Sunday 24 July 2022

Social norms, defaults, and tipping taxi drivers

When you come from a culture (like New Zealand) where tipping is not a social norm, understanding when and how much to tip in a tipping culture (like the US) can be a bit of a mystery. I admit that my tipping behaviour is strongly driven by the menu options that are available on screen when I pay by credit card. If the screen suggests 15%, 20%, and 25%, I'll often choose one of those. That way, I don't have to try and work out how much the tip should be. Choosing one of the default menu options lowers the cognitive cost of the tipping decision. Besides, if it wasn't a social norm to tip those percentages, why would they display them on-screen?

Obviously, they are important for me, but how important are the on-screen menu options in general? That is essentially the question addressed in this 2021 working paper (with a non-technical summary here) by Kwabena Donkor (Stanford University). Donkor has data on over 250 million Yellow Taxi trips in New York City between 2010 and 2018, but only uses a randomly-selected subset of that data (a 20% sample of the data from 2014, and a further 10% sample from the full dataset) to make the task more manageable. To understand how the default menu options affect tipping behaviour, Donkor looks at:

...variation in tipping behavior a year before and a year after the CMT [Creative Mobile Technologies] default tip menu changed on February 8, 2011. The menu showed default tips of 15%–20%–25% then changed to 20%–25%–30%.

If taxi customers were purely rational, then the default options should not affect tipping behaviour at all. They would automatically choose the size of the tip that was 'best' for them. However, as we discussed in my ECONS102 class this week, people are not purely rational, and are affected by (among many other things), how a decision is framed. If you change the default tipping options, then you are changing the context of the decision. In turn, this may affect tipping behaviour. Indeed, Donkor finds that taxi customers are not purely rational. That is:

...the average tip rate increased from 17.45% of the taxi fare to 18.84% (an 8% increase), but the share of default tips decreased from 58.39% to 47.13% (a 19.3% decrease). However, the share of passengers who do not tip stayed [the] same (no extensive margin adjustments).

So, changing the default increased the amount of tipping on average, but as the defaults increased in value, fewer people chose the default. Interestingly, this result supports both rational and quasi-rational behaviour. It was quasi-rational because changing the default menu options affected the amount of tipping. It was rational because, as choosing the default costs more, people do a little bit less of it.

Donkor then looks at what happens when you shift from three default options to five default options (as happened in 2017). Comparing 2016 and 2018 data, he finds that:

...default tips increased by 11.5% (up from 59% to 66%).

Perhaps that means that more people were able to see a social norm tip that they could agree with, when there were more options available? This reduces the cognitive cost of calculating an alternative tip, and so more people choose one of the (five) default options.

There were also some other interesting results that Donkor notes in the paper:

The norm tip increases by 24% on New Year’s, 6% on Thanksgiving, and 18% on Christmas. Norm conformity increases by 89% on New Year’s Day, by 42% on Christmas day, but not significantly on Thanksgiving. The norm tip increases by 5% and 1%, respectively, when it snows or rains. However, norm conformity does not change much during bad weather.

Traveling with co-riders reduces the norm tip by 3.5% and norm conformity by 12.3%. This finding aligns with the bystander effect: when traveling in a group, no one person feels directly responsible for the guilt of not tipping or paying a low tip.

The takeaway message overall is that people tend to follow social norms because it is less costly to do so than the alternative. The costs of not following a social norm are not monetary. They fit into the category of 'social incentives' (which Levitt and Dubner note in their book Freakonomics are the incentives that arise from other people thinking that something is right or wrong). However, as the costs of following the social norm rise, more and more people will choose not to follow the norm. So, fortunately there is a limit to how high taxi companies can push the default tips in the menu before they induce too many customers to opt out.

[HT: Marginal Revolution, earlier this year]

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