Monday, December 05, 2022

Cognitive Bias, Rationality, and the Cost of a Ride on Lyft

by Neil H. Buchanan

Having written at length over the last few months about the looming political disasters that face us, I will use today's column to talk about something far less consequential, yet still (I hope) interesting.  The broad question for the day is how human psychological quirks are used in social and economic analysis.  The narrow question is why Lyft does not (seem to) have an option for non-a la carte purchases.  Is it possible, I ask with an almost-straight face, that "the market" is not completely efficient?  Gasp!

One of the most popular genres of writing in some areas of law and related fields over the last twenty years or so is called "behavioral economics" (BE), with the legal version simply being called "behavioral law and economics" (BLE).  In 2013, I wrote a Verdict column and a complementary Dorf on Law column discussing BE/BLE, with my overall message captured in the title of the Verdict piece: "Has Behavioral Law and Economics Jumped the Shark?"

As someone who was never comfortable being an economist, in large part because so much of the field was dominated by -- and by "dominated by," I mean "completely closed to anything but" -- rational actor theory, BE would seem to be a godsend.  During the years that I was toiling away in grad school and as an instructor in economics departments, orthodox economists in large part would not even acknowledge, say, that people's saving behavior was not fully rational; and those economists who at least admitted that people might not be perfectly foresighted rational lifetime maximizers would tend to dismiss any attempt to deviate from the rational choice model by hiding behind the modernist claim that "the dominant model's assumptions do not matter, because it is 'as if' people are rational actors."

That claim is at best a dodge, and at worst dishonest bunk, but it was at least better than the dominant belief among the majority of economists at the time, who insisted that people are in fact rational actors.  Oh well.

When a few big-name economists broke ranks and dared to consider psychological factors, especially cognitive biases, that was truly a breakthrough.  And there were some genuinely breakthrough concepts that penetrated the literature, such as loss aversion (when a person dislikes losing something more than they liked gaining it in the first place), myopia, and so on.  The faux-Nobel in economics was awarded to BE/BLE scholars in 2002 and 2017, and there was a great deal of hope that behavioral insights could revolutionize the field.

A zillion books and articles about "nudges" and salience later, not much changed.  Yes, there are very compelling stories about how people use tropes and shortcuts to navigate the world, and some limited empirical evidence (including some experimental studies) exists to support those stories.  Still, I found myself wondering in 2013 what the heck had gone wrong, writing in my Dorf on Law column that reading a BLE paper induced this thought: "Kill me now.  If I read another paper that jumps on the 'behavioral' bandwagon for no reason other than to follow the latest fad, I might just become a born-again believer in rational actor theory."

So we are stuck.  We were in a situation in which a new research agenda came along that was extremely promising, possibly supplanting an older orthodoxy that never should have become dominant in the first place.  Yet it became obvious over time that BE/BLE was a bit too useful, because one can tell perfectly good behavioral stories on either side of any issue, meaning that rational choice theory's purported "proof" that economics is a science was being challenged by behavioralism's failure to prove anything.

I would never want to ignore behavioral arguments when discussing economic behavior, but I also no longer believe that those arguments add up to anything more than "and don't forget that these are unpredictable people, not widgets."  That alone is quite a big deal, but only because the orthodoxy that it challenged was so mindlessly narrow.  The "what next" question hangs over all of this, and I despair that there will be much progress on any but the most narrow fronts and that every prediction and empirical outcome will be highly contingent and thus not of much use.

With that as the broader story line, where does Lyft's pricing fit in?  For many reasons (some particularly icky), Uber has never been an acceptable choice.  Of course, Lyft was also right there in 2020 in California with all the rest of them (InstaCart, DoorDash, and so on), funding a ballot initiative campaign to neutralize legislation that would have turned employees from independent contractors into employees, for purposes of labor law.  That successful effort predictably further immiserated workers, so it is not as though there is a good choice in this space.  In any case, riding Uber is still unthinkable, so I will refer to Lyft in my analysis here.

I have loved not owning a car since 2005, but there are times when a ride in a car is necessary.  And because traditional taxi companies did everything possible to destroy themselves when Uber disrupted their market, only a few places in this country still have anything resembling an adequate taxi fleet.  Gainesville, Florida, is certainly not one of them.  So Lyft it is.

How does their pricing work?  It is a simple per-ride system, with some not-simple twists caused by per-distance charges and especially "surge pricing," which means that a rider cannot know in advance how much it will cost to take a trip -- even a trip that the rider has taken many, many times.  As much as total predictability would be nice, however, there is at least some reasonable range within which one can predict the price to land.

The more interesting part of the story for present purposes is the per-ride limitation.  Why is that interesting?  From a behavioral perspective, per-ride pricing is almost too good at making people aware of the costs of their activities.  Owning or leasing cars is in many (maybe even most) cases more expensive than buying only as many rides as one needs -- with monthly car payments, insurance, maintenance, gas, and depreciation combining into a very high price, even ignoring things like contributions to pollution and traffic congestion -- but none of those costs are salient, nor are they marginal (in the economic sense, which means "costing me something for this particular decision").  Once one makes the leap to own/lease a car, taking a drive seems to be "free," and in an important sense, it almost is.

To consider taking a Lyft ride is, in every instance, to confront the very salient question: "Do I want to spend (say) $15 to go from A to B?"  Frequently, my answer is, "I can walk, bike, or simply not go."  In one sense, that is exactly what we want the price mechanism to accomplish.  The problem, however, is that it becomes tempting to say, "I should just get a car of my own, because this is annoying, and I can't stop myself from cheaping out every time I face the decision to spend marginal dollars."  But of course, that is exactly what we would not want the price mechanism to do, that is, pushing people to make a more expensive (and destructive) decision because of the salience/marginal cognitive bias.

Having recently returned from another lovely stint in Vienna, I could go on once more about that city's wonderful public transit system.  I will, instead, simply mention that a person can buy monthly no-limit passes on that system (quite inexpensive passes at that, because the Austrian government has long understood that subsidizing public transit is a great investment), rather than buying per-ride tickets.  As an aside, note that some city's transit passes are per-ride but are tracked on a debit card, which erases the salience (being easy to ignore, as is also true of EZPasses) but not the marginality.

"Hey," you might be saying, "that's hardly unique to Vienna, because there are plenty of transit systems that offer per-time options.  Get over yourself."  To which I respond: "Yes, of course, but this was an excuse to remind myself how much I loved being in Vienna again.  Cut me some slack."

In any case, now that I am back in Florida, still committed to living my car-free life, I need to think about Lyft again.  Once I thought about all-inclusive monthly passes, I checked to see if Lyft offers an option along those lines.  And the answer is that I could not find anything like that anywhere on the app.  And if anyone tells me, "Hey, you didn't look hard enough, because it's on their website and you can add it to your app," or even, "Hey, it's on the app itself, so I don't know how you missed it," the answer is that both of those possibilities merely raise a different cognitive bias issue, which is why a company that offers an all-you-can-eat option would not make it visible and obvious to users.

Assuming that there is no such option, why not?  It is not as if this kind of pricing necessarily loses money.  Hell, if a company does not want to bother figuring out how to price monthly (or weekly, or any other non-per-ride alternative) in a way that generates a profit, they can simply copy Disney's algorithm!

But where does all of this take us?  There is a perfectly good story that says that Lyft is losing out on a behaviorally-based profitable opportunity, either by not offering a pricing option that many people might choose or by not telling us about it.  On the other hand, there is an equally good story that Lyft is a greedy corporation and that its decision not to offer (or, if offered, to promote) the non-per-ride option is a rational, maximizing decision.  It feels as though taking note of salience and marginality, along with the perverse cognition that those things can induce, ought to have led us to a better answer.  When we do not see what we might expect to see in light of those behavioral considerations, what should we conclude?

Unfortunately, the answer continues to be: "Almost any answer is arguable."  Science!

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