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what bus companies can teach us

Once every now and then, I witness an economic plan so brilliant that it simply puts me in awe.  Amid a world of cheesy jingles, repetitive commercials, and tried and true marketing plans, there are companies that really think outside of the box.  And it’s not like the economic plan I am about to discuss is to my benefit; as you’ll see, it works entirely against me.  But while I cannot declare defeat, I still tip my hat to two public fleets of horseless chariots, Dan and Kavim.

It all started with the רב-קו.  About a year or two ago, Kavim and Dan began offering a card that would allow passengers to prepay for busses, the רב-קו.  This card would enable many passengers to board a bus and pay without having to search their pockets for change.  As a result, busses spent less time at stops, drivers could focus on the roads instead of looking for change, and if this wasn’t enough, Kavim and Dan offer an additional 20% discount for all people using the רב-קו (when a person puts ₪ 50 into the רב-קו, it is considered as if he or she put in ₪ 62.50, giving the passenger more money to use, but effectively giving a 20% discount.)

But the רב-קו has another, much more important use.  By having passengers only pay for the bus once every few weeks when they recharge their cards, passengers no longer pay attention to the amount they are paying per ride.  This has two benefits for Dan and Kavim (1) passengers may take more busses, not noticing how it depletes the amount in their card and (2) it allows Dan and Kavim to jack up the rates without anyone noticing.  In economic terms, passengers tend to spend more when they do not notice the marginal cost.

Teaching the consumer to ignore the marginal cost allows the consumer to turn a blind eye most of the time and lead to tremendous increase in spending.  Conversely, if the public truly wanted to see a reduction in the usage of a good or service, the best thing would be to have the consumer actively pay for it more often.  Imagine how you would control your water usage if you had to pay your water bill at the end of every day.  Imagine how you would curb your electricity usage if you had to feed a meter, the way people did many years ago.

What really is catching my eye is the extent to which Dan and Kavim are going to make consumers more and more insensitive to price.  A few months ago, when a passenger used a רב-קו, the bus driver would print out a receipt, which would contain how much the passenger paid and how much is left on the רב-קו.  Nowadays, drivers no longer print out a receipt unless requested.  Dan and Kavim are willing to forgo any lost revenues by people who sneak onto busses in order to ensure that no one has a ticket and that those who do pay become increasingly insensitive to the price.  In contrast, Egged spends thousands hiring guards to board busses and check receipts while making their drivers pay enormous fines if a single passenger is missing his receipt.  Dan and Kavim have uncovered a simple economic fact: the gain of price insensitivity greatly outweighs a couple of hundred free riders; seeking out enormous potential profit is worth much more it than plugging a few holes.

As a single consumer, I am powerless against Dan and Kavim.  I cannot ignore using the רב-קו; I would just be paying 20% more and not proving anything to anyone.  All I can do is advise that if you ride Dan and Kavim busses, always ask for a receipt and try to be sensitive to price.

More importantly, I think it is worth learning from Dan and Kavim.  Sometimes it is more important to look for new prospects than plug existing holes.   Driving yourself crazy to chase down every little bargain and pay the least for everything is not worth as much as allowing some flexibility and utilizing your time more wisely.  Next time you’re on vacation, instead of just going according to plan, allow for skipping some stops and exploring new possibilities as you see them.  Managers, instead of micromanaging your workers, allow some flexibility; your workers are likely to pay you back with a redoubled work effort.  Sometimes when you give an inch, you really will get a mile.

paying for cabs

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.

what about busses?

A while ago my sister and I were discussing all the wonderful movies we grew up watching even though (1) we couldn’t fully understand them at the time and (2) they scared the crap out of us.  Such classics include The Return to Oz, Alice in Wonderland (1985 version with the scary Jabberwocky), and of course Who Framed Roger Rabbit. Who Framed Roger Rabbit is one of those movies that I watched again and again, but never fully understood until I watched it as an adult.  The plot comes together at the end: an evil cartoon wants to destroy toontown in order to build the LA freeway.  This, he believes, would jumpstart a booming auto industry from which he could profit.  But building a freeway isn’t enough; people during the 1940’s (when the story took place) loved their public transportation and would not leave it for a simpler alternative.  So the villain had to do one other thing in order to hatch his plan – he had to destroy public transportation.

Does the auto industry aim to destroy public transportation?  I would find it hard to argue that they are not at least competitors, and believe that the auto industry wants public transportation to be an inconvenient alternative.  In fact, I would find it logical to believe that the auto industry tries to ensure that public transportation does not become too convenient.  At the same time, public transportation probably aims to fight the auto industry.  Indeed, it could be argued that as gas prices rise, so does the attractiveness of public transportation, and subsequently, its profitability.

But this is not true.  If someone already has a car, he isn’t going to take a bus when gas prices rise.  The cost of the car and insurance are already sunken costs, so the driver looks at the marginal cost of gas and the time saved and then decides what to do.  In the end, public transportation will almost never win on cost.

But it can win in convenience.  If the state of Israel were to take steps to make public transportation more efficient such creating more “public transportation only” lanes and enforce their rule the rules of the road, more people would flock to public transportation in order to beat traffic.  Traffic would obviously still exist, but as it gets worse and the alternative of public transportation looks better, people will begin making the switch.

Unfortunately, Israel does not really care about public transportation.  Busses stay tied up during rush hour when they should be able to work more efficiently in lanes of their own.  Most of the central bus stations in this country are filthy, outdoor drug dens that are dangerous at night and have no clean public restrooms.  Many busses take extremely long routes that are inefficient for the rider, but are needed in order for the bus company to turn a profit.

It is no shock that only 16% of Israelis commute to work using public transportation.  And trust me, it’s not because they want to.  While Israel’s public transportation is tremendously advanced, even more than most of the US and Europe, its deficiencies are significant and often prohibitive.

A while ago, at a Shabbat meal at Hannah’s house (it should be noted that Hannah is a fantastic cook and a wonderful host, as you would expect from the writer for cookingmanager.com), Hannah discussed what Israel could be like if suddenly everyone in cities switched to public transportation.  Busses would have to be reconfigured to could get you from anywhere to the center of town in 15 minutes and from there to the major city in another 20.  Busses would zoom, people would probably get to work faster (but would have to switch a couple of busses) and we’d cut down polluting significantly.  A city planner’s dream.

But we’re so far away.  As long we can’t even get clean central bus stations, we will not have a more efficient public transportation system.

The good news is the opportunity for change is now.  Right now we are in the middle of a green tech bubble and counties all over the world are cutting back on emissions (or at least telling their constituents they will.)  We could make it clear to our government that our cities need better public transportation for our economy and our peace of mind.

So start with something simple.  Ask your mayors about fixing up your central bus station.  And while we’re on the subject, I advise you to jump the turnstile and refuse pay-toilets.  Pay toilets are part of the reason there is such horrible public urination in central bus stations.  Tell the mayors we already pay with our taxes.  And if he wants to make people pay for toilets in public places, tell him you want the pay-toilets to be the ones in city hall, not in the central bus station.

In short, if you care about the environment, if you care about the poor, heck, if you care about blatant government corruption, then start making a big deal about public transportation.  We have a small window of opportunity and only with public outcry will we be able to utilize it.

the commute

When it comes to commuting, I have been spoiled.  When I was young I worked in a photo lab that was a 10 minute bike ride from my house.  When I taught in Chicago I literally taught in the building next to where I lived.  In the army I had a long commute (2 and a half hours each way) and I had one job in Israel that was 40 minutes away, but thank God, my current workplace is only a 20 minute walk from home.

Even though public transportation is fantastic in Israel, Israelis still have a long commute to work.  Last August there was an article in Ha’aretz that summed up our situation:

“Israelis… tend to spend a good deal of time traveling to and from work. As a consequence, they have little time left to be with their families, or for spiritual, sports or other activities.

Sixty-two percent of Israeli employees drive private cars to work. The remainder rely on public transportation (16 percent), walk (13 percent), or use transportation provided by their employers (6 percent); very few (3 percent) get to work on bicycles or motorcycles (according to data from the nonprofit organization Transport Today & Tomorrow). Around the world people spend, on average, 40 minutes getting to work. In Israel, however, the traffic jams along the Ayalon highway, Highway 4 and other routes leading to the central Dan region hold people up a minimum of one hour a day – in each direction.”

The tradeoffs are tremendous.  For many, living further away from work means more commute, which is less time for family, friends, or even a second job.  On the other hand, it may also mean a nicer neighborhood, cheaper housing, a better community, and better schools.  Alternatively, for those who want to live in the heart of it all, the higher living costs pay for time to spend with friends and family.  It all boils down to the basic principle:  time  = money (or in economic terms, everything has an opportunity cost).

Clearly this is a complicated issue where the ideal answer is to reach some sort of balance.  But no matter where you stand, the most important thing is to be aware of the tradeoff and understand not only what you sacrifice, but what you gain as well.

How does your commute affect your life?

slowing down Israel’s drivers

Over the past month, I started listening to some audiobooks.  I know what you’re thinking, but when you don’t have a car and you walk everywhere, audiobooks become a great way to pass the time.  The first audiobook I “read” was a recent controversial economics book called Superfreakonomics.  I liked this book because it took a microeconomic method to measuring everyday problems and the solutions that work.  They don’t ask how we can stop global warming; they ask how we can cool down the earth.  They don’t ask how to stop prostitution; they look for how (and if) it can be brought to a realistic best-case scenario.

While walking and “reading” I could not help but notice a large traffic jam.  This got me thinking about what causes traffic accidents in Israel.  Were one to listen to public service announcements on the radio, one would think the #1 killer on the road is drunk driving.  But Israelis don’t drink so much more than the citizens do in other western countries.  And while drunk driving is dangerous, most drunk drivers do not get into accidents (although they are much more likely to do so).  So then what makes Israel’s drunk drivers so dangerous?

Another commercial break on galgalatz got me thinking that the problem is drivers’ daydreaming.  This is clearly a very hard statistic to measure.  The only thing I can attest to is that I don’t see this being too much of an issue in Israel.  Not nearly as much as what I think it is the real heart of the beast.

In my opinion, drivers in Israel are dangerous due to a lack of patience.  Everyone is always cutting one another off, out of fear of being considered a “friar” (slang for loser) for being nice to someone on the road.  Yes, you read correctly, “friar.”  I learned this term after moving here, and apparently every Israeli’s biggest fear is being thought a “friar.”   “Better death than friardom” would be a good motto for Israel.

Back to the main point.  I don’t think I am alone in my evaluation of the situation.  Many others I have spoken to identify lack of patience as the #1 killer on the road.  Of course, this is very hard to measure and not simple to wipe out.  In an “I want it now” kind of world, this problem will probably only get worse.  

So what is the solution?  Should we have an economic policy that gets people off the roads (prohibitive tariffs on cars etc)?  Should we just live with it and keep trying the same public service campaigns that probably don’t do much?  Maybe we can have a program in schools to teach Israelis to be patient.

I personally believe the answer lies with science and engineering.  For one, Israel can make it a law that cars cannot go over a certain limit.  Why does a car need a feature that allows it to go 180 KPH if the highest speed limit is 120?  Perhaps mechanics should find a way to slow it down a bit.  Also, if the problem is drunk driving, make a breathalyzer test necessary for starting a car after 9 PM.  The same way Israelis have number codes for starting a car, we can have breathalyzers.  And if you’re afraid the person will get someone else to breath into it for him, consider why would a friend breathe to start someone else’s car.  If he is sober, then he can drive his friend home.  The fact that the friend needs him to breathe will probably stop a most friends from letting friends drive drunk (nothing can stop everything.) 

But none of this addresses our core problem, a lack of patience.  That is why I think Israel should invest creating something in a car to calm people down. Perhaps a certain smell can keep people calm, maybe a certain melody that plays when the car starts, perhaps something in the air.

I would be interested to see how the costs for these technologies compares with the cost that Israel pays economically with drivers in traffic, people dying on the road, and of course the public service announcements. Perhaps just a small shift in investing our money for safe roads can keep us safer longer.

Did I just advocate drugging Israel’s drivers.  Apparently so.  If you have any other solutions, please list them below.