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Labor Supply of New York City Cabdrivers: One Day at a Time
Abstract
Life-cycle models of labor supply predict a positive relationship between hours supplied and transitory changes in wages.
We tested this prediction using three samples of wages and hours of New York City cabdrivers, whose wages are correlated within
days but uncorrelated between days. Estimated wage elasticities are significantly negative in two out of three samples. Elasticities
of inexperienced drivers average approximately −1 and are less than zero in all three samples (and significantly less than
for experienced drivers in two of three samples). Our interpretation of these findings is that cabdrivers (at least inexperienced
ones): (i) make labor supply decisions “one day at a time” instead of intertemporally substituting labor and leisure across
multiple days, and (ii) set a loose daily income target and quit working once they reach that target.
... An example of narrow framing in the field is the New York cab drivers. Camerer et al. were curious about how New York City cab drivers allocated their labor time [11]. These drivers paid a fixed daily rental fee for their cabs every day, and then they could drive their cabs for 12 hours and keep all the revenue they earn. ...
... The study, however, indicates that cab drivers measured their revenue one day at a time: they have a target for daily income, and they stop working after reaching the target. Therefore, they would quit earlier on busy days [11]. Now it is clear that narrow framing does affect people's behavior. ...
Loss aversion is an important psychological phenomenon. Adding loss aversion to the category of behavioral economics can well explain many phenomena that cannot be explained by general models. This paper reviews some relevant studies showing the application of loss aversion in the stock markets, real estate markets and COVID-19, and finds that loss aversion does influence people's decisions and the market as a whole. In the stock market, the combination of narrow framing and loss aversion leads to a shorter valuation period and investors reluctance to sell the stocks. Loss aversion in the real estate market will drive house sellers to set a higher price, and investors with more experience are even more loss aversion than inexperienced investors. In the context of COVID-19, emergency orders can improve their profits, and the time of blockade can be extended under the loss framing. In general, loss aversion makes people more reluctant to give up what they have, leading to higher trading prices and other problems. Thus, this paper corroborates that loss aversion has more explanatory power than general economic models in some aspects. Further analysis is needed as to how loss aversion can be used to predict and modify people's behavior.
... According to prospect theory [68], individuals are more sensitive to losses than equivalent gains. This behavior, which is empirically well-established [96][97][98][99], is considered the manifestation of the basic psychological phenomenon of loss aversion. For example, Tom et al. [99] used functional magnetic resonance imaging (fMRI) to explore brain activity while participants decided whether to accept or reject mixed gambles (i.e., an equal chance to win or lose some money). ...
The current paper provides a critical evaluation of the dual-system approach in cognitive psychology. This evaluation challenges traditional classifications that associate intuitive processes solely with noncompensatory models and deliberate processes with compensatory ones. Instead, it suggests a more nuanced framework where intuitive and deliberate characteristics coexist within both compensatory and noncompensatory processes. This refined understanding of dual-process models has significant implications for improving theoretical models of decision-making, providing a more comprehensive account of the cognitive mechanisms underlying human judgment and choice.
... In addition, another relevant body of literature concerns the concept of target wage, particularly relevant for workers facing income uncertainty. In this context, occupational drivers often aim for a target level of income that is necessary to meet basic living expenses, a phenomenon commonly observed among taxi drivers (Camerer et al., 1997) and unscheduled truck drivers (Drakopoulos & Theodossiou, 1997). When the pay rate falls below this target, drivers are confronted with a dilemma: either accept lower earnings or increase their efforts to reach the target, potentially leading to increased crash probability, whether consciously or subconsciously, through engaging in risky behavior or working longer hours than legally allowed (Belzer, 2012;Rodríguez et al., 2006). ...
... Building on the assumption that effort is costly, early research, such as Hull's Law of Least Effort, concluded that when different actions provide equal reward, the option with least effort will be chosen (Hull, 1943;Solomon, 1948). In labour markets, when wages are higher and therefore less effort (hours) are required to reach a target salary, taxi drivers and bike messengers do indeed exert less overall effort (Camerer, Babcock, Loewenstein, & Thaler, 1997;Fehr & Goette, 2007). Empirically, in lab tasks, people also generally choose lower effort tasks and avoid cognitive effort (Kool, McGuire, Rosen, & Botvinick, 2010;Schouppe, Demanet, Boehler, Ridderinkhof, & Notebaert, 2014;Westbrook, Kester, & Braver, 2013). ...
... In a classical study, researchers found that because of daily income goals, taxi drivers in New York worked longer hours on days that had a lower demand (i.e., sunny days) and worked fewer hours on days with higher demand (i.e., rainy days) (Camerer et al., 1997). This phenomenon has shown to decrease the labor supply of gig work platforms by about 17% (Sinchaisri et al., 2019). ...
Building a global team requires appreciating the subtext of terms such as "global" and "international", as well as the origins of dominant ways of thinking in the development sector. Diversity is a never-ending process, and it requires commitment to intentionally and consistently shape an inclusive enviroment that acknowledges the power dynamics between Global North (GS) and Global South (GS) identities. International develpment might be uncomfortable with its impertial background. But tackling knowledge hierarchies requires acknowledging that bettering people and unpacking their lives through research has deep historical colonial root and is also anchored in a mental model that prioritizes transactions and economics growth, which reflects capitalist and usually neoliberal approaches. Knowledge production continues to celebrate particular ways of knowing or solving development problem that fellow Western or Global North traditions. Therefore, building a global team is much more complicated than just hiring people with different passports to work in different countries.
... Additionally, Camerer et al. [22] studied the labor supply of New York City cabdrivers and found out there is not a significant positive relationship between hours supplied and transitory changes in wages, which should be the result if individuals rationally maximizing their utility, namely working more during high-wage period and having more leisure in contrary situation. They argued that it was because they set a loose daily income target, which is the reference point to compare their losses or gains with, and once achieving such goal they will have leisure instead. ...
This article explores two key theories in behavioral finance: Subjective Expected Utility Theory (SEUT) and Prospect Theory, outlining their development as responses to historic economic paradoxes, challenging traditional notions of rationality in economic decision-making. SEUT extends the concepts of expected value and rational choice, incorporating individual utility functions and subjective probabilities. Despite its comprehensive approach, SEUT struggles to explain certain behaviors under risk and uncertainty. Prospect Theory, conceived by Kahneman and Tversky, offers an alternative. It introduces decision weighting, focusing on how individuals differently perceive gains and losses relative to a reference point. This theory explains human biases like loss aversion and framing effects, which SEUT overlooks. Through practical examples and empirical studies, the article demonstrates scenarios where human behavior deviates from SEUT predictions, influenced by psychological factors. However, both theories provide insights into economic decision-making, they have their respective strengths and limitations. The article suggests a more integrated approach, recognizing the complexities of human decision-making in economic contexts.
... However, piece-rate payment schemes introduce another potential confound if subjects are "income targeters". Income targeting behaviour reflects the idea that workers have an incentive to exert more effort, and therefore generate higher earnings under piece rates, until they reach a (subjective) income target (Camerer et al., 1997;Goette et al., 2004;Fehr and Goette, 2007). In the context of the experimental designs discussed above, if the low-rate employee perceives their pay to be below their income target, which could be influenced by the expected final earnings of their high-rate peer, disadvantageous pay inequality may generate an incentive to increase effort, in order to reduce the expected final earnings gap. ...
... Our work suggests that, within such work, it may be fruitful to apply formal tools from labor economics. For example, economic research has demonstrated nonmonotonic effects of incentives on worker effort (resulting in what is known as the backwardbending labor supply curve) and interactions between wage incentives and social preferences on worker behavior (Camerer, Babcock, Loewenstein, & Thaler, 1997). The present findings open up the question of whether effects such as these might also characterize decision making in cognitive control. ...
Daily life frequently offers a choice between activities that are profitable but mentally demanding (cognitive labor) and activities that are undemanding but also unproductive (cognitive leisure). Although such decisions are often implicit, they help determine academic performance, career trajectories, and even health outcomes. Previous research has shed light both on the executive control functions that ultimately define cognitive labor and on a “default mode” of brain function that accompanies cognitive leisure. However, little is known about how labor/leisure decisions are actually made. Here, we identify a central principle guiding such decisions. Results from 3 economic-choice experiments indicate that the motivation underlying cognitive labor/leisure decision making is to strike an optimal balance between income and leisure, as given by a joint utility function. The results reported establish a new connection between microeconomics and research on executive function. They also suggest a new interpretation of so-called ego-depletion effects and a potential new approach to such phenomena as mind wandering and self-control failure.
... As a straightforward experimental proof, people tend to reject gambles with equal possibilities to gain or lose money unless the potential gain is much higher than loss, which is observed in both laboratory (Tom et al., 2007) and large-scale web experiments (Brown et al., 2014). Realworld examples include house sellers' avoidance of realizing nominal loss (Genesove & Mayer, 2001), cabdrivers' stickiness to daily earning targets (Camerer et al., 1997), and one's faster drop in happiness for income drops below social reference level (Vendrik & Woltjer, 2007). Many economic effects such as the equity premium puzzle (Benartzi & Thaler, 1995), the status quo bias and the endowment effect (Kahneman et al., 1991) can also be explained in the framework of loss aversion. ...
In human decision-making under risk, loss is typically valued more than the same amount of gain, a behavioral phenomenon known as loss aversion, which suggests that gain and loss are evaluated differently in the brain. Most previous neuroimaging studies focused on the brain regions that show differential responses to losses relative to gains. What is still largely unknown is how the neural processing of gain and loss may unfold in time and drives loss aversion. Here we designed a gambling task ideal for investigating the temporal course of the valuation process and used magnetoencephalography (MEG) to track human participants’ brain activities for valuating gain and loss. Computational modeling of participants’ behaviors implies that the gain and loss presented simultaneously can compete for cognitive resources, during which loss signals dominate the valuation process, resulting in loss aversion. Indeed, time-resolved MEG analysis reveals that the evaluation process of loss terminated later for participants with higher loss aversion than those with lower loss aversion, though the gain valuation had similar temporal courses for different participants. These results suggest that the origin of loss aversion may lie in the neural dynamics of loss processing.
... According to Thaler's (1999) mental accounting theory, people create different mental accounts like long-term savings and have different marginal propensities to consume from each account. Academic literature supports mental accounting theory from a regular income flow or from an irregular, lump-sum, windfall (Adamopoulou and Zizza, 2017;Johnson et al., 2006;O'Curry, 1999;Souleles, 2002), and supports the periodic reconciliation of people's mental accounts for income and expense (Camerer et al., 1997;Heath and Soll, 1996;Read et al., 1999;Rizzo and Zeckhauser, 2003). ...
Recently, Richard Thaler was awarded a Nobel Prize for his work in developing Behavioral Economics. While much of economics assumes that people act rationally, Areily (2008), expanding on Thaler’s body of work, proves that we are not only often irrational, but we are predictably irrational. When an interviewer asked Thaler how he would spend the roughly $1.1 million in prize money, he responded, “This is quite a funny question.” Thaler added, “I will try to spend it as irrationally as possible.” We know that affective tags for money exist but what specifically are those affective tags? More specifically still, is one of those tags for sources of income “fun,” and if so, does that affect whether the money will be spent on fun? Classical economics would assume that satisfaction comes from the consumption of goods and services, that money is a medium of exchange, and that the source of that medium of exchange does not enter into the choice of the goods or services consumed. Thaler’s (1999) works show that people create mental accounts, indicating that the source of the money may not be as completely irrelevant as classical economics predicted. This is important because where irrational behavior is suboptimal behavior, if we can anticipate it, we can construct environments to support better choices. We find that fun sources of income are significantly more likely to be spent on fun expenditures. However, as the amount of the windfall increases, the amount spent on fun levels off, indicating that this affect may be bounded. We were unable to find statistically significant support that more “adult” sources of income are more likely to be spent on more adult uses, but money from adult sources was significantly more likely to be invested. This is important because understanding more about affective tags and how they affect decisions to use money, we become better predictors of irrational behavior.
... Numerous studies support mental accounting from a regular income flow or from an irregular, lump-sum windfall (Johnson et al., 2006;O'Curry, 1999;Souleles, 2002). Informally, people periodically reconcile their mental accounts for income and expense (Camerer et al., 1997;Heath & Soll, 1996;Read et al., 1999;Rizzo & Zeckhauser, 2003). Karlsson et al. (1999) reported that cash spending on a durable good depended on compatible reasons for saving. ...
This study examines whether people use different mental accounts for different types of hypothetical revenue windfalls rather than viewing them as fungible in their use consistent with neoclassical economics. This study finds that the income source sometimes influenced the amount spent/saved and a respondent’s general default as a spender or saver was highly significant in all regressions. This article adds to the literature by responding to Epley and Gneezy’s (2007) call for “a broader sample of participants, varying amounts of payment, and alternative frames” to identify moderators of windfall framing effects with implications for behavioral economic theory and financial planning.
... In a study of the work patterns of taxi drivers in New York City, Camerer et al. (1997) observed that taxi drivers, especially inexperienced ones, set a daily goal for themselves and when they reach that goal, they stop working for the day. This study has several noteworthy features. ...
This book chapter explains the necessity of behavioral economics to more accurately explain human economic decision-making processes.
... 3 These intertemporal daily labor supply findings contribute to a debate in labor economics regarding labor supply elasticity across more and less productive work time, though this context is complicated by the fact that firm owners with workers are working on a production process in conjunction with worker labor inputs. Camerer et al. (1997), Farber (2015, and Dupas, Robinson, and Saavedra (2018) presented evidence on the labor supply of vehicle and bicycle taxi drivers; Chang and Gross (2014) considered the labor supply of pear packers; Nguyen and Leung (2013) examined labor supply in fisheries; and Oettinger (1999) studied the labor supply of stadium vendors. ...
... The TLC regulates the taxi business in NYC and collects ride-level information for every registered cab ride via a dashboard taximeter computer system built into authorized taxi vehicles. Owing to its richness and granularity, researchers in economics, finance, and accounting have used these data to study learning (Haggag et al., 2017), tipping (Haggag & Paci, 2014), labor provision (Camerer et al., 1997), information acquisition (Choy & Hope, 2021;Kirk & Piao, 2022), and fraud (Douthit et al., 2021;Kenchington et al., 2022;Liu et al., 2019Liu et al., , 2021Paci, 2014;Rajgopal & White, 2019;Tang, 2020). For each trip, the following data are publicly available for download from the TLC website: date, time, distance traveled, time elapsed, geographic coordinates of the origin and destination, fare, tip, method of payment, a taxi driver identifier, and the TLC taxicab medallion number for the cab in question. ...
We measure individual-level loss aversion using three incentivized, representative surveys of the U.S. population (combined N=3,000). We find that around 50% of the U.S. population is loss tolerant—they are willing to accept negative-expected-value gambles that contain a loss. This is counter to expert predictions and earlier findings—which mostly come from laboratory/student samples—that 70–90% of participants are loss averse. Consistent with the different findings in our study versus the prior literature, loss aversion is more prevalent in people with high cognitive ability. Further, our measure of gain–loss attitudes exhibits similar temporal stability and better predictive power outside our survey than measures of risk aversion. Loss-tolerant individuals are more likely to report recent gambling, investing a higher percentage of their assets in stocks, and experiencing financial shocks. These results support the general hypothesis that individuals value gains and losses differently, and that gain–loss attitudes are an important economic preference. However, the tendency in a large proportion of the population to emphasize gains over losses is an overlooked behavioural phenomenon.
Raising the price of municipal water services is highly fraught in many countries due to the political pressures to keep water bills affordable. As a result, most countries fail to recover the full costs of water provision, a problem made worse by an underestimation of the real cost of providing water. The case of Singapore illustrates that this problem is in part due to “mental accounting,” which is consistent with Lasswell’s concept of an “intelligence function.” Situating an understanding of this intelligence function within the Singapore water case gives a better understanding of the reluctance to raise water prices.
This study examines how unexpected exogenous events, labelled as suprises, affect the utility of experience goods reported in online rating systems. Using over 300,000 reviews of accommodation services listed on Booking.com, the research investigates whether online ratings capture the impact of surprises related to meteorological conditions and whether they create additional biases in service evaluation. The study finds that sudden changes in weather conditions have a significant impact on experienced utility, with the effect varying based on the direction of the surprise. Additionally, in line with the hedonic adaption theory, we find that the duration of consumption moderates the surprise effect, reducing its impact on reported utility.
Loss aversion is one of the most widely used concepts in behavioral economics. We conduct a large-scale, interdisciplinary meta-analysis to systematically accumulate knowledge from numerous empirical estimates of the loss aversion coefficient reported from 1992 to 2017. We examine 607 empirical estimates of loss aversion from 150 articles in economics, psychology, neuroscience, and several other disciplines. Our analysis indicates that the mean loss aversion coefficient is 1.955 with a 95 percent probability that the true value falls in the interval [1.820, 2.102]. We record several observable characteristics of the study designs. Few characteristics are substantially correlated with differences in the mean estimates. (JEL D81, D91)
We use high-frequency data on fine particulate matter air pollution (PM 2.5) at the locality level to study the effects of high pollution on daily labor supply decisions in the metropolitan area of Mexico City. We document a negative, non-linear relationship between PM 2.5 and same-day labor supply, with strong effects on days with extremely high pollution levels. On these days, the average worker experiences a reduction of around 7.5% of working hours. Workers partially compensate for lost hours by increasing their labor supply on days that follow high-pollution days. We find that low-income workers reduce their labor supply significantly less than high-income workers. Unequal responses to high pollution along other dimensions (job quality, flexibility, gender) matter, but less than income. We provide suggestive evidence that reductions in labor supply due to high pollution are consistent with avoidance behavior. * We are grateful to
Expectations as a reference point shape our decisions to motivate effortful activity. Despite the important role of reference points in human performance, little is known about how the brain processes expectations to guide motivated exertion. Participants completed a reward-based effort task in an MRI scanner. During each trial, participants were presented with a risky option that would either result in a fixed monetary payment, regardless of their effort exertion, or a piece-rate payment where the payment was proportional to the amount of effort exerted. We found that participants exerted more effort as the fixed payment increased, suggesting that the fixed payment influenced the reference point for effort exertion. The strength of this reference-dependent behavior was correlated with neural activity in the ventral striatum, which was significantly modulated by the deviation from the payoff to reward expectations after effort exertion. Our results suggest that value-related brain areas, particularly the ventral striatum, encode expectations of reward as a reference point to motivate effort exertion.
One-Sentence Summary
Value-related brain areas process reward expectations and how we evaluate outcomes based on that.
We introduce loss aversion in an infinite‐horizon, alternating‐offers model. When outside options serve as reference points, the equilibrium of our model follows that of the standard Rubinstein bargaining model, i.e., outside options do not affect the equilibrium unless they are binding. However, when reference points are given by the resources players contribute to the pie, the bargaining outcome changes such that a player's share increases in her contribution. We test our model's predictions in the laboratory. As predicted, only binding outside options impact the division of the pie. Data also show that contributions matter for bargaining outcomes when they are activated as reference points, but not quite as predicted by our theory. Proposers gain a higher share of the pie only when they have contributed a higher share than the opponent has.
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In this chapter, we conduct an empirical study using data from a live streaming platform to examine the impact of social incentives on users’ digital content contribution behavior. Our findings indicate that both social interaction and monetary rewards can increase users’ short-term frequency of content contribution and long-term retention on the platform. Furthermore, we observe that the effect of social interaction varies among users with different levels of experience on the platform.
This chapter provides an overview of the live streaming industry, highlighting its three primary stakeholders: broadcasters, viewers, and platforms. The chapter introduces the industry and its context, emphasizing the unique aspects of live streaming that make it an intriguing subject for studying digital contribution and consumption behavior. The empirical analyses in this chapter focus on the economics of live streaming and address several key questions. Through a review of relevant literature and data analysis from a popular Chinese live streaming platform, the chapter investigates factors influencing broadcasters’ receipt of gifts and viewers’ motivations to send them. It also explores the impact of gifting on churn rates for both broadcasters and viewers, as well as the correlation between economic, geographic factors, and the growth of the live streaming industry. The findings offer valuable insights into the economics of live streaming in China and pose further research questions. The subsequent parts of the book build upon live streaming as an empirical context, delving deeper into social incentives, motivations, and dynamics of digital content contribution and consumption behavior, including their social aspects.
We propose an account of individual differences in risk preferences called “reference-point theory” for choices between sure things and gambles. Like most descriptive theories of risky choice, preferences depend on two drivers—hedonic sensitivities to change and beliefs about risk. But unlike most theories, these drivers are estimated from judged feelings about choice options and gamble outcomes. Furthermore, the reference point is assumed to be the less risky option (i.e., sure thing). Loss aversion (greater impact of negative change than positive change) and pessimism (belief the worst outcome is likelier) predict risk aversion. Gain seeking (greater impact of positive change than negative change and optimism (belief the best outcome is likelier) predict risk seeking. But other combinations of hedonic sensitivities and beliefs are possible, and they also predict risk preferences. Finally, feelings about the reference point predict hedonic sensitivities. When decision makers feel good about the reference point, they are frequently loss averse. When they feel bad about it, they are often gain seeking. Three studies show that feelings about reference points, feelings about options and feelings about outcomes predict risky choice and help explain why individuals differ in their risk preferences.
In this paper, we employ large‐scale sensor data to examine the impact of data‐based intelligence and work‐related experience on the time efficiency of individual taxi drivers, measured by their propensity of choosing the fastest routes. The identification strategy is built on 1) a unique exogenous policy shock banning taxi‐hailing apps with embedded GPS system, and 2) a measure of Non‐Recurring Congestion (NRC) avoidance, enabled by the real‐time sensor data, which serves as a proxy for GPS usage. Our empirical model provides evidence that data‐based intelligence improves taxi drivers’ routing decisions by close to 3%, as measured by trip speed. Our results further demonstrate that inexperienced drivers have a higher chance of choosing the fastest route, as they are more likely to rely on the real‐time traffic information from GPS technology than experienced drivers. The general implications of our findings on the adoption and utilization of data‐based performance‐enhancing technology are discussed in closing.
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"Adaptation levels appear as neutral or indifferent zones in bipolar responses… . Adaptation levels are revealed in all forms of behavior whether they are sensory, motor, or cognitive verbal in nature… . We have found that the weighted log mean definition of AL [Adaptation Level] is the best approximation to the neutral or indifferent region for sensory magnitudes." Studies indicating current trends that bear on fundamental issues in AL theory are considered under the following headings: Anchoring Effects of Subliminal Stimuli; Residual Effects of Anchors in Memory and Recall; Series Effects with an Absolute, Extraexperimentally Anchored Language; Neutral Zones in Unexpected Places; Assimilation and Contrast in Sensory and Social-judgmental Processes; The Methodological Importance for Social Psychology of Studies Leading to Functional Relations Between Variables; and An Adaptation-level for Reinforcement and Performance. (PsycINFO Database Record (c) 2012 APA, all rights reserved)
Recent research has revealed a pattern of choice characterized as
diversification bias: If people make combined choices of quantities of goods for future consumption, they choose more variety than if they make separate choices immediately preceding consumption. This phenomenon is explored in a series of experiments in which the researchers first eliminated several hypotheses that held that the discrepancy between combined and separate choice can be explained by traditional accounts of utility maximization. On the basis of results of further experiments, it was concluded that the diversification bias is largely attributable to 2 mechanisms:
time contraction, which is the tendency to compress time intervals and treat long intervals as if they were short, and
choice bracketing, which is the tendency to treat choices that are framed together differently from those that are framed apart. The researchers describe how the findings can be applied in the domains of marketing and consumer education. (PsycINFO Database Record (c) 2012 APA, all rights reserved)
Based upon a recently developed multiattribute generalization of prospect theory's value function (Tversky and Kahneman 1991), we argue that consumer choice is influenced by the position of brands relative to multiattribute reference points, and that consumers weigh losses from a reference point more than equivalent sized gains (loss aversion). We sketch implications of this model for understanding brand choice.
We develop a multinomial logit formulation of a reference-dependent choice model, calibrating it using scanner data. In addition to providing better fit in both estimation and forecast periods than a standard multinomial logit model, the model's coefficients demonstrate significant loss aversion, as hypothesized.
We also discuss the implications of a reference-dependent view of consumer choice for modeling brand choice, demonstrate that loss aversion can account for asymmetric responses to changes in product characteristics, and examine other implications for competitive strategy.
A new model of consumer behavior is developed using a hybrid of cognitive psychology and microeconomics. The development of the model starts with the mental coding of combinations of gains and losses using the prospect theory value function. Then the evaluation of purchases is modeled using the new concept of “transaction utility.” The household budgeting process is also incorporated to complete the characterization of mental accounting. Several implications to marketing, particularly in the area of pricing, are developed.
This survey aims at providing the reader with a thread through the literature on the topic of panel econometrics of labour supply, reporting also on the evaluation of the data used in these studies, and summarizing their substantive results. It documents the present trend away from models that take advantage of panel data almost exclusively in order to control for unobserved heterogeneity, towards fully dynamic models where wages become endogenous and consequently the concept of wage elasticity loses much of its appeal.
Contrary to theoretical expectations, measures of willingness-to-accept greatly exceed measures of willingness-to-pay. This paper reports several experiments that demonstrate that this "endowment effect" persists even in market settings with opportunities to learn. Consumption objects (e.g., coffee mugs) are randomly given to half the subjects in an experiment. Markets for the mugs are then conducted. The Coase theorem predicts that about half the mugs will trade, but observed volume is always significantly less. When markets for "induced-value" tokens are conducted, the predicted volume is observed, suggesting that transactions costs cannot explain the undertrading for consumption goods. Copyright 1990 by University of Chicago Press.
The equity premium puzzle refers to the empirical fact that stocks have outperformed bonds over the last century by a surprisingly
large margin. We offer a new explanation based on two behavioral concepts. First, investors are assumed to be “loss averse,”
meaning that they are distinctly more sensitive to losses than to gains. Second, even long-term investors are assumed to evaluate
their portfolios frequently. We dub this combination “myopic loss aversion.” Using simulations, we find that the size of the
equity premium is consistent with the previously estimated parameters of prospect theory if investors evaluate their portfolios
annually.
Myopic loss aversion is the combination of a greater sensitivity to losses than to gains and a tendency to evaluate outcomes
frequently. Two implications of myopic loss aversion are tested experimentally. 1. Investors who display myopic loss aversion
will be more willing to accept risks if they evaluate their investments less often. 2. If all payoffs are increased enough
to eliminate losses, investors will accept more risk. In a task in which investors learn from experience, both predictions
are supported. The investors who got the most frequent feedback (and thus the most information) took the least risk and earned
the least money.
Wages and their effect on labour supply are not only an important subject for labour economists who aim at measuring substitution and income effects. Additionally, the government is interested in the impact of policy changes on the labour market and companies would like to know if it is possible to increase labour supply and especially productivity by increasing the wage rate. This paper introduces a dynamic version of the traditional model of labour supply and presents model extensions and the underlying behavioural assumptions arising from empirical findings, psychology and neuroscience. It evaluates findings and behavioural assumptions derived so far. None of the contributions investigated in this work is entirely free from criticism. The problem of analysing a comprehensive model of labour supply on the one hand, is the scarcity of suitable subjects to investigate and on the other hand, the individuality of each subject observed. With this work a critical analysis of existing research on labour supply decisions is provided. This shall contribute to motivate and ease future research in this area which has to take these problems into account.
Does the period over which individuals evaluate outcomes influence their investment in risky assets? Results from this study
show that the more frequently returns are evaluated, the more risk averse investors will be. The results are in line with
the behavioral hypothesis of “myopic loss aversion,” which assumes that people are myopic in evaluating outcomes over time,
and are more sensitive to losses than to gains. The results have relevance for the equity premium puzzle, and also for the
marketing strategies of fund managers.
Much experimental evidence indicates that choice depends on the status quo or reference level: changes of reference point often lead to reversals of preference. The authors present a reference-dependent theory of consumer choice, which explains such effects by a deformation of indifference curves about the reference point. The central assumption of the theory is that losses and disadvantages have greater impact on preferences than gains and advantages. Implications of loss aversion for economic behavior are considered. Copyright 1991, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
Modern neoclassical business cycle theories posit that the observed fluctuations in consumption and employment correspond
to decisions of an optimizing representative individual. We estimate three first-order conditions that represent three tradeoffs
faced by such an optimizing individual. He can trade off present for future consumption, present for future leisure, and present
consumption for present leisure. The aggregate U. S. data lend no support to this model. The overidentifying restrictions
are rejected, and the estimated utility function is often convex. Even when it is concave, the estimates imply that either
consumption or leisure is an inferior good.
I test the disposition effect, the tendency of investors to hold losing investments too long and sell winning investments too soon, by analyzing trading records for 10,000 accounts at a large discount brokerage house. These investors demonstrate a strong preference for realizing winners rather than losers. Their behavior does not appear to be motivated by a desire to rebalance portfolios, or to avoid the higher trading costs of low priced stocks. Nor is it justified by subsequent portfolio performance. For taxable investments, it is suboptimal and leads to lower after-tax returns. Tax-motivated selling is most evident in December. Copyright The American Finance Association 1998.
This chapter presents a survey on the labor supply of men. This survey of male labor supply covers the determinants of whether men work for pay in the labor market and, if so, the determinants of their hours of work. The chapter also discusses the work behavior of men prior to their retirement from the labor force. Moreover, even though there are noteworthy investigations into the labor supply of men in many different countries, this survey is restricted almost entirely to the Anglo-American literature. The chapter identifies the major time-series and cross-section empirical regularities in male labor supply behavior. It is these that any economic theory should be designed to address. The chapter presents the canonical static model of labor supply and then immediately proceeds to deal with the problems in applying this model at the aggregative level. The static model is amended to handle the situation of nonlinear budget constraints. The chapter concludes with an outline of the most popular life-cycle model of labor supply. The chapter also addresses the issues in and results from the estimation of the static model. Problems in specifying the model are first considered and then the results are presented from the U.S. nonexperimental literature, the British literature, and the U.S. experimental literature. The chapter also discusses the estimates from the applications of the life-cycle model.
The paper presents a general theoretical framework for the analysis of integrated life-cycle models of consumption and family labor supply under uncertainty. Profit functions are used to represent intertemporally additive preferences and to yield convenient characterizations of "constant marginal utility of wealth" or "Frisch" demand functions. Conditions on preferences derived that allow additive fixed-effect specifications for the Frisch demands. Data from the British Family Expenditure Surveys from 1970-77 are used to derive panel-like information on male labor supply and consumption for several age cohorts over time. These data reproduce standard life-cycle patterns of hours and wages, but more detailed analysis shows that the theory is incapable of offering a satisfactory common explanation of the behavior of hours and wages over both the business cycle and the life cycle. Similarly, although the theory can explain the life-cycle behavior of hours and consumption separately, the same model cannot explain both, essentially because of a failure in symmetry.
Analysis of decision making under risk has been dominated by expected utility theory, which generally accounts for people's actions. Presents a critique of expected utility theory as a descriptive model of decision making under risk, and argues that common forms of utility theory are not adequate, and proposes an alternative theory of choice under risk called prospect theory. In expected utility theory, utilities of outcomes are weighted by their probabilities. Considers results of responses to various hypothetical decision situations under risk and shows results that violate the tenets of expected utility theory. People overweight outcomes considered certain, relative to outcomes that are merely probable, a situation called the "certainty effect." This effect contributes to risk aversion in choices involving sure gains, and to risk seeking in choices involving sure losses. In choices where gains are replaced by losses, the pattern is called the "reflection effect." People discard components shared by all prospects under consideration, a tendency called the "isolation effect." Also shows that in choice situations, preferences may be altered by different representations of probabilities. Develops an alternative theory of individual decision making under risk, called prospect theory, developed for simple prospects with monetary outcomes and stated probabilities, in which value is given to gains and losses (i.e., changes in wealth or welfare) rather than to final assets, and probabilities are replaced by decision weights. The theory has two phases. The editing phase organizes and reformulates the options to simplify later evaluation and choice. The edited prospects are evaluated and the highest value prospect chosen. Discusses and models this theory, and offers directions for extending prospect theory are offered. (TNM)
This paper discusses the bias that results from using nonrandomly selected samples to estimate behavioral relationships as an ordinary specification error or "omitted variables" bias. A simple consistent two stage estimator is considered that enables analysts to utilize simple regression methods to estimate behavioral functions by least squares methods. The asymptotic distribution of the estimator is derived.
Limited Computation and Fairness in Sequential Bargaining Experiments
- Eric J Johnson
- Colin F Camerer
- Talia Rymon
- Sankar Sen
Taxi Trip and Fare Data: A Compendium
- Limousine Nyc Taxi
- Commission
Labour Conditions in East Africa (London: Colonial Of ce
- G Orde-Brown
University of California at Berkeley working paper
- David Bowman
- Debby Minehart
- Matthew Rabin