“The one thing you shouldn’t do is try to tell a cab driver how to get somewhere.”
“Life is like a taxi. The meter just keeps a-ticking whether you are getting somewhere or just standing still.”
Imagine that you’re a taxi driver in New York City. You live modestly, so you need $50,000 a year to live on (OK…in New York City, that means you live like a pauper, but bear with me just for the sake of this example). You want to work 5 days a week for 50 weeks a year. That means you work 250 days a year.
How do you know how much to work during those days? If you’re a taxi driver, you can work up to 12 hours in any given shift, but you don’t have to work all 12 hours.
If you’re playing along at home, then you probably have come up with at least one quick mental shortcut for figuring out how much to work.
You’re going to drive lost tourists and harried Wall Street types around for 250 days a year. You need $50,000 to live on. Therefore, you need to earn $200 a day.
This is called, wisely, by psychologists who know much more about the human brain than I, “daily income targeting.”
Cabbies, it turns out, are very susceptible to daily income targeting.
Once they hit an income target for the day, they turn on the “not in service” sign and head home.
So, on New Year’s Eve, when there are a million people in Times Square who need rides home (or to the next party or to try to snap selfies with Ryan Seacrest), the cabbies, instead of continuing to ring the register, get their $200 and call it a night to go pop the bubbly. 2 hours worked, cha-ching!
But, they then subject themselves to 12 hours of drudgery and misery roaming the streets when a snowstorm hits and nobody travels anywhere.
Not only do they subject themselves to more misery later, they also subject themselves to potentially running a deficit. New Year’s Eve may be prolific for taxi drivers, but the next day may be barren (due to hangovers), meaning that, over the 2 days, instead of having $400 to keep pace with the need to earn $50,000 in the year, they might have $350.
By the way, good poker players are bad about this too. They get to a table full of fish (poor players in poker parlance), hit their income target, and instead of continuing to cast out a line and take advantage of the substandard skills at the table, they cash in their chips and walk away, chancing that the next table they hit will be full of sharks and they’ll lose money.
But what if the taxi driver, instead of going home after 2 hours on New Year’s Eve, worked all 12 hours while the drunks were staggering around, and made $1,200 in the night?
That’s 5 slow days when the taxi driver wouldn’t have to work! Or, alternatively, that’s an extra $1,000 that the cab driver didn’t expect to have. He could put it towards retirement!
He should be working like a dog on the heavy traffic days, carting around as many willing riders as he can, and then, if the day is slow and nobody is yelling “yo, taxi!” he should not work.
How do we act like taxi drivers in our financial lives?
Targeted returns for our investments. When we figure out that we need to invest $X and get a Y% return in a given year, we’re basically looking to earn X * Y. If we put aside more money or get better returns in a year, what happens? We feel like we have hit our target, and loss aversion kicks in, causing us to abandon our ideal asset allocation in favor of “safe” investments like the mattress or CDs.
Hitting performance goals at work for a bonus. If we know that we need to deliver 100 widgets to earn a $1,000 bonus and we’re looking to that $1,000 bonus to fund our new pool that we’re going to tell everyone about at the family Christmas party, then even though we could earn $1,500 for delivering 150 widgets, we slow down once we reach 100 widgets.
Coming in under budget for a month. You’re diligent. You do your monthly budget. You know you should be spending $Z per month. What happens when, one month, it gets close to the end of the month, and you discover that you’ve spent $200 less than $Z? Chances are that, if you think like the taxi driver, you go blow it on something meaningless rather than investing the excess. You’re playing with fire and hoping that you’ll never actually need to tap into that emergency fund.
How about you? Have you ever been guilty of acting like the taxi driver who goes home early on New Year’s Eve? Let’s talk about it in the comments below!