it was the highest price had ever been
and like many of you I was interested in
trying to use less gas partly because of
the cost but also because of the
long-term effect on the environment and
so a colleague at Fuqua Jack Saul and I
started to carpool in his hybrid and one
of the interesting features the hybrid
had was a cool screen that you see in
the middle of this picture that showed
the MPGs we were getting as her driving
to work so we both like numbers and he
started to ask me quizzes about mpg and
one of one example of it was imagine you
drove uphill for a hundred miles and you
got 10 miles per gallon and then imagine
you turned around and drove back the
same hundred miles downhill but got a
hundred miles per gallon what was your
average miles per gallon so this is he
was giving me little quizzes like this
it turns out I was failing the quizzes I
was not doing the right math with mpg
and it led us both to think about well
what information do we have available to
make smart energy energy decisions and
can we improve that information and
that’s what I’m going to talk to you
about today now mpg is very familiar to
Americans and in fact because we think
it’s important to reason with mpg the
EPA in the 1970s said every new car
needs to have it on the side of the
vehicle and anyone who’s bought a new
car has seen an updated version of this
sticker that’s now been around for a
long time so can we make good decisions
of mpg that’s essentially the challenge
now the idea of studying good
decision-making really has this
interesting history because two
different disciplines have focused on
our decision-making and really they
worked in separation for many years so
one is economics where economics assumes
that we’re very rational as we make
decisions we’re fully informed we
calculate everything correctly we’re
going to maximize the money for
ourselves at the same time psychology
was studying many questions about
decision making but they were taking
different assumptions to it that we rely
a lot on our intuition
that we don’t have full information
therefore that we have complex interests
and we take a lot of shortcuts and
what’s interesting about these two
parallel fields was they eventually
started to speak to each other and there
was a recognition that we really have to
work in a space between the rational
assumptions and economics and these
problems that psychology identified and
so the field of behavioral economics
emerged which really looks at the
overlap let’s accept the people don’t
make great decisions what can we do to
help them make better decisions now
Daniel Kahneman was a Nobel Prize
winning a psychologist who happen to win
the Nobel Prize in Economics and he did
it because he essentially spoke to
economists and gave them systematic
evidence that people are systematically
deficient to how they make decisions and
in a 2011 book called Thinking Fast and
Slow he coined a phrase Wiz iottie
which simply means what you see is all
there is and by that he meant to say
that when people get information they
get trapped by it they do a poor job of
figuring out how to convert it into
something they really care about and
they just try to work with whatever they
see and what I’m gonna do today is try
to give you four principles for getting
better information when you make a car
buying decision and in fact general
decisions about energy use and it
creates an acronym of course
cor e so I’m going to tell you to focus
on consumption metrics which I’m going
to illustrate for you that you should
know your objectives meaning and then
you don’t care about gas you care about
costs and the environment so know what
you’re trying to achieve and get
information on it there’s a value of
relative comparisons it’s often hard to
make sense of numbers without knowing
how big or small they are compared to
something else then finally expand
outcomes don’t think about this week’s
gas consumption but think about the
effect of owning one vehicle over
another over the course of a year or
seven years all right
let’s do a quick quiz so imagine a
family has two vehicles they drive both
the same distance over the course of a
year and they can trade in one and they
want to get a more efficient one one
possibility would be to trade in a 10
MPG vehicle for a 20 mpg vehicle and the
other is to trade in a 20 mpg vehicle
for a 50 mpg vehicle now which of these
trade ins do you think will
more gas for the family so raise your
hand how many think a would save more
gas alright how about B okay I think I
saw more hands for B and that’s in fact
what most people say B is very
attractive because it’s a bigger
difference 2250 s a thirty mile per
gallon difference and it’s a bigger
percentage improvement if you’re trying
to think in percentage terms it turns
out that’s wrong a in fact saves more
gas in fact it saves almost twice as
much gas as B does now here’s the math
that helps make that clear in this table
on the left hand side is miles per
gallon and they’re not spaced equally
and you’ll soon see why that’s the case
the right hand column tells you how much
gas you’re going to use driving a
hundred miles with a vehicle that has
that MPG and the math is simple you just
divide the hundred by the mpg and you
get the gallons of gas but the clear
thing that pops out here is that every
mpg improvement in the teens tends to be
very helpful in reducing a gallon of gas
that’s being used and if you look at the
change then from 10 to 20 as I had
proposed in the slide before you can see
you’re going from using 10 gallons of
gas down to five you’re saving five
gallons of gas with that trade-in if you
look at the twenty to fifty improvement
you’re going from using five gallons
down to two that’s only a three gallon
savings and it’s just very
counterintuitive to people that there’s
such a curvilinear eighty which I’ll
also show in the next graph but but one
striking thing here is that a 10 to 11
improvement is about the same magnitude
of benefit as a 33 to 50 they saved the
same amount of gas one gallon every
hundred miles and so those of you who
are more visual and think in terms of
graphs this is a graph of miles per
gallon along the x-axis and then the
amount of gas you use per hundred miles
on the y-axis and the same problem that
we just saw 10 to 20 reduces the gas
that you use by five gallons 20 to 50
reduces it by only three and so the
implication of this is think in terms of
consumption of gas not mpg but instead
this measure of gallons per hundred
miles because then you can actually get
an accurate picture of how much gas
you’re going to use when you compare one
vehicle to another so that’s principal
when I’m
look at consumption look at gallons per
hundred miles now a second principle is
be aware of what your objectives are and
make sure you get information that helps
you figure out whether you’re achieving
those objectives in a set of studies
with other colleagues we had people
think about the trade-off between buying
a cheaper car let’s say $20,000 vehicle
that gets 20 miles per gallon and a more
expensive car $25,000 car but one that
gets 30 miles per gallon is that mpg
improvement which means you’re gonna
have lower gas costs in the future worth
the additional costs upfront now the
objectives that people care about are
things like costs and also the
environmental impact and one of the
insights we had was that we thought that
when people just use mpg they may not
know the full implications for those
other things the costs and the
environmental impact and so we did a
study where we measured people’s
attitudes about the environment are they
essentially kind of hostile to the
environment low in terms of their
pro-environmental attitude or their very
high and on the x-axis on this graph you
can see it’s ranging from a red minus
sign up to a green plus sign so this is
our way of trying to capture their prior
attitudes toward the environment and
when we told them the kind of choice
that you just saw and we look to see are
they willing to buy the more efficient
car we found that they weren’t acting on
their attitudes these environmental
attitudes they seemed to be kind of no
matter what your attitudes were you had
a favorable attitude toward the car but
you weren’t sensitive to your own
preferences but we realized that if we
can actually give people something other
than fuel cost as the indicator of how
efficient the car is and we gave them
greenhouse gas emissions and
environmental income suddenly people
then begin to act on their stable
internal attitudes toward the
environment and we think of this as a
kind of sign post effect it sometimes
have to be reminded about where you want
to go and how to get there and so
there’s a value then to having cars
labeled not just with MPG and fuel costs
but with the greenhouse gas ratings so
that people remember to act on it and
know how to act on it okay
if you got a natural gas bill and you
found out that you were using 163 therms
of natural gas would you know whether
this is a bad or a good thing
let’s people have no idea what a therm
is so it’s hard to know whether this is
a lot or a little whether you’re doing
well or doing poorly and so a third
basic principle is the value of a
relative comparison for energy numbers
because we often don’t know what’s big
and what’s small and one of the
interesting pioneers in this space it
really has made a lot of progress
helping us understand the psychology of
how people make these decisions is a
company called oak power which took
social psychology research from about 10
years ago redesigned the kinds of labels
and feedback sheets that we get in our
mail about our energy use and
essentially created a comparison for
where you are where all of your
neighbors are and then in some cases
where the most efficient neighbors are
in terms of their overall energy use and
what’s clever about this is because it’s
a comparison to your neighbors it means
that they live in the same climate as
you they tend to live in the same size
house and age house and so it’s a fair
apples to apples comparison and now in
the case of this example if you find out
that you’re using 163 therms you find
out that you are actually worse than the
average neighbor and it might lead you
to reflect on what am I doing
differently what could I do to become
more efficient and save money and help
the environment whatever my concerns are
so there’s just a recognition that if we
give people comparisons it can motivate
them to catch up with their neighbors
and then the value of having the
efficient neighbor number which of
course here is very low meaning it’s
very good allows those who are already
better than average to have yet another
goal to strive for and want to catch up
with so the comparison helps motivate us
to do a better job all right
and then a final principle is the value
of looking at larger numbers and
thinking in terms of expanded outcomes
rather than kind of small ones and I’m
gonna use a non energy example to
illustrate this because it does a good
job of illustrating it and then come
back to energy so a few colleagues and I
presented subjects with a choice of two
cellphone plans plan a
a higher price per year but it had fewer
dropped calls per hundred calls and you
can think of drop calls as being a
quality measure so you want fewer of
them you don’t want to get disconnected
so plan a had 4.2 drop calls per hundred
for a price of 300 $84 Plan B had more
dropped calls 6.5 but at a lower price
324 dollars per year but if you look at
these numbers the drop call difference
doesn’t seem very large four and six
that doesn’t seem very different and
that yearly cost of sixty bucks seems
pretty big so most people in this case
favor B when they have a preference
they’d rather choose the cheaper plan
that’s going to make them suffer more
dropped calls but here’s the interesting
thing we gave another group of subject
the different frame but essentially the
same information in fact identical
information just a rescaling of it we
had them think about dropped calls per
thousand so it’s 42 versus 65 and the
price was expressed as per month rather
than per year so 32 versus 27 well
now the price difference looks small
it’s only five dollars a month and boy
I’m going to save twenty drop calls over
the next thousand that I make and with
this reframing we now have a majority of
the people wanting to pay for the more
expensive and higher quality plan but
the information is identical so the fact
that we can be moved around based on how
we scale information first of all says a
lot about our nature we get trapped by
what we see this is Kahneman’s point but
the others we can use this responsibly
by trying to make important things
bigger so we see the actual impact of
them and so here’s what I mean in the
sense of energy which is earlier I
argued we don’t want to think about
miles per gallon we want to think about
gallons per some distance so one
possible distance is a hundred miles so
if I think about improving a car from 20
to 25 I know I’m going to reduce my gas
consumption from five gallons every
hundred miles down to four that’s good
but five to four doesn’t sound that
impressive to me and I might be fine
with the five the car that uses five
gallons every hundred miles now if you
tell me over what I hope to be the life
of my car about a hundred thousand miles
that the difference is going to
be from 5,000 gallons down to 4,000 that
gets my interest I don’t want to burn
that extra thousand gallons I don’t want
to pay for it and I don’t want it to
hurt the environment and now I think I’m
more likely to act on it and so as we
think about then improving decisions for
people what information we can give them
and what you want to look for the next
time you’re buying a car the EPA label
was redesigned in 2013 to try to offset
the bad mpg number with other valuable
information and let me highlight some of
these for you
so mpg is still on the label so people
want it they expect it but now there’s
more stuff so when is this smaller
number which is the gallons per hundred
miles recommendation that Jack saw and I
made in a science article in 2008 so
that gets us into consumption and away
from mpg so that’s a step in the right
direction
they have annual fuel cost on there
that’s also good it’s a translation to
an objective we care about which is cost
they also have greenhouse gas ratings
this is that signpost of helping people
who want to help the environment get
directed in the right direction for it
and then finally the the last number
that I think is quite clever combined
several the principles that I just
proposed which is they make a comparison
to an average car so it’s relative and
you can see whether you’re saving money
or spending extra they scale it over
five years so it’s a bigger number it
gets closer to the kind of lifetime of
the car that you’re going to have and
you can essentially then quickly size up
how big an impact you’re having if you
buy an SUV that has poor mileage this is
no longer a savings number this is an
extra cost number that’s getting in the
thousands of dollars at that point and
then finally as as you leave today and
if you’re thinking about buying a car in
the future Duke has put together a
calculator that allows you to enter mpg
numbers for maybe your current vehicle
and one you might trade for or three
that you’re considering and you can put
in the mpg some distance you expect to
drive and I’d recommend pick a big one
like the lifetime of the car so you
really see the impact of your numbers
make a gasoline price assumption and
then you can compare the vehicles to see
how much you’re saving or how am I
you’d spend depending on which one you
pick so this is just zooming in you get
a final number that’s a comparison
between the vehicles whatever you
whatever assumptions you want to make
and you can find this easily it’s at a
URL GPM calculator comm and it will help
you when you make your next card
decision so as you walk away then with
this recognition of the problem of what
you see is all there is we can help you
make better decisions by making sure
when you look at the label or use the
calculator you’re thinking in terms of
consumption not mpg you’re thinking in
terms of the costs and the environmental
impact you get a sense of this relative
comparison across people or between
vehicles and you think about the big
outcomes over many miles of driving and
not just 100 miles thank you [Applause]