Thaler’s “all-you-can-eat” puzzle: two alternative explanations

To determine whether individuals take into account sunk costs when making deci- sions, Thaler (1980, p.48) conducted an experiment in which anonymous individuals decided to enter an \all-you-can-eat" pizza restaurant; a random selection of those customers was given back the $2.50 they had paid. The result was a surprisingly lower average consumption of pizza by the group that was reimbursed, as compared to the group that was not. Economic theory of consumer suggests that this is inconsistent with rational behavior because only incremental costs and benets should aect deci- sions. Since the cost of consuming any extra pizza is zero once a person is inside the restaurant, the benets, then, must undergo some change once those customers are paid back. The literature of behavioral economics suggests that the money paid on en- try plays a role in consumer behavior, based on mental accounting and prospect theory. In this paper we integrate several elements of this literature into neoclassical economic theory and make use of this comprehensive economic model to explain Thaler's puzzle. However, this model presents some shortcomings, and in the end we provide a comple- mentary economic explanation involving the physical satiation constraint, which helps to overcome those limitations.