A prospect theoretical approach to the labor supply decisions of NYC cab drivers

We introduce cumulative prospect theory and an empirical study regarding the labor supply decision of NYC cab drivers. Most drivers work until reaching a certain income target for the day. We show that with a target for both income and hours, cumulative prospect theory is able to describe the labor supply decision of NYC cab drivers as found in the empirical study. We use a decision tree formulation for the model, with functional forms proposed by Tversky and Kahneman (1992). Two aspects of prospect theory, loss aversion and probability weighting, provide the intuition for the results we have found