Tip percentage declines with larger bills

September 16, 2003

In the world of gratuities, the bigger they are, the harder they fall. Psychologists at Washington University in St. Louis have shown that the larger the bill, the smaller the tip percentage that food servers, hair stylists, and cab drivers receive.

Leonard Green, Ph.D., Washington University professor of psychology in Arts & Sciences, and Joel Myerson, Ph.D., research professor of psychology at Washington University, compiled data from nearly 1,000 tips in restaurants, hair salons and from cab drivers.

Their findings indicate that the percent of the tip actually decreased with the amount of the bill across all three tipping situations, although with bills over $100, the percent of the tip levels off -- if the bill is $200, the server is likely to receive the same percentage as if it were $100.

In the study by Green and Myerson, servers at two restaurants, hair stylists at two hair salons, and two cab drivers from different companies kept data for the researchers.

"We've shown a magnitude effect in tipping," said Green, who, with Myerson, has done numerous studies in behavioral economics. They examined tipping because it provides a good model for understanding economic and psychological decision-making.

Magnitude effects are economic phenomena that are contrary to standard microeconomic theory. The standard theory argues that the relative value of two amounts does not depend on the absolute amounts involved. In contrast, a magnitude effect occurs when relative value is affected by absolute amount. For example, previous work by Green and Myerson has shown a magnitude effect in choices that involve immediate versus delayed amounts of money.

"If you could have $1,000 in one year, how much would you accept right now instead of having to wait the whole year? You might say, 'Rather than wait, I'll take $500 just to have it now'," Green said. "If you could have $100,000 in a year, microeconomic theory would then predict that you would take $50,000 now. In both cases, an amount delayed for one year loses 50 percent of its value. However, we have found that this prediction is incorrect. If you were to take $500 now rather than $1,000 in a year, you would demand more than $50,000 now - for example, $70,000 - if the alternative were $100,000 in a year. Thus, with a smaller delayed amount ($1,000), the relative value of an equivalent immediate amount was 50%, whereas with a larger delayed amount ($100,000), the relative value is more than 50%."

In a paper published in the current Psychonomic Bulletin & Review, Green and Myerson, working with an undergraduate, Rachel Schneider, have now shown a magnitude effect in tipping, as well.

Let's say you had a bill of $10 and left a tip of $2 - 20 percent. The next week you're at a trendy restaurant and dinner for two is $80. You leave a tip of $12, 15 percent. The relative value of what is considered an appropriate tip has been influenced by the absolute amounts involved. Green and Myerson found that this appears to happen with regularity in tipping across all three situations studied.

One little "tip" the researchers pass on to current food servers is not to discourage separate checks at large tables.

"The magnitude effect as seen in our study would suggest that, for a table of six, and a bill of $25 a person, a single bill of $150 would give the server a smaller percentage tip than six individual bills of $25 each," Green said. "For the server, it pays to give individual bills."

By Teresa Shipley

Washington University in St. Louis

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