Economic Rationality Does Not Really Apply

By John Eichberger | November 2016

Which do you fancy? James Bond's 1964 Aston Martin DB5 or maybe his short-lived 2014 DB10? Magnum's Ferrari? The Bandit's Flaming Eagle Firebird or Michael Knight's technologically superior Trans Am? The Batmobile? Is there a preference between Adam West's, Michael Keaton's or Christian Bale's version of the legendary superhero's mode of transportation?

For decades, vehicles have occupied a central role in our pop culture and spurred our desires – how many Beach Boy’s songs extolled the virtues of owning the right set of wheels? “Little “Deuce Coupe,” “409” and “Fun Fun Fun,” just to name a few.

But is there a relation between what we dream about and what we buy? Clearly the dream cars mentioned above are not the shining examples of fuel efficiency and conservative investment. Are people not economically rational? What are they actually buying today?

The media likes to talk about the resurgence in larger vehicle sales because lower fuel costs and improved fuel economy have rendered these units more economical than just a few years ago. Is this true? WardsAuto data on new vehicle sales through October 2016, shows that light duty sales are trending just 0.2% behind the record-breaking year of 2015. The mix of sales has shifted slightly from the car to light truck and utility segments.

But again, are consumers economically rationale? In a March 2016 presentation on disruptive trends, Tony Seba, author of “Clean Disruption of Energy and Transportation,” says that by 2025, the electric vehicle will deliver what consumers need and want. He argues that there will be value in terms of utility, cost of acquisition, maintenance and fuel costs, that consumers will be compelled by economic reality to shift from internal combustion engines to electric drive vehicles. He further suggests that this compulsion will be so strong that in 2025 every single vehicle sold in the world will be electric.

I think most would consider this type of prediction outside the realm of reality. It contradicts every forecast I have seen. In addition, it conflicts with research that demonstrates consumers are not inherently rational when it comes to their vehicles and the fuel they purchase.

According to consumer surveys conducted by NACS, it is clear that consumers are not rational when it comes to buying fuel. When gasoline prices were low at the beginning of 2016, nearly 40% of consumers said they would drive five miles out of their way to save just 5 cents per gallon. Given average vehicle fuel economy and fuel prices, they spend more money to get to that station than they would save on the fuel purchase.

Likewise, when the Fuels Institute asked consumers who were likely to buy a vehicle within the next three years what characteristics were most important to them, they resoundingly said fuel economy and vehicle purchase costs (84% and 83% respectively). But when consumers were asked by Strategic Vision what issues were most important to the purchase decision they had made, fuel economy dropped to 15th place on the list.

What we have to keep in mind when considering the market for any new technology is the motivation that compels consumers to make their decisions. It’s a complex series of inputs that cannot always be explained. Economics is one factor, but so is emotion – how do they feel about themselves when driving this car? Can they brag to their friends about the “deal” they got on gasoline this morning? Does the vehicle they are considering fit their utility needs? Market evaluations that do not incorporate multiple aspects of consumer motivation are likely to be limited in their value.

So which supercar mentioned above do you desire - Bond’s Aston Martin, Bandit’s Firebird or Bale’s Batmobile? None of these are economically rational. But if you could afford them, wouldn’t you? Think about how you might feel cruising downtown on a busy Saturday afternoon, gleaming in pride with your new ride. Your ultimate purchase decision is much more complex than some would have you believe. What will be your leading motivation? Well, that is a big question and the answers are likely extremely diverse.

Read more from the November Issue of our Fuel for Thought newsletter.