After recently reading Dan Ariely's wonderful book Predictably Irrational, I decided to conduct an experiment of my own to see how people will, if given the chance, act irrationally in regards to their own best interest when making a decision.
The Hypothesis
The Hypothesis
As a formerly employed, commuting New Yorker, I am intimately familiar with the often convoluted, and always unsatisfactory, ways through which employers procure MTA Metrocards for their employees. In fact, my most recent employer outsourced their procurement operation to a company that would, if so authorized, garnish my pre-tax earnings to hold in escrow until I purchased my own monthly $89 Metrocard and submitted a receipt and voucher for reimbursement of my own pre-tax salary.
Despite the seeming simplicity of this operation, I often found myself in consternated frustration at having to “jump through hoops” on a monthly basis to receive my own money after filling out irksome paperwork. And doing it all just to save myself the taxes on $86 a month. In the end I often found myself leaving the money in my “Transit Account,” where it would just sit, doing nothing until I claimed it.
Effectively, I was often leaving my own money on the proverbial table despite being enrolled in a perfectly functional procurement program.
After reading Dan Ariely’s experiments, and seeing that the MTA will again increase the cost of a monthly Metrocard (this time to $104), I deduced an experiment of my own that I believed would demonstrate that other commuters will also fail to protect their own savings if given similarly convoluted choices, especially if one of them seems to take money “up front.”
Having learned in my Foundations of Finance class that “money paid out in the future is worth less than money paid today,” I created a scenario in which I acted as imaginary employer that offers employees two different options for procurement of their monthly Metrocards for a the week pre-dating the rise in cost from $89 to $104. One option was created to simulate “taking” the employees money up front, while the other was created to seem like a more gradual, less punitive garnishing of wages.
My belief was that given the choice, employees would choose the later, less-valuable option more often than the better, first option.
The Parameters
Option #1, “Pay Now”- My “company” will sell the employee a packet of six, monthly Metrocards at their face value of $534 before taxes. This amount will be garnished from your wages immediately.
The total savings for this option are $133.79 ($90 saved in avoiding Metrocard fare hike and $43.79 in saved sales tax)
Option #2, “Pay Later”- My “company” will garnish $104 in pre-tax wages, and provide a monthly Metrocard on the first Monday of every month. However, to offset the effect of the fare hike, we will add a taxable bonus of $15 to the employee’s paycheck at the end of every monthly pay cycle.
The savings in this option are approximately $20.38(Although $55.38 is saved in sales tax, roughly $35 would be paid in income taxes on the total of $90 in bonus).
The Experiment
I used 10 friends, whom I know to be employed, commuting, New York City residents, as a sample group and pitched them the two options verbally.
I did not allow them to take notes, as I was interested in their “gut decision” to the choices presented.
After they considered the options for 2 minutes, I laid out the options on two index cards, withholding the actual amounts of savings that they actually provided, for 30 seconds. I then gave them another minute to consider the options.
After the time was up, I asked them to write their choices anonymously on scraps of paper and pass them back.
I then tallied the results.
The Results
Seven of the test subjects chose Option 1 while only three chose Option 2.
Frankly, I was pleased that I was able to prove my hypothesis, but I remain somewhat baffled by the margin on which I was able to do so.
I was also rather surprised by how much, in the aggregate, was lost in potential savings by the 10 respondents.
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