taxi

For everything else, there’s MasterCard. Except taxis.

November 9, 2009 in New York

In a report that should surprise no one, the NYTimes finds that convenience yields higher revenues for NYC taxis. Indeed, the credit card machines which are now mandatory for every cab have coincided with revenues rising 13% from last year, bucking a national trend of -15%. Tips have risen from 10% of the fare pre-cards to 22% with the new system – and considering that only 28% of rides are paid for with plastic, that means the credit card tips are significantly higher.

Much of that may be attributed to the choices which are presented to riders when the ride ends, starting at $2, $3 and $4 and graduating to 20%, 25% and 30% as the fare increases. For a short trip, the fixed dollar amounts can represent massive percentage tips (an informal NYT survey reported a 38% average, most of which came from people using the presets). Obviously, this beats the old system of rounding to the next dollar, when (in my cynical view) tips were given not to help the driver but so the passenger wouldn’t have to deal with change. (Of course, use of the preset amounts suggests convenience remains a key factor.)

But all is not well: predictably, some taxi driver representatives are playing down the report, saying, for example “I know that’s not true.” And as we all know, anecdotal evidence from people with incentives to be biased is always more useful than TLC data (that’s the all-powerful Taxi and Limousine Commission, for the non-NY’ers among you). But the choice quote – the one which inspired me to dedicate a few hundred words to this analysis of what has become a daily ritual for me – is this gem, which puts a bizzare sense of accounting on display:

“Because of credit cards we get customers, that’s true,” said Muhammed Hamid, 35, of Queens. “But if they give us cash, you can put the gas on that; you don’t have to wait three, four days.”

It’s true that credit card payments take three days to clear. But why does that make a difference? If a taxi driver switched from all cash payments to all credit card payments and did exactly the same amount of business and received exactly the same amount of tips, there would be a period of three days during which he would realize no revenues – the days immediately following the transfer. From then on, there would be no difference; he would get cash every day, it would just be the cash from work done three days previously. Because of this rolling accumulation, there is absolutely no practical difference in revenues. Even if there were some bizarre quirk of the universe in which the credit card payments somehow lumped together and did not pay on a rolling basis, which there is not, the cash that is being received in the meantime can pay for gas.

I’m frankly at a loss to deconstruct this statement any further. And yet - if drivers get credit cards of their own and use those to pay gas, they can put off their gas payments for up to a month. It’s not necessarily a good solution, but to try and tie this debate back to cashflow timing is very strange, especially in light of all the methods both sides have to adjust those timings and the fact that, as illustrated, it doesn’t matter anyway.

Actually, that’s not entirely true. It’s probably much easier to hide cash payments from the IRS.

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Self-defeating systems

October 3, 2009 in Economics, New York

Last night, trying to catch a cab in a Manhattan rain, it occured to me that it really shouldn’t be so surprising that so many of our systems fail exactly when we need them most. I was standing blocks from the nearest subway or bus and had no umbrella; I needed a cab to get home. But so did everyone else. Result: no cabs available for anyone. The real surprise is that we expect those systems to work at such times.

The number of available cabs is a (somewhat) efficiently determined quantity. At any moment, the supply of taxis matches the demand for private transportation. But when demand spikes, there is a scarcity of cabs. The trouble is that these demand spikes only occur infrequently – they are tail events. But more than that, they are wrong-way risk events. Not only is demand higher in terms of quantity demanded, but demand is also escalated in terms of how much people need cabs (think of this as the minimum price a person is willing to pay having gone up as well). Thus, the time I need a cab the most is the exact time it will be hardest to find.

It is in many ways a futile exercise to apply central measures to tail events. The real surprise is that we expect those systems to work.

Any system which is based on the center of the distribution will fail to give satisfactory results when tail outcomes appear, such as rainy nights or the United Nations convening. On the other hand, any system which is designed to operate smoothly 90% or 95% of the time must, by definition, be based on the center of the distribution. To deal properly with tail events, a system must either a) ignore the center or b) undergo a regime shift to deal with the tail (which is just a sneaky way of saying it should be two systems, one for the center and one for the tail). Taxis operate based on the center; therefore the system breaks down in the tail. However, tail events for cabs are generally forecastable – I would think that supply could adjust relatively easily and undergo the necessary regime change. If I drove a cab and I saw it was raining, you bet I’d be out looking for extra fares.

The BLS birth/death model which I discussed yesterday is another example. Designed to represent the manner in which businesses change over time, it must be built in accordance with normal (i.e. central) behavior. It therefore fails anytime the economy experiences sharp growth or contraction – tail events.

And how about value at risk? The analogy should be obvious by now. On the one hand, the distributional assumptions for VaR come from historically observed data. Thus, the system is based on the center. On the same hand, VaR doesn’t tell us anything about the tail event – it merely defines what constitutes such an outcome. By the time you experience the tail, you’re beyond VaR’s ability to help you. So VaR, for all its comfort and reassurance, is another system which fails to account for the periods it will be needed most. Better risk measures deal exclusively with the tail, which is to say the outcomes they are being used to evaluate.

taxi

For everything else, there’s MasterCard. Except taxis.

Self-defeating systems

Two Taxis