Why Stand in Line for Cheap Broadway Tickets?

The New York Times has an interview with Victoria Bailey, executive director of the organization that operates the TKTS Booth. The Booth's long lines (for discount Broadway tickets) have always been an anomaly. If tourists are willing to stand in line hours in sauna-like heat, why not charge a higher price for tickets (and have shorter lines)? One answer: Fairness research has shown that most people regard lines as "fair" and higher market prices less so. The New York Times' Erik Piepenberg asked Bailey about the lines and got this:

Our mission is in large part to promote conversations about theater. You do that in person. The booth is kind of a town square. About 30 to 35 percent of people there are first-time Broadway attendees. There is anxiety about what to see. You hear those conversations within a few minutes of getting there.

It’s hard to believe because the lines are moving so quickly but almost every transaction involves a series of questions: “I’m interested in ABC show, but which show has the best seats or the steepest discounts?” There is an urban fellowship about that experience.

Fourth Circle of Hell (Home Edition)

In George Loewenstein's classification, people can be divided into "tightwads" and "spendthrifts." Tightwads feel an excess of pain when spending money and thus spend less. Spendthrifts don't feel enough pain and overspend. In both cases, the gut reaction to spending money biases, and sometimes trumps, rational budgeting. A new study by Scott Rick, Deborah Small, and Eli Finkel finds that spendthrifts tend to marry tightwads, and vice-versa. That may not be a good thing — "In spite of this initial attraction," the authors write, "spendthrift/tightwad differences within a marriage predict disagreements over finances, which in turn predict diminished marital well-being." The article begins with this quote from Dante's description of the Fourth Circle of Hell:

I saw a nation of lost souls…they strained their chests against enormous weights, and with mad howls rolled them at one another. Then in haste they rolled them back, one party shouting out: “Why do you hoard?” and the other: “Why do you waste?”

Why We Don't Always Order the Gnocci

Take a look at the menu above (click for a larger version). It's a prix fixe meal recently offered at a Tel Aviv restaurant. The prices are quoted in New Israel Shekels (NIS), worth about as much as an American quarter. The three-course meal costs 115 NIS, or around $30. You've got a choice of five entrees. Which would you choose?
The menu is from an experiment by behavioral economists Ori Heffetz and Moses Shayo, of Cornell and Hebrew University, Jerusalem. They got a fancy Tel Aviv restaurant to play along as they manipulated the menu prices, specifically the little prices in parentheses telling how much the entrees would have cost a la carte. They wanted to test whether more people would pick an item just because it was more expensive. (Did you choose the shrimp gnocchi?) Those who pick up many checks on dates might swear it works that way, but Heffetz and Shayo showed it didn't. The a la carte reference prices did not affect diners' choices.
“Maybe, sometimes, old-fashioned economics is just about right,” Shayo told The New York Times' John Tierney. “Maybe when it comes to food, people do have reasonably stable preferences. Some people like shrimp and some don’t, even if it’s worth a lot of money.” The Times article picks up on that thought, offering the research as a corrective to the current wave of Homo economicus-bashing.
Well, kind of. Nobody disputes that taste can trump money, especially when money isn't truly at stake. More generally, it's long been known that reference prices affect estimations of prices — but choices are a whole different matter. In the late 1960s, Sarah Lichtenstein and Paul Slovic demonstrated this in some classic experiments. Volunteers were required to assign prices to wagers and, separately, to choose between pairs of wagers. Their choices and prices were often contradictory. That is, the volunteers would insist that wager A was worth more than wager B… but when given a free choice of the two, they would consistently chose wager B. This was especially paradoxical because the volunteers were simply trying to maximize money (not balance a taste for stuffed artichokes against a desire to get the best "deal").
Obviously, both choices and prices are important in the real world. There is now a applied science of menu design, based at least loosely on psychological principles. The practical restaurateur is mainly concerned with nudging diners to select high-profit items. One trick is this: If a restaurant wants to push a $30 steak, it will put it on the menu next to a $80 Kobe steak. The latter, even if no one orders it, makes the $30 steak seem reasonable in comparison. And it causes more diners to choose the $30 steak rather than something else, or so menu consultants believe. The Heffetz-Shayo menu was unusual in that it gave prices that don't apply (you're going to pay the prix fixe no matter what you choose). Conceivably, some diners might have picked the most expensive item, to get maximum value (the hypothesis Heffetz and Shayo were testing), while others might have momentarily forgotten about the prix fixe and picked something inexpensive, to get a bargain (as the menu design trick supposes). It's even possible that the two effects canceled out, contributing to the null result. It might be interesting to see more rigorous testing of the tricks used by menu designers.
News to me: that shrimp, pork, and sausages are popular entrees in Tel Aviv.

Frank Lloyd Wright Money Pit, $15 Million

In the hard-to-price real estate department, a foundation has listed Frank Lloyd Wright's iconic Ennis House, in the Los Feliz district of Los Angeles, for $15 million. Completed 1924, it's the grandest of Wright's "textile block" houses, constructed from molded concrete blocks. Wright had the utopian notion that these concrete blocks would be the lost-cost housing material of the future. It didn't work out that way. Only four textile block houses were built, all for rich people in Southern California. Wright wrote: "The concrete block? The cheapest (and ugliest) thing in the building world.… Why not see what could be done with that gutter-rat?… It might be permanent, noble, beautiful."
Well, two out of three isn't bad. The textile blocks began crumbling at the first drop of rain. Earthquakes didn't help, either. Exasperated owners tried well-meaning conservation treatments, like sealing the concrete, that did more harm than good. The Ennis House, severely damaged by the 1994 Northridge earthquake and some monsoon-like rainy seasons, was red-tagged by city inspectors in 2005.
How much would you pay for a Frank Lloyd Wright masterpiece needing perpetual TLC?
Pluses: The architecture, of course, and unparalleled views of the city and Hollywood Hills. The foundation invested $6.5 million on repairs. The home has been in numerous movies, including Blade Runner. It was in a Ricky Martin video.
Negatives: It's estimated the new owner will need to spend $5 to $7 million in further repairs. Zillow's "Zestimate" for the place is only $2,131,500, presumably reflecting what it would be worth without the Wright name or the upkeep issues. The last price paid for the house, in 1968, was $119,000.

Listed by Hilton & Hyland and Dilbeck Realtors with international marketing by Christie's Great Estates.

The Price Machine of Irving Fisher

There's a great piece on the "Phillips machine" in today's New York Times. It's a hydraulic computer that uses water to predicts the ebb and flow of the economy. A New Zealander named Bill Phillips built it in 1949, and copies were sold to Harvard, Cambridge, Ford Motor Company, and the Central Bank of Guatemala(!) The Times site has video of a restored Phillips machine gurgling away.
Not mentioned is a remarkable predecessor, the 1892 price machine of Irving Fisher. (I write about Fisher and his machine in my upcoming book, Priceless.) Fisher was probably the most famous American economist of the Gilded Age. The public first knew him as the author of a best-selling self-help book with the earnest title, How to Live. A successful inventor, Fisher devised an index card system, a precursor of the Rolodex, and made a fortune off of it. From his perch at Yale, Fisher pontificated on the issues of the day. He was for vegetarianism, prohibition, eugenics, and just about every nutty health regimen under the sun.
Like Phillips' machine, Fisher's was based on a simple principle: water seeks its level. The device consisted of a tank of water with a flotilla of half-flooded wooden “cisterns” connected by a system of levers. Adjustments to “stoppers” and levers fed in data on incomes, marginal utilities, and supplies; then prices could be read off scales. The device prefigured, if not parodied, the direction of twentieth-century economics. “Press stopper I and raise III,” read part of Fisher’s instructions for the thing. “I, II, III now represent a wealthy, middle class, and poor man respectively…”
Fisher’s career came screeching to a halt in 1929. Days before Black Monday, Fisher waved aside the volatility that was worrying investors. “Stock prices have reached what looks like a permanently high plateau,” he announced. They hadn’t, and that statement — now perhaps Fisher’s most quoted pronouncement — inevitably turns up in humorous compendiums of Famous Last Words.

Are Two Prices Better Than One?

In Australia, it's been the custom for home sellers to list two prices, a minimum and a maximum. The practice has turned up in suburban Long Island, reports Marcelle S. Fischler in The New York Times.

…Ms. Karekinian has joined a small group of pricing pioneers on Long Island: Rather than settling on one number for her five-bedroom colonial, she opted for a “value range price” of $999,000 to $1,194,876. She decided to adopt the tactic in listing the property last fall with Carol Poetsch of Prudential Douglas Elliman’s East Meadow office.
“I am not just going to say I want $1.3 and that’s final,” Ms. Karekinian said, signaling her flexibility but vowing that she won’t sell below the range. “Now I’m flexible — not stupid flexible, but flexible.”

Prudential Douglas Elliman is said to have begun using the strategy in 1996. The Times says that 180 homes in Nassau County and 360 in Suffolk County are currently listed by a range.
One advantage is obvious: Buyers scanning listings online usually set a minimum and maximum price, and these are round numbers (often chosen from a menu on the listing site). In the example above, a buyer whose maximum price was $1 million would presumably see a house listed at "$999,000 to $1,194,876," but not a house listed at a single price higher than a million. (Of course, this depends on listing sites being able to handle price ranges.)
I can think of a couple of other reasons why this may work. The range probably acts like an advertised reference price. Discount stores will have price tags saying something like "$14.99 COMPARABLE VALUE OF $25.00." Empirical studies and retail practice confirm that customers, even those who know better, are more likely to buy at $14.99 when reminded that they could be paying more elsewhere. In the case of a house, buyers will figure that if they can get it near the low end of the listing range, it's a bargain.
I suspect the biggest advantage of this trick may be simple confusion. Just about everyone knows that a listing price of $X typically signals that the seller is willing to accept a good deal less than $X. In this market, few sane buyers are going to offer list price. Having two prices upsets this comfortable strategy. Do you offer the low price of the range? Less than the low price? Or do you make an offer somewhere in the range? Maybe you really, really want the house and want to make a preemptive offer. Do you offer the high price?
All of the above make a certain amount of sense. Range pricing is likely to spread out the bell curve of offers. Since sellers choose an offer from the high end of the bell curve (or did, back when there were buyers) that ought to result in higher transacted prices.
Prudential apparently has some weird algorithm for devising its range prices. Another example given in the Times article is a Cape Cod listed at $399,000 to $458,876. The $399,000 is easy to understand. But where did they get $458,876, with six significant figures?

Do Credit Card “Deadbeats” Get a Free Ride?

In credit card industry parlance, a "deadbeat" is a customer who pays his bill in full each month, incurring no finance charges. Since most cards have no annual fee, deadbeats pay nothing for use of the cards. In recent days, there's been much speculation that the "free ride" is over. Congress' credit card reform bill is due to be on Obama's desk by Memorial Day. The purpose of the bill is to limit the fees and penalties imposed on those who don't pay their monthly minimums (the folks the rest of us might actually call "deadbeats"). Understandably, banks aren't crazy about the bill. They've been hinting that they'll take it out on the other deadbeats. This might involve discontinuing rebate programs or grace periods and introducing annual fees.
I'm a hard-core deadbeat. I don't pay fees or interest, and I get free credit between the time I make a purchase and pay for it. That adds up. Assuming a 6 percent cost of funds, one month's free interest amounts to a 0.5 percent "rebate" on everything I buy. That's not all. My main card (get this: a "Platinum Rewards Visa Card" issued by State Farm Bank) gives me an additional 1 percent rebate on purchases, good for paying my home insurance premiums. Since I'm going to pay my insurance anyway, that's as good as cash.
Am I getting a free ride? Not really. I am paying for that 1.5 percent total "rebate," just not in ways easy to see. Merchants pay credit card companies a service fee for all credit card purchases. The fee usually ranges from 2 to 4 percent. When gas stations first starting taking credit cards, they offered a "cash discount" rather than a "credit surcharge." The credit card companies knew enough behavioral economics to demand that. Increasingly, transactions are electronic, and that means there's always a third party getting a cut. Today, to do business with Amazon, iTunes, or car rental places, you basically have to pay by credit card. Ergo, these businesses build the 2 to 4 percent fee into their prices. That means I pay 2 to 4 percent more than I would otherwise, in order to give the credit card issuer its cut. The issuer than refunds 1.5 percent to me. It's still made a profit of 0.5-2.5 percent (less its expenses) on the transaction. As long as the expenses are less than 0.5-2.5 percent, the issuer is making money off deadbeats.
Banks may well use the new credit card regulations as an pretext to test how price-sensitive their customers are. Would you really give up your credit card if you had to pay a $35 annual fee? (My answer: no, not for the one card I really use. I would cancel a bunch of rarely-used cards in my wallet.) Issuers are unlikely to do anything that causes too many customers to cut up their cards. The business—even the deadbeat business—is too profitable.