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Thaler’s “all-you-can-eat” puzzle: two alternative explanations

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  • María José Caride
  • Eduardo L. Giménez

Abstract

To determine whether individuals take into account sunk costs when making deci- sions, Thaler (1980, p.48) conducted an experiment in which anonymous individuals decided to enter an \all-you-can-eat" pizza restaurant; a random selection of those customers was given back the $2.50 they had paid. The result was a surprisingly lower average consumption of pizza by the group that was reimbursed, as compared to the group that was not. Economic theory of consumer suggests that this is inconsistent with rational behavior because only incremental costs and bene ts should a ect deci- sions. Since the cost of consuming any extra pizza is zero once a person is inside the restaurant, the bene ts, then, must undergo some change once those customers are paid back. The literature of behavioral economics suggests that the money paid on en- try plays a role in consumer behavior, based on mental accounting and prospect theory. In this paper we integrate several elements of this literature into neoclassical economic theory and make use of this comprehensive economic model to explain Thaler's puzzle. However, this model presents some shortcomings, and in the end we provide a comple- mentary economic explanation involving the physical satiation constraint, which helps to overcome those limitations.

Suggested Citation

  • María José Caride & Eduardo L. Giménez, 2004. "Thaler’s “all-you-can-eat” puzzle: two alternative explanations," Working Papers 0401, Universidade de Vigo, Departamento de Economía Aplicada.
    • Handle: RePEc:vig:wpaper:0401
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    References listed on IDEAS

    as
    1. Thaler, Richard H, 1990. "Saving, Fungibility, and Mental Accounts," Journal of Economic Perspectives, American Economic Association, vol. 4(1), pages 193-205, Winter.
    2. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    3. Thaler, Richard, 1980. "Toward a positive theory of consumer choice," Journal of Economic Behavior & Organization, Elsevier, vol. 1(1), pages 39-60, March.
    4. Soman, Dilip, 2001. "Effects of Payment Mechanism on Spending Behavior: The Role of Rehearsal and Immediacy of Payments," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 27(4), pages 460-474, March.
    5. Arkes, Hal R. & Blumer, Catherine, 1985. "The psychology of sunk cost," Organizational Behavior and Human Decision Processes, Elsevier, vol. 35(1), pages 124-140, February.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Sunk Costs; Mental Accounting; Prospect Theory; Physical Constraint; Satiation.;
    All these keywords.

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory

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