“The vast majority of buyers will throw up their hands and perform no math at all.”
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Quick, how many of you can tell me:
1. Your cars’ fuel economy in miles per gallon or, even better, gallons per mile.
2. How much you drove in the last year.
3. The cost to fill your tank.
4. Your monthly and annual fuel expenditures.
5. How your cars’ fuel economy sits in relation to other cars in their classes.
6. What your fuel savings in gallons and dollars would be if you switched to a hybrid or other highly economical vehicle.
If a 2006 paper by Thomas S. Turrentine and Kenneth S. Kurani (of the University of California, Davis) is accurate, your score on this quiz may well be zero.
If so, you’re not alone. Much as I hate to admit it, even I could only answer one question (number one) with any degree of certainty; the best I could come up with for the others were rough estimates; and I’m a transportation scholar who makes his living exhorting people to drive more fuel-efficient vehicles. Turrentine and Kurani found surprising (or not) evidence that when it comes to fuel economy, car purchasers make decisions that are very, very different than what you would get from the rational, profit-maximizing consumers that populate many economic models.
First, the paper found that recent car purchasers and prospective buyers rarely even mentioned fuel economy as a factor in their decision. (The main exception was hybrid owners, who were considered separately; I’ll write about them when I look at altruistic and emotional motivations for fuel conservation, another time).
Car size and capacity were the most important features for buyers. The car purchasers almost never compared the fuel economy of the autos they were considering purchasing. To the extent they made any comparison, it was between the new car and their current vehicle. But this was problematic. Very few members of the sample of 57 households kept any sort of records of their current car’s fuel consumption or how much money they spent on gas. They had only a rough conception of how much it cost to fill up their tank, and many households (19) didn’t even know their own car’s m.p.g.
In addition to a lack of data, the subjects demonstrated questionable mathematical prowess. When asked how much they’d be willing to pay for a hypothetical m.p.g. improvement of 50 percent, respondents were flummoxed. The results were wild guesses that ranged from $0 to $10,000.
Some tried to make a rational calculation, but with poor results. Even mathematically-skilled individuals like finance professionals or computer engineers had little clue. Two thirds of the households never even dreamed of analyzing how long it would take for an investment in greater fuel economy to pay for itself. Only 10 intrepid households attempted the payback period calculation, and 8 of those performed it wrong.
Two lonely households managed a reasonable stab at it — sort of. But even they did not perform the important step of converting future dollars to net present values. (NPV discounts future income — in this case, fuel savings down the road — on the grounds that getting $1,000 ten years from now is worth a lot less to you than getting $1,000 today. This means you can’t just add up the dollars you will eventually save and count them as money in the bank; at the moment you buy the car the real value of the future savings is a lot less than it seems.)
And even the two households who were in the ballpark on the payback question didn’t actually think to make such a calculation when they purchased their last car.
Interestingly, when pressed, respondents tended to seriously overestimate both their gas costs and the potential financial savings from improved fuel economy. They expressed a willingness to pay much more upfront for a more efficient car than the eventual fuel savings would warrant.
And here is where ignorance may be bliss. With the impending arrival of more hybrids and pure electric cars, we have a perhaps once-in-a-lifetime chance to free ourselves from our shackles at the gas pump. And surprisingly, when we make this fateful decision, a bit of individual irrationality might make for greater collective rationality — provided Americans don’t dazzle us with their financial acumen.
First, thanks to our myopic focus on recent fuel prices when we make car purchasing decisions (those big gas station signs are among the very few bits of data we carry with us into the auto showroom), consumers might make some very good bad decisions. A rational financial calculator would consider not just the general rise in real fuel prices in the 2000’s but the two decades of plunging real gas prices in the 1980’s and 1990’s. However, short memories may make us forget that oil prices can go down as well as up.
True, fuel prices have dropped since the lofty peaks they hit last summer. But the 2008 spike might have seared fuel economy into our psyches, the way traumatic events often do, and this may cause us to behave a bit more “irrationally.” It’s interesting to note that a few subjects in the study did consider fuel economy thanks to memories of the 1970’s oil shocks, which still reverberate in their consciousness 30 years later.
So buyers will have insufficient data and will probably interpret it irrationally; but in a way that promotes concern with fuel economy. Next, throw in some faulty math, which also tends to favor more efficient cars (for example, by omitting the NPV step). Even better, the vast majority of buyers will throw up their hands and perform no math at all, in which case they will hazard guesses that, this paper suggests, may make them pay more for fuel efficiency than they will ever see back.
All of these forces may line up to shift us into more economical but costlier vehicles (e.g. electrics) even when it makes little financial sense to do so — but only if consumers don’t do the math too carefully and don’t realize the dollar savings might not be all they think they are. Of course, there are altruistic motives (concern for global warming) and emotional ones (hatred of the oil companies) involved in the fuel economy calculus as well, but these might not pull the American public along like perceived economic ones might. So let’s all come together in the noble cause of keeping America irrational — and let’s start by keeping this post strictly between us.