A new gallons per mile calculator

Rick Larrick, who blogged about the MPG Illusion, has created a new calculator that lets you check out the gallons per mile for your vehicle, or any other for that matter. You can also compare gallons per mile information for all 2009 vehicles. The calculator is here.

A classic is back – cash discounts and credit surcharges

Last month USA Today said gas stations were bringing back the cash discount. Indeed they were. The Nudge blog shot this picture at a Shell station in northern Virginia today.

The regular price was $3.99 a gallon. USA Today makes no mention of why gas stations are advertising a cash discount instead of a credit card surcharge – an old retailing trick – but good behavioral economists know the answer. Humans view discounts differently from surcharges. The first is an opportunity cost; the second a cost outlay. In Toward a Positive Theory of Consumer Choice, Thaler wrote:

Until recently, credit card companies banned their affiliated stores from charging higher prices to credit card users. A bill to outlaw such agreements was presented to Congress. When it appeared likely that some kind of bill would pass, the credit card lobby turned its attention to form rather than substance. Specifically, it preferred that any difference between cash and credit card customers take the form of a cash discount rather than a credit card surcharge. This preference makes sense if consumers would view the cash discount as an opportunity cost of using the credit card but the surcharge as an out-of-pocket cost.

In Choices, Values, and Frames, Kahneman and Tversky argued that the distinction is one of framing. The discount is seen as a gain while the surcharge is seen as a loss. Since humans are loss averse, we are more likely to give up the discount (the gain) than accept the surcharge (the loss).

The fact that the cash discount is applied to gas provides an interesting wrinkle to the original credit card discussion which ignored the good itself. The sharp increase in the price of is especially painful to loss averse humans whose purchasing power at the pump has slipped considerably. Filling up anywhere, with cash or credit, feels like a raw deal. On a good like this, does the gap between those who forgo the discount and those who pass shrink? In other words, if a pair of a jeans and a gallon of gas both have the same cash discount on a percentage basis, would the number of people taking each be similar?

The behavioral economics behind free gas

With high gas prices, you might have noticed promotions for free prepaid gas cards when you buy some product. Like a Callaway golf club. A Comfort Inn hotel room stay, a lodge stay on Big Bear Lake, or one booked through Expedia. Or a new Chrysler car with of three years of gas guaranteed at $2.99. Assuming these prepaid cards aren’t coming at a massive wholesale discount, companies could just offer a simple cash reward, or even a free prepaid generic Mastercard  or Visa that would be good anywhere, not just at gas stations. So why play up gas?

It’s a classic mental accounting trick. Most Americans have a transportation budget, which has been blown over the past year by $4 a gallon gas. People have a hard time moving money from one mental account to the other, say from clothing or dining out to gas. The prepaid cards give them a way to restore the solvency of the transportation account without upseting their other budgets. Straight cash would be more fungible physically, but less fungible mentally.

Comparing fuel efficiency gains for a Jeep, a Camry, and a Civic

Richard Larrick, who guest blogged for us, points to a graph from The Green Grok showing gas money savings for mpg improvements over 1,000 miles at three fuel efficiency levels. They equate to driving a Jeep SUV (red), a Camry (blue), and a Civic (green). The figure assumes $4 per gallon gas.

You can also watch Larrick and co-author Jack Soll in this spot produced by Duke University.

When it’s worth driving across town for a deal

Tom Vanderbilt of How We Drive picks up on a Thaler classic from mental accounting. People irrationally say they will drive across town to save $5 on a lousy $10 calculator, but won’t do the same for $5 off a nice $125 jacket. Vanderbilt says his car’s navigation system shows him real time prices at nearby gas stations, allowing him to rationally calculate when it’s worth driving across town or even down the street for a better deal.

Interestingly, there was a 36 cents a gallon difference between the closest station and one an additional .3 miles away. So, on a 11 gallon fill-up, i could save nearly $4, with a minimal amount of driving. Doesn’t seem so irrational…But the next three stations, all located near each other, were charging the same price. I’ve actually used that more expensive station before, for the odd reason that there’s hardly ever a line (perhaps precisely because it’s more expensive). But I’ll be curious to see what long-term effects will be on gas-station pricing transparency as more drivers have these devices; will prices flatten out, or will there be more volatility as individual stations advertise particular deals, luring drivers who wouldn’t have considered those stations before?

Second borns watch out