Humans have the capacity to think through problems carefully, but we’re also hardwired to make ‘intuitive’, automatic decisions. This is what psychology experts have labelled as system 1 and system 2 thinking. You may not be aware of it, but your intuition might prevent you from saving tens of thousands of dollars when you buy your next car.
As you perform complicated tasks such as driving or even simple tasks such as tying your shoes, you often rely on your intuition to automatically guide you through the process. Our intuition helps us simplify information and operate in modern society, but it can also lead us to make mistakes. Researchers have identified a long list of cognitive and emotional biases (think of them as mental shortcuts) that prevent people from making the best decisions. In this article, I’ll focus on how Present Bias and Loss Aversion Bias prevent car buyers from making the best financial decision when they choose between buying an electric or gas car.
Electric vehicle technology has been around for more than a decade now (in fact, there have already been more than 2 million electric cars sold in the USA). Moreover, the Department of Energy (DOE) published a study in 2021 showing that on average electric vehicles cost 6.1 cents per mile driven, whereas similar gas-powered vehicles cost 10.1 cents – if you drive 200,000 miles over the lifetime of your vehicle, this amounts to $8,000 in savings! Despite these significant savings, many people incorrectly assume that electric vehicles are more expensive because they place too much focus on their higher purchase price.
The next time you buy a car, you will make the best financial decision if you watch out for two common biases.
Present Bias
People value immediate rewards more than they value future rewards. For example, most people would prefer to receive $100 today even if they could receive 10% more money just by waiting another week. When it relates to car-buying, it means that your bias towards present rewards can prevent you from accessing thousands of dollars in government incentives.
Consumers who buy electric cars can receive up to $7,500 in federal tax credits and up to $5,000 from their state government. The challenge is that some of these incentives become available after you purchase the vehicle (especially if you finance the car). Car buyers who rely on their intuition are likely to be influenced by Present Bias and buy a car that is cheaper upfront but actually more expensive after you account for government incentives.
For example, the starting MSRP for the Hyundai Kona SEL trim is $11,050 lower than the starting MSRP price for the electric version of the same car. Hence, your intuition might tell you that the gas car is the better option when you visit a dealership. However, if you’re aware of your Present Bias, you might instead calculate the cost difference after all incentives are applied: if you live in California or Colorado, upgrading to the electric version would only cost you $1,550.
Loss Aversion Bias
Humans experience losses more painfully than they experience happiness from equivalent gains. For example, people will feel happier if they can avoid losing $50 than if they find $50 on the street. It means that our intuition leads us to avoid losses at the expense of achieving similar, or better returns.
Due to Loss Aversion Bias, you might focus too much on your monthly car payments and not enough on the total cost to own your vehicle. Going back to our previous car example, if you are comparing the gas and electric version of the Hyundai Kona, you can see that it costs around $450 per month to finance the gas version and $615 per month to finance the electric version with zero down payment over 5 years. The fear of losing $165 each month will encourage you to choose the gas car.
The problem is that when you rely on your intuition to buy a car, you don’t think about all the relevant costs of your decision. For example, electric cars run on electricity which is often 50% less expensive than the cost of gas. What’s more, EVs have fewer moving parts, meaning they require less maintenance. In fact, EnergySage conducted an analysis comparing the cost of Telsa models to comparable gas vehicles and found that if you drive 1,000 miles in a month, you’ll save about $52.50 by charging a Tesla Model 3 instead of fueling a Honda Civic. You can also expect significantly lower maintenance costs for electric vehicles: engine maintenance tends to be a large money sink for gas-powered cars, and engine oil, coolant, transmission fluid, and belts adds up over time.
Now, to tie it all together, let’s put ourselves in the shoes of a consumer in Colorado who is aware of these cognitive biases and wants to buy the most affordable 2022 Hyundai Kona. She would first calculate that buying the electric version will cost an extra $9,900 ($165 per month x 60 months). Then she would determine that she will actually save $100 if she buys the electric version because she qualifies for $10,000 in federal and state tax credits. Lastly, she could visit EnergySage’s vehicle comparison tool and determine that the gas version of the Kona will be $9,083 more expensive over 5 years (this assumes that she drives 15,000 miles per year, would pay $3.80 per gallon of gasoline and 23 cents per kWh of electricity, and she takes out a loan at 3.5% interest to buy the car). By the end of her analysis, this consumer would determine that buying the electric version of the Hyundai Kona is the best financial decision.
The next time you want to buy a car, keep in mind that your intuition will be influenced by Present and Loss Aversion Biases. Rather than following your intuition that ‘gas cars are cheaper than electric cars’, take a moment to calculate the true cost to own each vehicle and remember that your future self (and bank account) will thank you for making the best financial decision.
Guest author: Adrian Gomez
This article was written by Adrian Gomez, former co-founder of Green Light Labs. Adrian’s personal mission is to create healthier communities by accelerating eMobility adoption. At Green Light Labs, Adrian spent almost 3 years helping thousands of consumers and fleet owners learn about electric vehicles. He was also a key contributor to Lucid Motors’ billion dollar Series D raise and helped one of Canada’s largest electricity generators secure $20M in EV infrastructure projects. You can get in touch with him via Linkedin. The views, thoughts, and opinions expressed in this article belong solely to the author, and not to EnergySage.
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