Gee (1997) and Gneezy and
Rustichini (2003) provide other evidence of this
motivation crowding-out.

• Suppose I give you S$100, and I ask you to divide with
another person of your choice (e.g. a friend, a
girlfriend/boyfriend, a family member etc. ). You can
decide whatever division you want.
• The rule: The other person must either accept the offer or
reject, no negotiation is allowed. If he or she rejects it,
both of you walk away with nothing.
• What would you offer? and why?
S$100 S$(100-x) ; S$x
accept
S$ x
A B
you receives S$100 recipient reject

from me, and, S$0 ; S$0
S$0
makes offer S$x>0
out of S$100 to B
• By backward induction (game-theory): In this ultimatum

game: B should accept S$x, because S$x>0  knowing
this A should indeed offer S$x  since A’s payoff is
decreasing in S$x, A should offer as low x as possible (i.e.
x≈0).
• If you run this experiment: people are always making
‘generous’ offer.

What have We Learned?
• People exhibit various systematic behavioral biases and

limitations  leading to seemingly irrational choices.
• Understanding these behavioral biases and limitations
could enrich economic theories and offer some
perspectives on the limitation of economic theories.
• These behavioral biases and limitations have profound
impacts on people’s economics decision makings.
• The decisions and choices made will influence the success
of public policies.
• Public policies need to consider the choice architecture
(Thaler and Sunstein, 2008)  the context in which
people make decisions  allow us to nudge people into
the direction we want them to go.
Behavioral Economics and Public Policies
• How do we change people’s behavior (e.g. healthy habits,

quit smoking, adherence to speed limit…) for the better
with policies?
Prohibition and Fines Don’t regulate (free

(Paternalism) Choice)
(Libertarian)
Indirectly by nudging
them to the direction
we want them to go
Must understand the psychological aspects and contexts in which

people make decisions (economic decisions or non economic decisions
that have significant economic implications).

Behavioral Nudges

Behavioral Nudges

Behavioral Nudges

Behavioral Nudges
Nomophobia: the phobia (intense,

irrational fear) of being out of mobile
phone contact.

Behavioral Nudges
Singapore Digital Marketing Statistic 2015
5.2 3.5 3.4 2.9 2

HOURS HOURS HOURS HOURS HOURS

Behavioral Nudges – IKEA Phoneless Table

Behavioral Nudges – Hope Soap (South Africa)
 WHO ranked South Africa as one of the most

unhygienic places in the world
 Thousands die from diseases which regular hand

washing could reduce by 70% and the majority of them
are children
 Hand washing with soap is one of the most effective

and cheapest ways to practice hygiene and prevent the
spread of deadly disease.
 In collaboration with SafetyLab South Africa and

Blikkiesdorp 4 Hope, Young and Rubicam Group (Y&R)
aims to encourage children to wash their hands
thoroughly with soap

• Toys: Hello Kitty for girls to Car figurines for boys

• Child-friendly with curved edges and colorful
appearances
• A simple sticker is also pasted at the back of the soap
which provide instructions and spread the importance of
hand washing


Behavioral Nudges – The Social Swipe – Making
Donation Easy

Behavioral Nudges

Behavioral Nudges

Behavioral Nudges

Behavioral Nudges

Behavioral Nudges

Behavioral Nudges
WHAT IS A GOOD NUDGE?
1. EASY TO OPT OUT 2. TRANSPARENT 3. IMPROVES WELFARE

Behavioral Nudges
WHAT IS A BAD NUDGE?
1. POORLY DESIGNED 2. BAD INTENTIONS

Behavioral Nudges – Fighting Diabetes – Less Sugar
Diet

Behavioral Nudges – Fighting Diabetes – Less
Sugar Diet
(C) Geraldine Soh, Goh Wanling, Josiah Lim, Lin

Yifeng, Tan He Jiang 92
Behavioral Nudges – Fighting Diabetes – Less
Sugar Diet

Behavioral Nudges – Fighting Diabetes
– Less Sugar Diet
Sugar Taxes
The idea is being mooted for implementation in Singapore

(public consultation).
In April 2018, UK implemented it.

Behavioral Nudges – Fighting Diabetes
– Less Sugar Diet
What about Behavioral Economics based Policy to complement?
Consider the following group project submitted by

students in my Behavioral Economics class (HE4004) at
NTU.
• Visual nudge (to increase social awareness)

• Shaping preferences
• Allowing people to identify themselves with the
health conscious group.
• Building social norm  creating bandwagon effect
Special thanks to: Geraldine Soh Zixin, Goh Wanling,

Josiah Lim Guan Qun, Lin Yifeng, Tan He Jiang
Fighting Diabetes – Less Sugar Diet







Overview of Behavioral Economics & Behavioral Nudges

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Overview of

(C) Yohanes E. Riyanto 1

(C) Yohanes E. Riyanto 3

(C) Yohanes E. Riyanto 4

(C) Yohanes E. Riyanto 5

Neuroeconomics mental functions

Daniel Kahneman Amos Tversky Richard Thaler

 It studies how psychological limitations affect

(C) Yohanes E. Riyanto 9

Behavioral Economics Methodologies:

 People face risky decisions all the time  how do

(C) Yohanes E. Riyanto 11

Imagine that the U.S. is preparing for the outbreak of

If program A is adopted 200 people will be 72%

If program B is adopted, there is a 1/3

Imagine that the U.S. is preparing for the outbreak of

If program A is adopted 400 people will die. 22%

If program B is adopted, there is a 1/3

 Kahneman and Tversky (1979).

 In addition to whatever you own, you have been

(C) Yohanes E. Riyanto 14

 People treat gains differently from losses.

 People are risk-averse in gains and risk-

 Loss aversion: the disutility of losing is larger

• He wanted to know how people react to price

• Thus, there is asymmetric response  a price

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• Conducted a study on cab drivers in NY city.

• Cabdrivers rent the cab from taxi companies.

• The rent is paid in advance (for 12 hours).

• Passengers typically hail cruising cabs.

• Rains, Snow, Holidays, and Convention days are good days.

• Weekends and when few business people are around are

• BUT what they found:

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• Cab drivers use “daily income targeting”

• Drivers have loss aversion  they dislike losing money

• As a result: drivers do not want to quit before they

• Chou (2002) found similar results using data of

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• Lab experiment based on the Dollar

• $50 bill for auction, bidding starts at $1

• The winner pay his (her) bid and gets $50.

• Participants open the bidding  but very soon bidders

• 2nd highest bidder not willing to lose decides to outbid

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• They should have quitted much earlier  sunk cost fallacy

• But, more importantly, bidders failed to see this eventuality

• By the way, this auction format is used in a real online

• Swoopo  a legitimate auction format or a scam?

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• A baseball and bat together cost $11.

• The bat costs $10 more than the ball.

• How much does the ball cost?

• Write down your answer.

50 cents: $10.50-$.50 = $10.00.

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 You recently bought a new pair of non-returnable

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• What will you do?