The Parking Meter Paradox

Abstract

We show inconsistencies in expected utility theory in a setting characterized by the possibility of under-commitment and over-commitment of resources. The setting involves the purchase of tokens, where each token buys a number of coverage minutes, and a probabilistic penalty for purchasing fewer minutes than the realized value of time needed for full coverage. Economic theory would prescribe that when minutes are cheaper demand for minutes should increase, and vice versa. However, as in many real-world situations, the mapping of minutes to tokens divides the choice set into discrete intervals that become coarser when minutes become cheaper. We find that this results in a pattern of demand for tokens and minutes that cannot be explained by standard expected utility theory. We explain this paradox with a model of under-commitment and over-commitment regret. Furthermore, we hypothesize and find in a repeated decision context that individuals will adjust the costly resources they choose to incur in the opposite direction of the regret they recently experienced — asking for fewer (more) minutes in a subsequent round when they discover ex-post that they previously over-invested (under-invested) in minutes demanded.

Keywords: Regret, Pricing, Decision Making Under Uncertainty, Waste Aversion, Learning