As I wrote, the web is pretty excited about the story of a harvard business school professor Ben Edelman got legalistic with a Chinese restaurant that over-charged him $4. I get it. It seems no one can get over with the sympathy they feel for that poor restaurant owner. As I mentioned in my previous blog, empathy, the very attributes we seem to think so highly of, lead to awful judgement errors.
Many businesses take it as a strategy to "mistakenly" over-charge customers. Since the amount is small, most people will not complain other than frowning at it. These little sums, when coupled with volume, accumulates to a big number. 4 dollars is no big deal, but do this to 100 customers a day, that will lead to 12K a month. Pretty good money, I would say. In fact, those stupid banks do it all the time. This charge and that charge. When you call their customer service, you wait half an hour on the line, and got told that it is a "mistake" and get refunded. Sure, I can get refunded, but how many of us will get around to do it. I still remember TDbank over-charged me 12 bucks that I meant to call them for. But it has been a year and I have not called them yet. Telecommunication companies like AT&T also employ this ploy.
When it comes to banks, we feel we are justified to be angry. Because banks are jerks. The very same act, when committed by seemingly innocent restaurant owner, we blame Ben. How logical is that? Take this to the next logical step, empathy is the rule upon which we judge. We need no laws.
I am a selfish guy. When this happens, I do the cost benefit analysis, and mostly just get over with it and never pursue it further. In economics, we call it "Rational Inattention". It is the optimal strategy for each one of us. However, when taken collectively, we sow the seeds for businesses to take advantage of us and incentivize them to be dishonest "incrementally". In the end, we all got worse off. This is the well-known "prisoners' dilemma". It is because there are "irrational" agents who are willing to go after such jerks who abuse our rational inattention that puts such behavior in check. In fact, I wish everyone is like Ben, so that I can free-ride on that vigilance---as it becomes unprofitable for businesses to be dishonest. How does that help? When enough people refuse to let it go, business's revenue from such fraud diminishes, and they have less incentive to be dishonest. Furthermore, if each time a customer stands out like Ben, the business incurs a loss, the expected profit for being dishonest will go negative. This is when business no longer wishes to be dishonest. In fact, that is why the law requires the business to suffer a penalty larger than the amount of the overcharge. Gary Becker got this a long time ago---when enforcement is costly, we will make punishment higher.
Friend or Foe, it is a question of logic, not empathy.
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