The Frontal Cortex

Car Buyers Are Dumb v.2

In response to my blog yesterday about America’s continued love affair with horsepower and V8 engines, I recieved an excellent comment. It’s worth a read:

If you ask people why they drive 4WD SUVs you get a number of answers, usually associated with safety, or power and control. While many early SUV models were available in 2WD versions, people overwhelmingly prefered 4WD. Yet repeated usage surveys in the 90s showed only about 10% of SUV drivers ever used 4WD. What gives? Why are people buying the extra design, precision engineering, and transmission weight and buying the extra gas to haul all this steel around everywhere they drive, if they never use it?

In the 50s and 60s American automobiles sprouted strakes and tailfins that mimicked the jets and rockets of the new Space Age, except they were useless on cars. Today we see them as quaint stylistic touches of an era, nostalgia like hula hoops, doo wop, sock hops, and fizzies.

4WD is just like those 50s tailfins, except it’s not external and visible, it’s inside and implied. Well, actually there is usually something outside. That little 4WD logo stuck on the rear and side panels. In other words, 4WD, like the entire SUV phenomen, is simply a fad. It’s not about safety and performance — SUV buyers don’t seriously and rationally make these part of their buying decision. While it’s a fad, pure and simple, most SUV owners would resist admitting they forked over many hundreds of dollars for a fad. But we don’t put “6 Cup Holders” or “9 Onboard Computers” or “Leather Seats” or “12-Speaker Entertainment Center” or “Wi-Fi Enabled” logos on the outside of our vehicles.

Economically and socially this is a very expensive fad. The rise of the SUV is like the rise of the tailfin, except tailfins were only a couple extra pounds of sheet metal. Not so these implied tailfins. One out of every nine barrels of oil pumped out of the Earth is consumned in the U.S. as gasoline. One out of nine.

How does this happen, that Americans buy into an expensive, ostentatious, and obvious fad they can’t admit to? There’s a psychological inability to admit that’s the dynamic underlying the SUV craze. That they are spending maybe over a thousand dollars on a fad is key. Clearly, 50-75 years from now this phenomenon will be viewed in much the same way we now see tailfins.

People, overwhelmingly, don’t buy, think,or vote based on reason, but on emotion.

Hence the implied tailfin. Humans are primarily emotional, not rational, beings.

While I think the “implied tailfin” is part of the issue – people really do associate SUV’s with safety, power, etc. – I also think the car makers are goading people into buying cars with bad fuel economy by using hefty financial incentives. (This is one of the main reasons Ford and GM are flirting with bankruptcy: incentives are expensive.) I just wish consumers could see through the cash rebates and low APR’s and realize that, over the long run, buying fuel efficient cars saves money, even if they tend to be more expensive up front.

But maybe I’m expecting too much from American consumers. After all, behavioral economists (like Richard Thaler) have long known that people aren’t very good at making choices concerning the future. Consumers buy cars with big engines for the same irrational reasons we purchase cheap air conditioners, refrigerators and water heaters. We opt for the discounted and less energy efficient model even if it’s more expensive over time.

Why are people so consistently incapable of taking the long term into account when buying products or making financial decisions? In an important 2004 Science paper, Jonathan Cohen of Princeton University stuck people in an fMRI machine and asked them whether they wanted a a small Amazon gift certificate right away, or a larger gift certificate that they could receive in 2 to 4 weeks,. (This roughly approximates the choices facing a consumer confronted with a discounted Suburban and a hybrid selling at sticker.) Contary to the predictions of classical economics (which assumes humans are rational), Cohen discovered that the two different options activated very different brain regions. When subjects started thinking about getting a gift certificate right away, brain areas associated with emotion lit up. In particular, the parts of the cortex rich in dopamine neurons – the neurotransmitter associated with the rush of sex, drugs and rock and roll – became extremely active. Cohen had found the cells responsible for impulsive purchases and credit card debt.

On the other hand, when subjects contemplated gift certificates in the distant future, brain areas associated with “higher level deliberative processes and cognitive control, including numerical computation” were turned on. These neurons, clustered in the frontal cortex (the uniquely human part of the brain), help us make rational decisions about saving for the future. That’s the good news. The bad news is that our frontal cortex is usually overruled by our impetuous emotions. Contrary to the expectations of classical economics, most volunteers wanted the gift certificate right away.

I think Cohen’s work (and that of other neuroeconomists) sheds an important light on the irrational behavior of consumers. Instead of cooly calculating the cost of gas over the long term, we are swayed by the growl of V8 engines and the prospect of immediate cash rebates. Given our own incompetence, it only seems fair that the EPA step in, and impose mandatory fuel economy standards on automakers. It’s for our own good.

Comments

  1. #1 SkookumPlanet
    July 19, 2006

    You’re correct about the distorted financial incentives. But this itself is the result of Detroit getting addicted to the enormous profit margins of SUVs. This is from a PBS documentary on SUVs I saw twice, so I’m certain of the gist, if not actual figures. For several years in the early- and mid-90s, the plant that build the Ford Explorer was the single most profitable industrial plant on Earth.

    There’s also a concept I’ve come across related to your post I’d like to learn more about. Hyperbolic Time Discounting. It’s a way of explaining how people are so poor at making decisions long term. My memory is I first found this at the site of a researcher who’s research focus included the dopamine-driven reward center. I don’t have time today to find it.

    And finally, more food for thought. There’s another new field that, like neuroeconomics, will probably cut the legs out from under classical economic theory — evolutionary economics.

  2. #2 Andrew Dodds
    July 20, 2006

    Actually, there does seem to be a point where running costs become noticeable, it’s just thay have to be seriously painful for people to take notice.. (see my last comment). $8/gallon would do it.

    Regarding the time discounting, I remember reading about it as well.. I believe that the rate was of the order of 25-35% per year. Wich basically means that, instinctively, people don’t even think about more than 4 or so years in the future. Interestingly, it also seems to be the limit for credit card interest rates…

    An interesting implication is that moderate inflation rates (say 5-10%) combined with high interest rates are actually good for the average person, since they combine to continually make things seem expensive due to continual price rises and interest rates and pay off debt by inflation. The current environment of low interest rates and inflation is associated with an explosion in personal debt; this being a result of low interest rates. Unfortunately, low inflation also means that people won’t be bailed out of bad loan decisions by inflation.

    Of course, in our evolutionary past, thinking even 4 years ahead would be a big gamble.

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