"A Great New Book" —Larry Kudlow, CNBCGet it on AmazonExplore the Book
Often, the best outcome seems less satisfying than alternatives.
Daniel Kahneman is a psychologist who won a Nobel in economics for Prospect Theory, more commonly called Behavioral Economics. In his book, Thinking, Fast and Slow, Kahneman describes a cognitive bias that leads people to make the wrong choice on automobiles. But the bias might actually keep gasoline consumption high by fooling people with number.
Say you’re concerned with the amount of gasoline you use. You have a Ford Focus that gets 30 MPG, and a Hummer that gets 12 MPG. You need a huge SUV, but you want to minimize your environmental footprint.
a) trade in your 30 MPG Focus for a Prius that gets 40 MPG, or
b) trade in your 12 MPG Hummer for an H3 that gets 14 MPG?
(Circle you choice)
Chances are, it feels better to jump up to the 40 MPG Prius. In fact, it looks like a no-brainer. Both the government and environmentalists push us toward 40 MPG choice. But let’s do the math.
First, we have to convert miles per gallon to gallons per mile. The formula is simple: 1/MPG. Then, assume we drive each vehicle 10,000 miles a year. Here’s how the numbers work out:
Hummer: 1/12 = 0.0833 GPM * 10,000 = 833.33 Gallons per Year
H3: 1/14 = 0.0714 GPM * 10,000 = 714.28 Gallons per Year
Savings: 119.05 Gallons per Year
Focus: 1/30 = 0.0333 GPM * 10,000 = 333.33 Gallons per Year
Prius: 1/14 = 0.0.25 GPM * 10,000 = 250.00 Gallons per Year
Savings: 83.33 Gallons per Year
If your goal is to reduce gasoline consumption as much as possible, trade in the Hummer for the H3. But it still won’t feel right. Going from a Hummer to a Prius, of course, would be the biggest possible savings of 583 gallons per year, or $1954 at $3.35 per gallon. But people resist drastic changes. You’re more likely to entice a Hummer driver to make the switch to brand new H3.
It might sound counterintuitive, but just because gas prices are high doesn’t mean it’s the right time to trade in that SUV for a high-mpg vehicle, Wiesenfelder says. When fuel costs are high, the demand and price for efficient vehicles goes up. Conversely, demand for gas-guzzling SUVs goes down, and their trade-in values fall.
“It’s a romantic notion to drop your SUV for a Prius, but you’ve got to do the math,” says Wiesenfelder. [source]
Advocates count on people to be lazy and take the obvious choice. As we’ve seen here, though, the obvious choice isn’t always the best choice. Remember this whenever you hear the government talk about obvious, no-brainer choices. Chances are, it’s a lie.