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We’ve written previously about Predictably Irrational, and the larger phenomenon of behavioral finance.  Generally, I think the field has added a great deal to our understanding of human behavior and the limits of intuition.  However, on bad days I think the field can step over the line and into the realm of “Gotcha” research - stuff that deliberately confuses its respondents into irrational behavior that they are unable to display in more realistic situations.

A recent example of such “Gotcha” research comes from Rick Larrick and Jack Sole on The MPG Illusion.  I’ll let Rick and Jack explain the research:

Many people consider fuel efficiency when purchasing a car, hoping to reduce gas consumption and carbon emissions. However, an accurate understanding of fuel efficiency is critical to making an informed decision. We will show that there is a systematic misperception in judging fuel efficiency when it is expressed as miles per gallon (MPG), which is the measure used in the U.S.A. People falsely believe that the amount of gas consumed by an automobile decreases as a linear function of a car’s MPG. The actual relationship is curvilinear. Consequently, people underestimate the value of removing the most fuel-inefficient vehicles.

The paper was published in Science Mag, and dutifully reported on by none other than our favorite blogger, Dan Ariely of Predictably Irrational.  Ariely sums up the research so well, that I’ll let him tell it:

You need both types of cars and for now you can replace only one of them.  What should you replace?
Option 1: Replace the 5 MPG van with a 10 MPG van
Option 2 Replace the 20 MPG sedan with a 50 MPG sedan

What would you select?

As a new paper by Rick Larrick and Jack Soll shows many people select option 2, where in fact option 1 would be better for them (also see this story about the research).

Does this sound odd?  Lets look at it more carefully:  Lets assume that people drive 100 miles a month.  This means that the 5 MPG van uses 20 gallons a month while the 20 MPG sedan uses 5 gallons a month. Now what if we change them?  If we change the van we would change from using 20 gallons a month to using 10 gallons a month (saving 10 gallons a month). If we change the sedan we would change from using 5 gallons a month to using 2 gallons a month (saving 3 gallons a month).  Now it is clear that changing the van is a much better move.

The payoff is this: consumers, when presented with mpg information, make the incorrect decision about which car to replace.  But the obvious question is: is this how consumers actually think about their own cars?  I would argue not.  Most of us think about fuel efficiency when standing at the pump, watching those little numbers scroll forward.  We therefore are likely to mentally account for our fuel efficiency as a weekly fuel cost.  And weekly fuel cost is exactly the sort of metric that will lead us to make the correct decision - i.e. to replace the inefficient van, not the relatively more efficient sedan.

I would argue that this paper succeeds only in fooling its respondents because they pose the question in a framework that is unfamiliar to the vast majority of drivers.  Are consumers actually choosing to replace their sedans, while keeping their bulky SUVs?  If we are to believe the latest industry trends, SUV (and Hummer!) sales are way down, while sales of the more fuel-efficient crossover vehicles are way up (16% in 2007).  In other words, people are choosing rational option 1, not irrational option 2.

Irrational human behavior is so prevalent - is there really a need to invent it where none exists?

This entry was posted on Thursday, June 26th, 2008 at 3:01 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.