:Fixed Point

I’m often struck by how our purchasing behaviour appears inefficient. There are many instances where we appear to either mispredict the utility we would derive from a product, or are apparently attributing a high option value to owning the product. These two interpretations can broadly be seen as behaviourist or rational.

Take car ownership. I’ve often wondered why so many people own a car in London when they do so few miles. With the impending arrival of Baby Boot we considered replacing our old VW for someting a bit bigger and new. The annual cost came to about £7000 (including depreciation and finance). We do about 5000 miles of which 2000 are in and around Greater London. Incidentally, my figures of around £7000/annum compare pretty well with the AA’s estimates, which don’t include financing costs.

In addition we pay £2400 for two people to use the public transport system. If we switched all our Greater London car miles to to public transport then it means we’re paying an additional £4,500 to travel 3000 miles or £1.50/mile. London cabs aren’t this expensive. And as this table shows, there are many instances when renting a car can be cheaper than owning a new car.

So why do many people in London own a car? Either the valuations in the reports do not account for option value, i.e. that combination of reduced hassle and increased flexibility that car owning gives over rental, or perhaps people overestimate the benefits of owning a car. In my own example, those 3000 non-London miles are covered in only 6-8 trips. They are also journeys I know of in advance and can therefore arrange to hire a car. I could, at that cost, hire far more fun cars and be flexible in whether I want to get up North quickly, or safely, whether I’m travelling alone or with the family.

My own anecdotal explanation is that people prize the option value more than mispredict their own utility, though this effect may be different for those that purchase prestige cars with a work bonus.