Everything Is Bullshit: The Greatest Scams on Earth Revealed (8 page)

When tasteless yellow coloring is added to vanilla pudding,
consumers say it tastes like banana or lemon pudding. And when mango or lemon
flavoring is added to white pudding, most consumers say that it tastes like
vanilla pudding. Color creates a psychological expectation for a certain flavor
that is often impossible to dislodge.

Sight is crucial to identifying common foods. At
Dans
Le Noir, a restaurant that employs blind waiters to
serve customers expensive dinners in a pitch black restaurant, diners are not
told the menu. An investor in the restaurant explains that “After dinner we
show them photos of what they ate and the menu, and they can’t believe it. They
might get the difference between carrots and peas, but they confuse veal and
tuna, white and red wine.”

There are many other examples of how information garnered from
our other senses, including higher-order information, impacts our sense of
taste. The surrounding environment makes a difference — we get more
pleasure from food when surrounded by soft lighting. So too do our
expectations: our experience with similar foods in the past, branding and
packaging, and price tags all influence the taste and enjoyment we derive from
food and drink.

This means that our enjoyment of good food is just as
susceptible to trickery as wine. Fish markets, restaurants, and sushi joints
present less expensive fish as their more prestigious (and supposedly better
tasting) peers unnoticed every day. This past year, Europeans happily ate up
meatballs containing
horse meat
, only expressing
outrage when regulators revealed its presence.

Given the huge variation in wine prices, people react strongly
to findings that price has no correlation with pleasure in blind tastings. Yet
what these studies really tell us is that our idea of taste as a constant, even
if appreciated in subjectively different ways, is a fiction. Due to the
complicated way that we experience taste — as an amalgamation of
information from all five senses, our expectations, and how we think about what
we
are tasting
— taste is easily manipulated.

True experts are less easily tricked. Master sommeliers have an
incredible ability to identify wine; to earn their certification, they must
pass an exam in which they identify a wine’s vintage from a blind tasting. To
see someone with the skill of a master sommelier taste is a remarkable
performance. She recites characteristics of the wine to identify the type of
grape, then the region, and finally the exact vineyard and date of production.
Given anecdotes like master French judges mistaking French and Californian
wines, however, the level of knowledge needed to be immune to trickery is
likely beyond reach of almost the entire market. Even when they start with
substantial industry experience, aspiring master sommeliers spend years doing
nothing but blind taste tests and studying wine. The majority of oenophiles who
describe wine using pointers they pick up from wine tasting courses likely
appreciate price tags more than any other qualities of the wine.

While this makes a good case for unapologetically reaching for
bottom shelf wine, this is not necessarily a reason to shun expensive bottles.
Journalist Felix Salmon points out that while there is no correlation between
the price and enjoyment of a wine in blind taste
tests,
price and enjoyment almost perfectly correlate when the price is known. “You
can call that Emperor’s New Clothes syndrome if you want,” he writes, “but I
like to think that there’s something real going on.” Even if it’s a con, the
effect of liking pricier wine more is still real; there is no such thing as
fake pleasure. According to Salmon, this is why rich people like wine so much:
“It’s the most consistently reliable way that they can convert money into
happiness.”

But there’s a cheaper way to enjoy the con, and that is to take
advantage of all the other factors that “trick” us into enjoying wine more.
Like Troy Carter, you can ride to Napa and walk the vineyards before you buy a
bottle. If you don’t live near wine country, you can talk to the manager of a
wine store about the wines she loves.
A nice pair of wine
glasses, candles, and a picnic in a beautiful park all lend
wine a
refined air.

All these strategies take advantage of the psychological biases
that lead us to enjoy the same wine more than we would in other circumstances.
And they do so without the rarefied price tag.

PART II:

EXISTING POWER STRUCTURES

***

“They want
me to stand with them, right? But where the fuck they at when they supposed to
be standing by us? I mean, when the shit goes bad and there's hell to pay,
where they at? This game is rigged, man. We like the little bitches on a
chessboard.”

(
Bodie
, The Wire)

6.

THE TYRANNY OF

TAXI MEDALLIONS

T
he life of
a taxi driver is hard. When cabbies start a shift, they owe about $100 to their
company as payment just for the opportunity to drive a taxi. They might not
break even until halfway through their shift, or maybe not at all that day. In
most American cities, they have to work very long hours to make a living.

During a shift, taxi drivers play a strange form of roulette
when they pick up anonymous customers. The customer could be a pleasant family
that tips them well, a drunk college kid that vomits in their car, or a violent
criminal that robs and assaults them. After the customer leaves the car, there
is no record of their behavior in the taxi.

Why is it that taxi drivers have to pay their companies for the
privilege of doing a difficult and dangerous job? After all, when you show up
to your office, you don’t pay a fee to your boss every morning.

The reason taxi drivers have to pay for the right to work is
that they need access to a taxi medallion. A medallion is a permit issued by
the government that is required to drive a cab in most American cities. If you
don’t use the medallion yourself, you can rent it out to other drivers on your
own or, more commonly, through a taxi company. Taxi companies that rent out
access to the medallions have immense economic power over the drivers. If
you’re not willing to basically become an indentured servant to get medallion
access, well, you’re out of luck.

Taxi medallions are scarce, which is what makes them powerful.
It also makes them expensive; medallions can sell for hundreds of thousands of
dollars on secondary markets. In most American cities, there is a hard cap on
the number of permits issued. That number doesn’t change for years or even
decades. This scarcity of medallions is also the reason it’s so hard to find a
taxi in many American cities (cough, cough: San Francisco).

But what if you didn’t need a taxi medallion in order to drive
people around in exchange for money? A number of startups are doing just that,
pioneering a movement called “ride-sharing” where drivers are typically just
regular members of the community driving their own cars around in exchange for
money.

If anyone with access to a car and cell phone app could become a
driver, what would happen to today’s taxi drivers, the owners of medallions,
and the industry that exists to extract value from the scarcity of the
medallions?

Taxi
Medallions 101

The
current structure of the American taxi industry began in New York City when
“taxi medallions” were introduced in the 1930s. Taxis were extremely popular in
the city, and the government realized it needed to make sure drivers weren’t
psychopaths luring victims into their cars. So, New York City required cabbies
to apply for a taxi medallion license. Given the technology available in the
1930s, it was a reasonable solution to the taxi safety problem, and other
cities soon followed suit. (Many of them have different names for the licenses,
but we’ll refer to them all as medallions.)

But the taxi medallion requirement had an unintended consequence
— it made taxis scarce. The “right” to drive a taxi became very valuable
as demand outstripped supply. When this medallion system was introduced in New
York City in 1937, there were 11,787 issued. That number remained constant
until 2004. Today there are 13,150.

As demand for taxis has increased while supply remained
relatively fixed, the cost of medallions in New York City has skyrocketed to
over one million dollars. In Boston, the price of a medallion is $625,000. In
San Francisco, you need to drive a taxi at least 10 hours a week if you want to
hold a medallion and lease it out. Veteran taxi drivers can sell their
medallions for $300,000, and the city of San Francisco takes a $100,000 commission
on the sale.

In the taxi market, there are three players: The medallion
holders who have the ordained right from the government to operate a taxi, the
taxi driver who pays the medallion holder to drive the taxi, and, sitting in
between these two parties, the taxi dispatch company. A pure middleman, the
dispatch company facilitates the transmission of funds between medallion
holders and provides some infrastructure like scheduling, fleet maintenance,
and occasional customer leads for the taxis.

There is some overlap between these three entities. Sometimes
drivers own medallions, or taxi companies hold medallions. Still, it’s useful
to isolate these three main economic interests in the taxi industry. How each
of them reacts to industry disruption is very different.

The Taxing
Days of Taxi Drivers

In
America, we often complain about taxis. They’re never around when it’s raining,
they don’t show up when you need to get to the airport, the interiors are
filthy, and the drivers talk on the phone and drive aggressively. But as bad as
consumers have it, the taxi drivers have it worse.

The root cause of taxi drivers’ problems is that they need
access to a medallion in order to drive and make a living. Because of this,
taxi companies that distribute medallion access can charge usurious fees and
freely abuse the drivers. If the drivers don’t like it, well, then they can’t
be taxi drivers.

In a study of Los Angeles taxi drivers, UCLA professors Gary
Blasi
and Jacqueline Leavitt found that taxi drivers work on
average 72 hours a week for a median take home wage of $8.39 per hour. Not only
do they have to pay $2,000 in “leasing fees” per month to taxi companies, but
the city regulates things like what color socks they can wear (black) and how
many days a week they can go to the airport (once). None of the drivers in the
survey had health insurance provided by their companies and 61% of them were
completely without health insurance.

Recently, the Boston Globe published an undercover exposé on the
Boston taxi industry. One of the Globe’s writers (who used to drive a cab in
college) started driving a taxi for a company called Boston Cab. He discovered
a corrupt system where medallion access empowered taxi dispatchers to abuse
drivers.

The writer describes the fees drivers faced as follows:

“Boston Cab charges him the standard shift rate of $77, plus an
$18 premium for a newer cab, as well as a city-sanctioned, 30-cent parking
violation fee. Factor in the sales tax ($5.96) and optional collision damage
waiver ($5), and his cost per shift is $106.26, not including gas.”

In order to get the opportunity to pay this $106 fee, taxi
drivers had to bribe the dispatchers to get good shifts or to drive at all. The
author waited around for hours before he could drive a taxi since he didn’t
bribe the dispatchers.

On top of the base fees the driver owed the taxi company for
each day of work, the taxi company would arbitrarily make up fees that drivers
needed to pay. In the Globe reporter’s case:

“After every shift, the reporter fills his gas tank at a station
less than three blocks away.

He pumps until the gas gurgles over onto his shoes. Yet when he
reaches the garage one night, the gas attendant tells him he owes the company
an additional $2.09.

‘How is that possible?’ the driver asks the attendant,
incredulously.

‘It happens to everyone,’ the attendant shrugs.”

Passengers often complain that they feel unsafe in a taxi with
an aggressive driver. But the drivers are the ones who have to worry about
safety. According to the Bureau of Labor Statistics, driving a taxi is one of
the top ten jobs that result in work related fatalities. The odds of taxi
drivers dying because of work related fatality is even higher than for police
officers. Picking up anonymous strangers who could be violent late at night
while carrying a lot of cash is risky. Just sharing the road with other drivers
is risky too. In the case of the Boston Globe undercover driver, he (and his
passengers) ended up in the hospital when a drunk driver ran a red light and
crashed into his car.

Medallions require that drivers get permission from someone else
to drive a cab. This power asymmetry gives the medallion-holders a lot of
leverage over drivers, and it appears that they abuse it.

And Here
Comes Disruption

A
number of mobile phone apps, however, are replacing taxi dispatch services and
allowing anyone with a car to become a taxi driver without needing access to a
medallion. Increasingly, if you want to become a taxi driver, all you need is a
car and an app that tells you where to pick up passengers.

In the last
half decade
, two trends
conspired to end the taxi medallion regime. First, people are more comfortable
with trusting strangers. This is evidenced by the success of the company
AirBnB
, which allows regular people
people
to rent out extra rooms in their home to strangers. Marketplaces like
AirBnB
provide the data (reviews of guests and hosts),
brand, and insurance
that allow
strangers to trust
each other.

The second trend is that we all carry around
location
enabled
sensors in our pockets in the form of our phones. Before smart
phones, the best way to find a taxi was to go outside and wait for one on the
street like an idiot. Now, you can click a button and an app that knows your
location can connect you with the nearest car. Since you can see reviews of the
driver, you can trust that it’s safe to get in the car.

The ride-sharing economy started conservatively with
Uber
allowing anyone to call a black town car via its app.
That quickly led to companies like Sidecar and
Lyft
,
which let anyone with a car act as a taxi driver, and hybrid services like
InstantCab
that let taxi drivers and community drivers both
get fares. These companies and their products are called “ride-sharing” apps.

Cheekily, if you hail a ride using one of these ride-sharing
apps, the payment is often called a “donation.” This sort of seems like a made
up legal loophole that can justify any behavior (“Officer I wasn’t paying for
sex, I was making a donation!”). But for now that’s one of the ways
ride-sharing apps nominally get around local regulations that restrict
who
can be a taxi.

The
Advantage of the Ride-Sharing Apps

Another
significant way ride-sharing apps avoid taxi medallion legislation is by not
picking people up from the street. You have to hail them using an app. This
ends up being a feature, rather than a constraint. First, it’s safer for the
driver and the passenger because the transaction isn’t anonymous. Second, it’s
more reliable than a taxi dispatched by a cab company. We spoke to
InstantCab
CEO
Aarjav
Trivedi
to understand why:

“Cab drivers don’t have to listen to cab company dispatch and
rarely do. If they see people with their bags that look like they’re going to
the airport by the side of the road, they will ditch the dispatched call and
pick up the street hail. They have no reason to be accountable to the cab
company, which in turn has no reason to be accountable to customers because the
company makes practically all their money by leasing cabs and medallions to
drivers. That’s why taxis dispatched by cab companies don’t show up when you
call them.”

InstantCab
is in an
interesting position because it has taxis and community drivers in its fleet.
However, if a taxi driver bails on an
InstantCab
customer to pick up someone on the street instead, he gets booted from the
service.
InstantCab
has to artificially add this
constraint to taxi
drivers,
otherwise its service
wouldn’t work for the customer.

Finally, these apps can use technology to help drivers optimize
their earnings. Taxi drivers maximize profit by knowing where the demand will
be depending on the hour and timing where they look for fares accordingly. Over
time, some drivers develop an intuition about this. Ride-sharing apps have the
data to formalize and optimize this learning. In a world without data, it would
take taxi drivers years to know exactly where in these high demand zones they
need to be and when they should be there. If it’s 5 pm, should they be in front
of JP Morgan or
Zynga
? If it’s midnight, should they
be at the Ruby Skye nightclub or
Circa
? Mastering
these skills takes years and is essential to making a good living as a taxi
driver.

In San Francisco, the transformation from a medallion
constrained taxi system to a free market is nearly complete. When
Uber
recently announced its latest round of funding in June
2014, it noted that its revenue in San Francisco was now more than the entire
legacy taxi industry in the city. These ride-sharing companies are all rapidly
expanding across the world.

The Winners
and Losers of Disruption