Hybrid Irrationality, Hybrid Culture

Tim Haab wonders about the impact of saving gas money by buying a hybrid on consumers' purchase decisions. He notes a recent report that taxi drivers are jumping on the hybrid bandwagon, whereas regular consumers are slower to give up their conventional engines. Yet according to Haab's back-of-the-envelope calculations, the taxi drivers are only saving $455 more over the car's lifetime than the regular consumers. I can think of several reasons why taxi drivers might be more sensitive to the savings from hybrids than ordinary people:

1. The discount rate. Haab uses a typical 5% discount rate on the gas savings. But that assumes a high level of mathematical sophistication within the consumer's perceptual apparatus. A more likely thought process would be for the consumer to consider their gas costs over a more easily imagined short timespan -- say the first month. If those savings aren't a lot, they get rounded down to nothing, or next to nothing, before the consumer multiplies them over the lifetime of the vehicle. Because the savings don't show up as a big chunk (whereas the car price does), they get enervated by rounding. A business, on the other hand, would keep careful records of such expenditures, making it easier to be economically rational about them.

2. Separate budgets. Most people don't conceptualize their budgets as one big pool of money. In particular, big one-off purchases like a car are separate from recurring costs like gas. So when people head down to the car dealership, they aren't going to think very much about, or put very much weight on, trade-offs between gas and the sticker price. A business like a taxi, on the other hand, will tend to conform better to the kind of economic rationality that Haab's calculations presuppose. Both the car and the gas come out of the same bottom line for the taxi driver, so the potential for trade-offs is clear.

3. Culture. This, I think, is the biggest factor driving decisions to purchase or not purchase a hybrid. When you buy a car, you're not just buying just a mode of transportation and making a financial commitment, but you're also making a statement about who you are and what kind of people you associate with. Hybrids are very strongly associated with a particular culture -- the middle-class liberal greenie. This was a key to the early success of hybrids, as people snapped them up as a way of proclaiming themselves to be greenies. But that strong cultural association then inhibits the spread of hybrids to other sectors of society, particularly those who define themselves in part by their rejection of greenies' values and lifestyles. The cultural factor is weaker in the case of taxis, as people don't tend to pick their cab company as a cultural statement.