A recent drive on an express lane showed tolls as high as $9 to Broadway and $10 to I-380, depending on real-time conditions. What makes this interesting is that the price for using the same road is not predetermined; it is decided on the spot.
Dynamic toll pricing may adjust based on traffic volume, creating an anchor for drivers to evaluate the value of the express lane. If traffic is heavy, the higher toll can feel worth it when compared to the frustration of sitting in congestion. This shifting price serves as a real-time incentive or deterrent, depending on how drivers value their time at that moment.
Mental accounting, the tendency to categorize resources such as money and time, is a key principle at work. The price is not just about the toll but about the potential loss of time stuck in traffic. For many, the higher toll feels like a small price to pay to avoid the larger loss of wasted time, especially during busy hours.
Dynamic pricing taps into our varying perceptions of time. During a stressful commute, paying $10 to save several minutes is more appealing than when traffic is light. The system uses behavioral cues to nudge drivers into seeing the express lane as a valuable, time-saving option.
In essence, dynamic toll pricing leverages human psychology to adjust behavior in real time, making the express lane more than just a road—it is a reflection of what happens when we convert time into money.
The sunk-cost effect, an irrational attention to non-recoverable past costs while making current decisions, has been documented widely in the domain of monetary costs. In this paper, I study the effect of past time investments on current decisions. In three experiments using choice situations, I demonstrate that the sunk-cost effect is not observed for past investments of time, but the effect reappears when the investments are expressed as monetary quantities. I further propose that this ‘pseudo-rationality’ is due to the fact that individuals lack the ability to account for time in the same way as they account for money. In two additional experiments, I facilitate the accounting of time and show that the irrational sunk-cost effect reappears. In a final experiment, I test my propositions in a setting where subjects make real investments of time and subsequently make real choices.
Coming January 3rd to 6th of 2022, EBS Business Review will broadcast “Behavioral Economics for Dummies.”
The world-renowned bestseller book, Nudge, by Richard H. Thaler, winner of the 2017 Nobel Prize in Economics, is well known for its coverage of behavioral economics. The term nudge which has an idiomatic meaning of nudging with an elbow refers to guiding people’s choices through gentle intervention instead of compulsion or coercion. Different from normative economics and descriptive psychology, prescriptive behavioral economics intervenes and guides people’s choices by closing the gap between behavior and mind.
What is the hidden key of behavioral economics? You will learn its various cases which show the power that moves the world.
The secret of 99% adoption of organ donation (January 3rd)
As medical dramas suggest, hospitals need more organ doners. In order to solve the supply-demand problem of organ donation in Korea, a policy was implemented in 2007 which inserts a statement regarding donation into the driver’s license upon issuance or renewal. However, the survey result in 2018 showed that the actual number of those who wish to donate is only about 3%.
What about other countries? If we look into the organ donation rate in European countries in the early 2000s, Denmark had a rate of about 5%, Germany had a rate of about 12%. However, there are many other countries boasting a rate of 99%, such as Portugal and France. What is the secret behind these countries with a high donation rate? We will explore successful uses of behavioral economics that change people’s behavior.
Public institutions can be smarter (January 4th)
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In 2020, an experiment was conducted in US to find out how to increase the vaccination rate for the flu. As a result of sending 20 messages that encouraged people to get vaccinated, the most effective one was the combination of messages sent three days before vaccination saying “a flu vaccine is available for you” and one day before vaccination saying “a flu vaccine has been reserved for your appointment.” For those who received these messages, they made a promise to themselves to get vaccinated, resulting in an increased vaccination rate of about 5%.
Since behavioral economics brings great results with little cost, it is actively applied in many public institutions. Let’s listen to other cases of public policy which solve tough social problems.
When tech giants meet behavioral economics (January 5th)
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Marketing is a key area in which behavioral economics is actively applied. Various mechanisms can be used to target customers, which can lead to an increase in revenue and market share. Lyft, a ride-sharing company once conducted an experiment to encourage users to drive during peak demand times, Friday nights, instead of quiet mornings on Wednesdays.
They divided drivers into two groups randomly. One group was given information that their income would increase if they worked on Friday night. The other group was given information that their income would decrease if they did not work on Friday night. More people in the latter group chose to drive Friday night because people tended to avoid loss, helping Lyft mobilize the drivers’ behavior. What are the other special secrets of behavioral economics that change peoples’ choices and help companies increase profits?
Nudge yourself (January 6th)
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Self control is a process of paying the small pain in the present to obtain a greater gain in the future. But when the pain in the present is overwhelming to bear, people lose their motivation to control themselves. To solve this problem, we have to go beyond the present bias and go back to the past self.
Imagine that alarm wakes you up in the early morning. If you want to overcome the thought of having sleep for one more hour, you need to go back to the ‘me’ last night who set the alarm. To make a rational decision, you have to remember your own attitude of yesterday when getting up early eventually leads to a greater benefit than oversleep. We will introduce the secret of behavioral economics that makes a better ‘me’ based on deep understanding of human.
Jaewoo Joo is a field researcher who applies academic insights to solve real world problems. He received a Ph.D. in Marketing from the University of Toronto after obtaining a Bachelor degree and a Master degree from Seoul National University. Jaewoo is interested in developing customer experience by utilizing empathic design thinking and counter-intuitive behavioral economics. He is an associate professor of marketing and participating professor of experience design at Kookmin University.
References
Johnson, E. J., & Goldstein, D. (2003). Do defaults save lives? Science, 302(5649), 1338–1339.
Milkman, K. L., Patel, M. S., Gandhi, L., Graci, H. N., Gromet, D. M., Ho, H., … Duckworth, A. L. (2021). A megastudy of text-based nudges encouraging patients to get vaccinated at an upcoming doctor’s appointment. Proceedings of the National Academy of Sciences of the United States of America (Vol. 118).
Scheiber, N. (2017). How Uber uses psychological tricks to push its drivers’ buttons, The New York Times, April 2, https://www.nytimes.com/interactive/2017/04/02/technology/uber-drivers-psychological-tricks.html.
Soman, D., & Shi, M. (2003). Virtual progress: The effect of path characteristics on perceptions of progress and choice. Management Science, 49(9), 1229–1250.
This research examines the effectiveness of traffic-boosting mobile coupons through a randomized field experiment of over half a million South Korean consumers. The research question analyzes the effectiveness of the content (six message types) and context (three days out of the week for coupon distribution) of mobile coupons on response-to-coupon, store visits, and purchase amount for a health and beauty retail chain. Big data on individual customers, gathered from a field experiment, was analyzed through bivariate probit, mediation analysis, and tobit regression. The results show that message content affects store visits, which was fully mediated through response-to-coupon. In particular, messages that “made the amount of discount salient” and “formed a personal connection” were more effective than other messages. In terms of context, messages sent during the weekdays were more effective in increasing store visit, than those sent during the weekend.
Keywords
Mobile promotion · Mobile coupon · Message content · Message context · Coupon distribution · Field experiment
Acknowledgements
We would like to express our deep gratitude to Hyojung Kim, Sul Namgoong, and Joongjae Lee at Shinhan Card for their assistance with the collection of our data.
We often pay in cash or by credit card. Differently from cash, credit card often leads us to over-consumption. This is because credit card does not require us to write down the amount paid (rehearsal) and our wealth is not depleted immediately rather than with a delay (immediacy) (Soman 2001).
We could also donate in cash or by credit card. For example, visitors at the Tate Liverpool in UK could donate 4 pounds by inserting bills into a silver box or tapping their credit cards on a white device. Which donation mechanism benefits the museum better?
Past expenses have been shown to influence future spending behavior by depleting available budgets. However, a prerequisite for this relationship is the accurate recall of past payments and the experiencing of the full aversive impact associated with them. This article shows that the use of different payment mechanisms influences both these factors and hence moderates the effects of past payments on future spending. Specifically, past payments strongly reduce purchase intention when the payment mechanism requires the consumer to write down the amount paid (rehearsal) and when the consumer’s wealth is depleted immediately rather than with a delay (immediacy). Two experiments show support for the proposed theoretical framework.
I have seen pay toilets at train stations or tourist spots in London. Since paying money to use public toilet was new to me, I simply thought making profits by victimising tourists is unethical. However, one of my friends who has been living in London for a few years said money should be collected to maintain toilet clean.
I found that I paid too much attention to consumers’ service and did not carefully think about the maintenance issue. In order words, I did not separate the toilet service from the train service, and simply requested free toilet service because I paid for the train service.
When I lived in Toronto a few years ago, I did not expect free bundles or free services. I walked to a restaurant to eat, I carried a newly purchased microwave oven by myself, I visited a bank to pay hydro, and I paid for the lotions at stores. After moving to Seoul from from Toronto, however, I have become accustomed to free things; I ordered food or bought devices and asked for free delivery service, wired money at home without visiting the bank, and received a lot of free sample lotions at stores. Indeed, the guardian chose Seoul as the 10 best cities in the world to be a student because McDonald’s in Seoul runs a 24-hour delivery service. Although free goods and convenient services offered by this city may welcome budget-tight foreign students, people who are constantly surrounded by free stuffs become easily spoiled. I am not exception, either.
Then, how could I fix this situation? I believe mental accounting might be an answer. Researchers suggest that people keep track of their past transactions and plan their future budgets mentally. While doing so, people often make mistakes. They do not accurately remember how much they spend when using credit card or fail to separate different expenses but put them into one category. For instance, if I mentally account better when someone delivers McDonald’s set to my place, I can separate delivery cost from McDonald’s set price and then, at least, appreciate and thank for free delivery service. If I mentally accounted better about pay toilet at the train station, I paid for toilet without complaining.
Mental accounting was originally proposed to study people’s biased financial decisions. However, it may help people to be nicer by decreasing the degree to which they are spoiled. 🙂
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