Jun 03

When the server drops off the check at the end of a meal, people often scramble to figure out the norms for payment. Do we each pay for what we ordered? Do we split the bill evenly even if John had that extra glass of wine and the crème brûlée?
Luckily, findings from behavioral economics can help answer this burning question. It turns out that one person should pay the entire bill, and that the person paying should alternate over time. Here is the reason:

When we pay any amount of money we feel some psychological pain (we call this the pain of paying). This is the unpleasantness that is associated with giving up our hard earned cash. But it also turns out that this pain does not increase linearly with the cost of the meal. This means that when we double the payment, the pain doesn’t double-it only increases by a bit. In fact, the biggest increase in the pain of paying comes when we switch from paying nothing to paying something. This of course means that we are happiest when we pay nothing, that we are slightly less happy when we have to pay something, and that we become even more unhappy as the size of the bill increases.

Now, if we take into account the utility of all the people at the table, it is easy to see why one person should pay the entire bill. If every person paid their share they would all experience some pain of paying (lets say 4 people, each experiencing X amount of pain for a total of 4X), but if one person paid the entire bill, then the pain of paying for that person will not be that much higher than if he paid just for himself (lets say it will be 1.5X) and everyone else would be “pain free.”

Is this system financially efficient? Probably not, because different meals cost different amounts, or the person whose turn it is to pay may be out of town, etc. But even if you end up paying a bit more in the long-run for engaging in this practice, you are likely to experience less pain of paying and have more fun dining out with your friends.