The MPG Illusion

cameron diaz priusIt’s the beginning of summer, which means the beginning of driving season. Perhaps anticipating summer driving, many people bought new vehicles last month, putting automakers on track to have the best year since 2007.

So, here’s a question, particularly for readers who were part of this vehicle-buying wave:

Which of the following two choices leads to more fuel savings:

(A) buying a 15 mpg Cadillac Escalade instead of a 12 mpg Chevrolet Suburban, or

(B) buying a 50 mpg Toyota Prius instead of a 29 mpg Toyota Corolla?

Assume you would drive the same distances and speeds no matter which car you have.

side by side toyotasThe answer is (A), though several academics have discovered that many people get answers to questions like this wrong.

In case you were one of them, here’s a quick explanation. If you were going to drive 100 miles, it would take 8.3 gallons in the Suburban and only 6.7 gallons in the Escalade, so you’re saving 1.6 gallons for every 100 miles driven. By contrast, buying the Prius instead of the Corolla means using 2 gallons for every 100 miles instead of 3.4, so only saving 1.4 gallons over 100 miles.

But, mistakes – like answering (B) instead of (A) –  appear so pervasive that academics have labeled the phenomenon the “MPG Illusion.”

In an article published in 2008 in the journal Science, two Duke University business school professors, Richard Larrick and Jack Soll, reported results from surveys they administered to undergraduates. They asked the undergraduates to rank five comparisons, like the two above, and found that only one respondent out of 77 got the correct ranking.

Larrick and Soll’s research suggests that people think that improvements in MPG ratings translate linearly into reductions in gasoline consumption. People think, for instance, that increasing fuel efficiency from 12 to 13 MPG is the same as increasing from 22 to 23 MPG. But, the relationship does not scale linearly.

mpg graphIn a blog post on their Science article, Larrick provides this graph plotting gasoline used per 10,000 miles against MPG. The large gas savings from small changes in MPG at low MPG levels are clear.

In a recent paper, NYU economics professor Hunt Allcott broadens the surveyed population beyond undergraduates to a representative sample of Americans, and asks them to compare the gas consumed by cars they own to gas consumed by cars they recently contemplated purchasing. Again, he finds evidence of MPG Illusion.

MPG illusion and energy policy?

So, if vehicle purchasers suffer from MPG Illusion, what are the repercussions for energy consumption and energy policy? In general, MPG Illusion suggests that consumers are likely purchasing both too many gas guzzlers and too many super-efficient plug-in hybrids, and avoiding vehicles with mid-range MPG ratings more than they would if they weren’t under the MPG Illusion.

In other words, consumers are mistakenly thinking that a Suburban is not that much worse in terms of fuel consumption than an Escalade, so purchasing too many Suburbans.

From a policy perspective, though, addressing the MPG Illusion would seem relatively easy. The EPA already mandates labeling on new vehicles, and these feature MPG ratings prominently. What if instead, labeling encouraged consumers to think about gallons of gas used per 10,000 miles driven?

allcott knittelIn ongoing research, Hunt Allcott and Chris Knittel are running an experiment to test whether providing more information to prospective buyers in vehicle dealerships impacts which car they purchase. They are showing information on gas consumption, like what’s contained in the screenshot below, to a randomly selected set of prospective new vehicle buyers. Then, they will compare car purchases between prospective purchasers who see the screenshots and purchasers who were randomly selected into a control group and don’t see the new information.

My prediction is that there are enough people who are buying the super-efficient vehicles just because they are the best available, and not necessarily because they’re doing a calculation (perhaps wrongly) on the likely fuel savings relative to something else. After all, Prius drivers like Cameron Diaz and Larry David are unlikely to opt for the Corolla once dispelled of the MPG Illusion.

catherine wolframSo my guess is that Allcott and Knittel’s screenshots will keep people out of Suburbans more than it will keep them out of Priuses (actually, “Prii,”according to Toyota). If I’m right, providing information like Allcott and Knittel’s may turn out to be a highly cost-effective energy-efficiency policy. Stay tuned for the actual results.

Catherine Wolfram
The Berkeley Blog

Monday, 3 June 2013

Published by the LA Progressive on June 4, 2013
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About Catherine Wolfram

An associate professor at the Haas School of Business, Catherine Wolfram's research interests include regulation of business, energy and environmental economics, and electricity-industry restructuring. She received her PhD in economics at MIT and her undergraduate degree in economics at Harvard.