10. Game theory can be dangerous to your health
Late one night, after a conference in Jerusalem, two American economists
found a licensed taxicab and gave the driver directions to their hotel.
Immediately, recognizing them as American tourists, the driver refused to
turn on his meter; instead, he proclaimed his love for Americans and
promised them a lower fare than the meter. Naturally, they were somewhat
skeptical of this promise. Why should this stranger offer to charge less than
the meter when they were willing to pay the metered fare? How would they
even know whether or not they were being overcharged? *
On the other hand, they had not promised to pay the driver anything
more than what would be on the meter. If they were to start bargaining and
the negotiations broke down, they would have to find another taxi. Their
theory was that once they arrived at the hotel, their bargaining position
would be much stronger. And taxis were hard to find.
They arrived. The driver demanded 2,500 Israeli shekels ($2.75). Who
knew what fare was fair? Because people generally bargain in Israel, they
protested and counter-offered 2,200 shekels. The driver was outraged. He
claimed that it would be impossible to get from there to here for that amount.
Before negotiations could continue, he locked all the doors automatically and
retraced the route at breakneck speed, ignoring traffic lights and pedestrians.
Were they being kidnapped to Beirut? No. He returned to the original
position and ungraciously kicked the two economists out of his cab, yelling,
“See how far your 2,200 shekels will get you now.”
They found another cab. This driver turned on his meter, and 2,200
shekels later they were home. Certainly, the extra time was not worth the
300 shekels to the economists. On the other hand, the story was well worth
it. It illustrates the dangers of bargaining with those who have not yet been to
our course More generally, pride and irrationality cannot be ignored.
Sometimes, it may be better to be taken for a ride when it costs only twenty
cents.
There is a second lesson to the story. Think of how much stronger their
bargaining position would have been if they had begun to discuss the price
after getting out of the taxi. (Of course, for hiring a taxi, this logic should be
reversed. If you tell the driver where you want to go before getting in, you
may find your taxi chasing after some other customer. Get in first, then say where you want to go.)