The $144 Million Default Rule

A blog about business and economics.
May 15 2012 8:16 AM

The $144 Million Default Rule

A taxi passes an Olympic display during the Team USA Road to London 100 Days Out Celebration in Times Square on April 18, 2012, in New York City
A taxi passes an Olympic display during the Team USA Road to London 100 Days Out Celebration in Times Square on April 18, 2012, in New York City

Photograph by Chris Trotman/Getty Images for USOC

Cabs in New York City used to accept payment exclusively in cash, and tipping was governed by informal norms. Then they installed touchscreens that display advertorial content and also facilitate credit card payment. When you pay with a card, you can manually enter a tip number or you can select one of three default options, and Joshua Gross notes that the defaults make an enormous difference:

During payment, the user is presented with three default buttons for tipping: 20%, 25%, and 30%. When cabs were cash only, the average tip was roughly 10%. After the introduction of this system, the tip percentage jumped to 22%.
Those three buttons resulted in $144,146,165 of additional tips. Per year. Those are some very valuable buttons.
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This sort of psychological anchoring is well-known from behavioral economics. Adding a more expensive dish to a menu or a "super size" option can often induce people to spend more even if very few people actually make the high-end purchase. But thinking about the kind of role that norms, anchors, and heuristics play in shaping behavioral responses often gets left on the cutting-room floor when pondering issues in a non-experimental context.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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