There are two ways to determine how to pay a cab driver in Israel:

(1) You can pay according to the meter.  This means that you pay according to how much time you spend in the cab.  Alternatively, you can…

(2) Set a price in advance and go according to that price no matter how long the ride takes.  There is an urban legend that this is illegal because it allows the driver to pocket the money.  This is not true.  As long as you request a receipt, the ride is registered and the driver will not be able to pocket the money.

So which option is best?

As first glance, one might say that the meter is best.  After all, if the ride takes longer you pay a bit more, but if the ride is shorter, you save money.

But once you take behavior into account this is no longer true.  Once the burden of time is borne by the consumer, it becomes in the driver’s best interest to take his time.  Suddenly, it’s okay to stay behind a slow car on the highway.  It isn’t so important to catch that yellow light anymore.  A few dishonest drivers may even take a “short cut” for extra time or knowingly drive into a traffic jam.

This is why I always agree to set a price in advance.  Once I set a price, I make it in the driver’s best interest to get me to my destination as soon as possible (usually alive, although sometimes you have to specify this.)

Technically, cab drivers have a guide that tells them how much they are supposed to charge, based on your location and destination.  Practically, they never stick to it.  The same way that the member states of OPEC (Order of nations who Pathetically use Extortion because they Can’t beat Israel) often sell oil on the side for a marginal profit while undermining the cartel they are trying to build, cab drivers will negotiate on the margin, even though it means lesser fairs for everyone in the end.  It’s nice to know we have something in common after all.

Getting back to our subject.  Practically, how do I set a price?  Well, if I have an idea of what I should pay, I offer it to the driver.  If not, I offer the driver some ridiculously low price and see if he takes it.  Sometimes he says yes, but more often than not he will tell me a higher price.  I will always try to drop his first asking price by ~ ₪ 10.  If the driver does not agree, I stop a different cab.  This time I offer the cab driver a bit above my initial offer for the last driver, but will eventually settle on the final price I gave the last one.  If this driver does not agree, then I will take the next cab that will agree to anything less than the cheapest price offered to me by the first two drivers.

This system is based on a common application of game theory.  The game is for me to get a cheap ride and for him to get me as a customer and then get the most money out of me.

So in order for me to set the terms of the game I should :

(1) control the game by making the opening offer (“Can you take me to Petah Tikvah for ₪ 50?)

(2) learn the market price, which is why I never let a cab leave me without making a final counter offer (“okay, the how much will you take me to Petah Tikvah for?  That much?!  What am I, a friar?.”)

(3) negotiate marginally (“what about ₪ 10 less?  Is ₪ 10 so much that you don’t want my business?”)

(4) never let the cab driver’s comments affect me (“I’ll have you know, my mother is a saint!”).

In short, by using game theory one learns the market price and then looks for the best price by thinking marginally.

Do you usually go by the meter or negotiate a price?

PS – if you have elderly people in the cab, it is in your best interest to go by the meter to make sure that the elderly people do not get hurt due to crazy driving.