Analyzing rising gas prices Part 2 – the surprising results.

On Sunday (Mar 11), we blogged about Martha’s conversation with George over her suggestion that she trade in her 30 MPG vehicle for a 40 MPG vehicle. George retorted that he’d rather trade in his gas guzzling 10 MPG monster truck for a 12 MPG hot rod. Here’s how the data actually works out in their scenario:

At $5 per gallon and 10,000 miles George will pay $5,000/yr for gas for his truck, but only $4166.67 for his hot rod. Savings to George for going fr0m 10 > 12 MPG = $833.33.

For the same gas price and miles driven Martha’s existing 30 MPG car will cost her $1666.65/yr for gas vs. her new 40 MPG car at $1250. Savings to Martha for going from 30 > 40 MPG = $416.65

By going from 10 MPG to 12 MPG George saves DOUBLE the amount on gas that Martha saves by going from 30 MPG to 40 MPG.

We all have a hard time with this problem because of the way it is framed. The frame is based on how many miles we get per gallon rather than how many gallons we get per mile – i.e. how much it costs us in gas for each mile we drive. This is a famous example called “The MPG Illusion” first published in Science Magazine in 2008. As a result of this faulty framing, beginning in 2013 the fuel economy stickers on new vehicles will include not just MPG figures, but also GPM or gallons per mile.

Having good data is important to making good decisions. Having a proper framework for understanding the data is equally important.

For a thorough discussion of “The MPG Illusion” go to: http://nudges.wordpress.com/why-we-misunderstand-what-miles-per-gallon-ratings-are-telling-us/

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