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How choices change behavior

Finally, a relaxing mini-vacation! Just Mike and I in Aruba – a place that holds many nostalgic memories for us, including one very special marriage proposal 14 years ago (can it be that long ago???). With all the tranquil beauty of the sea, the beach, the perfect sunsets, one naturally reflects on … optimality of choices? Yes, when the “one” is an economist.


      Here is a dilemma for you. Upon arrival at our hotel, the front desk clerk makes us an offer to upgrade to the club level.  The freebies include: continental breakfast, light lunch, hors d’oeurves and desserts in the evening, unlimited wine and top-shelf liquor throughout the day, and a daily spa “activity” which no one could explain to us. There is also some less exciting stuff like daily laundry and pressing, concierge service, and free internet (which is already free for all guests J). The cost at face value: $300 per day for the two of us (a “discount” from the normal rate of $400 per day).  What would you do?  Well, let me add another piece of information that perhaps shouldn’t be relevant if you are totally rational, but might matter for everyone else: if we don’t do the club upgrade, our hotel stay is free. That’s right: we are staying here on points, and with our status we also already got a sweet upgrade to a suite with ocean views.
     Here is the rational approach.  Breakfast at the hotel would cost around $20 per person, lunch around $60 per person, and excluding dinner (which we planned to eat off the resort) drinks and dessert around $50 per person. That gives $260 total value, which doesn’t include the spa treatment whose value is uncertain, but probably more than $40 for two people. Sounds like the $300 price tag might actually be worth it. Also, once paid, the $300 becomes a “sunk cost” and should not affect subsequent decisions. For example, if we had already decided to do dinners at restaurants off the resorts, the fact that we paid for the club level should not change our mind to eat there.
     But Mike and I are rational enough to know that we aren’t actually rational. The choice to upgrade to the club level would change our in-the-moment behavior. Firstly, we typically don’t eat breakfast, but having committed to the club level would be “forced” to go. Now I love breakfast food, so I would definitely get extra enjoyment from the experience in the moment. But then would come the regret from overeating.  We would also probably end up overindulging in desserts and drinks because we would be similarly trying to extract maximum value from our club-level upgrade. This might actually decrease our enjoyment we would get from exploring different restaurants and local bars.
     The second consideration is that paying for the upgrade messes with the feeling that we are getting our vacation “for free.” This also is a thoroughly irrational way of thinking. Of course, without the club upgrade, we are still going to pay for all our meals.  But because we obviously have to eat whether or not we are on vacation, paying for those meals doesn’t feel so painful. On the other hand, paying for the club is dissociated from regular meals and feels like an “extra” expense. Furthermore, at the moment of the decision to upgrade to the club level, those payments feel remote – in a distant future – while paying $300 a night for the club is in the present.  In behavioral economics, we call this “present bias” which distorts intertemporal decision-making.
     So, we didn’t upgrade. And that decision set us on a completely different path to actions relative to the path we would have taken were we to pay for the club.  I am still happily caffeinated in the morning with the free in-room coffee, but we are sticking to the no-breakfast rule. Instead of sending a wrinkly dress to the overpriced pressing service, we hung it up in the shower and the humidity successfully took the wrinkles out.  We are also getting enjoyment from the idea that our vacation is still “free” (which is awesome, despite the fact that, of course, it is not because we’re still paying for pricey food and drinks).  And yesterday night we visited a favorite restaurant of ours from the trip when we got engaged, Papiamento, without any regret that we were forgoing free food at the club lounge!
Engagement dinner on the beach, June 2003
Dinner at Papiamento, September 2017

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