Tuesday, June 10, 2008

The Behavioral Economics of the 2nd Serve

            Throughout the 2007 US Open, Andy Roddick's first serve percentage was 71%.  When he got the first serve in, he won 82% of the points.  He won 52% of his second serve points.  He rarely double-faulted.  I couldn't find his double fault numbers, but I'm guessing his 2nd serve percentage was around 99%.

            Though these numbers are typical of Roddick, and similar for other players with big serves, they are totally bizarre.  When he steps up to the line for a 1st serve, he wins the point 58.2% (71%*82%) of the time.  If he misses his first serve, why would he bother hitting a conservative second serve if he has less than a 52% chance of winning the point with it?   If he's trying to win points, he should just be hitting bombs for both his first and second serves.  Sure, he will double fault a lot, but it's still his best chance of winning the point.  If he had hit nothing but bombs when he played Federer at the US Open last year, the numbers suggest he would have won the match. 

            If he is trying to win points, Roddick, like many other players, is not serving rationally.   It really is strange that players would continue to spin in their second serve when the numbers show this plainly that it is a bad idea.  You would think that coaches would look at stats to see if there are any obvious areas of improvement like this.  Sampras even demonstrated that you can have great success hitting huge 2nd serves, even with a healthy amount of double faults.  

             I'm sort of at a loss to explain this anomaly.  Either Roddick is irrational, or he is maximizing something other than his probability of winning points.  That's not to say that I don't empathize with Roddick; I too have an excessive fear of double-faulting.  Nothing is more infuriating in tennis.  Your opponent is just standing there waiting for you, and you lose the point before it starts because you can't even get it in the box.  For some reason, it feels much worse to lose a point this way than after a nice rally.  

         Maybe winning isn't all Roddick cares about, and how he wins or loses is important to him.  If hates double faulting a lot, he might be willing to lose some matches to avoid too many double faults.  If he were consciously making that choice, it seems like unusual behavior for a professional athlete.

        Maybe Roddick and I are overconfident in our groundstrokes and we think, "if I can just get the serve in, I will probably win the point anyway."  Other than that, I don't really have any other idea of how to explain this.  It's just so strange.

            Whatever the reason for this apparent irrationality,  I think it can be overcome.  All Roddick needs to do to win another grand slam is serve rationally.  

Rental Car "Insurance"

Welcome to my blog.  I have been researching the subject of my first post for many months, so it might be a little involved.  Since it seems no one else has done much research on it, this is probably the only thing that I'm uniquely qualified to talk about, so enjoy it.  In my future posts, I plan on turning to the traditional blog format of ranting mindlessly about things I really know nothing about. 

Contracting in the free market is remarkably efficient.  Self interest guides information to interested parties with speed and precision, constantly creating a myriad of mutually beneficial exchanges.  Those who offer an inferior product at an inflated price will soon have few customers, as word spreads of the unattractive terms.

However, someone will occasionally find a way to sell a product on unattractive terms to a large number of purchasers.  When a product depends entirely on a lack of information or irrationality to be marketable, it might be appropriate for law to intervene and prevent a misallocation of resources.             

The rental car loss damage waiver (LDW) or collision damage waiver (CDW) is such a product.  Anyone who has rented a car has felt the pressure from agent to purchase this optional "insurance" for anywhere between $10 and $40.  You might have noticed two suspicious aspects of this transaction; the rental agent seems overly eager to sell this product to you, and is careful not to refer to it as "insurance."

The rental agent is so eager to sell the product to you because rental companies absolutely depend on you buying it to make money.  In the United States, people spent about $800 million last year on rental car LDWs. They account for 4% of revenue for rental car companies.  Margins in this industry are such that if rental car companies could not sell LDWs, NONE of the major rental car companies would be profitable.  

The rental agent is careful not to refer to the product as insurance because if it were sold as insurance, it would be subject to insurance regulation requiring that it be fairly priced. The product is formally a waiver of liability.  Rental companies must provide liability insurance for you free of charge, but you remain liable for damage you cause to the rented vehicle.  For the price of the LDW, the rental car company agrees that it cannot collect from you if you mess up their car.  

Few informed consumers would purchase the LDW; the LDW is expensive relative to insurance and usually duplicative of the renter’s own auto insurance or coverage on a credit card.  The LDW is 20 times more expensive than a day worth of typical collision coverage.  If you paid $26/day you would end up spending $9490 a year just for collision insurance!  

Most credit cards and almost all collision coverage under a regular auto insurance policy cover rental cars.  It doesn't even make sense for people without collision insurance to purchase the LDW; they drive their own car without collision coverage, so why would they spend so much to drive a rental car on better terms than they drive their own car?  I admit that you might be more likely to get in an accident if you are renting a car, but the difference is certainly not they great.

Why do people remain uninformed and continue to buy such an awful product?  If Ford started selling terribly unreliable cars, their business would crash pretty quickly.  The problem here is the nature of the information.  No one can say "You should not buy the LDW."  All you can say is that "Almost no one should buy the LDW."  Until you go through all the effort of calling your credit card and insurance provider, you might actually be the one person who would like to be covered but has a strange credit card and strange car insurance policy with no coverage.  Everyone needs to find out for themselves whether they need to buy it.  This sort of information does not spread quickly because no one else can tell you that you don't need it.  

State governments have tried to keep people from wasting money on LDW's, but their attempts to do so have been misguided.  California, New York, and Illinois have set a price ceiling on LDW's.  In Illinois, rental car companies cannot charge more than $12.50 for an LDW.  Enterprise totally ignores these restrictions and charges $18 for an LDW at O'Hare.  The apparently weak enforcement of this law is to be expected since most people renting a car are from out of state; why should Illinois spend tax dollars protecting these people from wasting money in Illinois?  

A price ceiling has a more troublesome aspect.  From the perspective of rental car companies, uninformed consumers are a common resource susceptible to a tragedy-of-the-commons type problem.  Renters are more likely to become informed if the last time they rented a car they arrived at the rental counter to find out that the LDW was very expensive.  Perhaps they purchased it anyway since there was no time to find out whether they needed it, but they will remember the unpleasant experience and do some research the next time they need to rent a car.  

If there were a single rental car company, it would choose to price the LDW low enough that consumers are not driven to informing themselves in the future.  Multiple firms are would be less concerned with this because it is unlikely they will have many repeat renters anyway.

If multiple firms are approaching the pricing problem differently than a single firm would, their decisions will be incongruous with the welfare of the industry.  By setting a high price for the LDW, each firm is imposing an external cost on other firms by decreasing the stock of uninformed renters.  The rental firms would “overuse” the uninformed consumers by pricing too high, and motivating them to become informed. 

Firms might want to collude to set a price ceiling for the LDW.  This is precisely what a statutory maximum price does.  The enactment of such legislation in some states could possibly have been proposed by rental company lobbyists as a creative way to enact a binding collusive agreement.

Most states have disclosure laws that require the rental contract to mention that you "may" already be covered by a credit card or other insurance.  If anyone reading this has ever been deterred from purchasing an LDW by this message buried deep in the "terms and conditions" folder you get your rental agreement in (after you have already signed the rental agreement), I will send you $20.  

New York's other attempt to solve this problem is much better.  New York requires auto insurance policies to apply to rental cars.  This is unintrusive because most insurers do this already.  It also does a lot to solve the information problem.  If you have New York auto insurance, I can tell you for sure, "You don't need the LDW."   

Unfortunately, I don't know anyone in New York to whom I can recommend my blog and pass along this valuable information.  To the rest of my readers, after researching this issue for months, I honestly cannot tell you for sure that you should never buy the LDW.  

THAT is the problem.