Saturday, 30 August 2008

easy money

Here's a little tale that shows just how far removed economic theory is from reality. The basis of conventional economics is the idea of a rational agent with perfect information, who maximises utility. According to these assumptions, a taxi-driver, for example, will arrange his activities to generate the most money for the least effort.

Now, the income of a taxi-driver depends on circumstances. On good days, with lots of passengers around, he will do well; on bad days, he won't. A rational taxi-driver will therefore work longer on good days and give up early on bad ones. However, a study of taxi-drivers in New York carried out by Colin Camerer and others shows the exact opposite. The taxi-drivers seem to set themselves a daily target, and stop working once they reach it. So they work shorter hours on good days, and longer hours on bad ones. They could increase their earnings by 8 per cent just by working the same number of hours every day, for the same total working time. If they worked longer on good days and shorter on bad ones, they could increase their earnings by 15 per cent. But they don't have a good enough intuition for economic phase space to appreciate this. They are adopting a common human trait of placing too much value on what they have today, and too little on what they may gain tomorrow.

From: The Science of Discworld II: The Globe

This is why I don't work regular hours, although I'm supposed to. I compensate bad days, when I'm just less productive, with good ones. (Fortunately, the good ones seem to outnumber the bad ones often enough for me to regularly take an afternoon off for the hell of it.)

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