Category Archives: Saving

Mental accounting at the pump

Mental Accounting and Gasoline Consumption, by Justine Hastings and Jesse M. Shapiro

“When the price of gasoline increases … the market share of regular gasoline increases while the market share of higher quality gasoline falls.”

While conventional economic theory suggests that decision makers treat a dollar as a dollar no matter how it was earned or is to be spent, in practice some households may engage in “mental accounting” — setting aside special budgets for certain purposes, like food, clothing, or transportation. Households that budget this way may respond to a given income gain, or loss, differently depending upon how it arrives. For example… a household may reduce spending on vehicle-related luxuries more in response to an increase in fuel prices than in response to a comparable loss in financial wealth.

In Mental Accounting and Consumer Choice: Evidence from Commodity Price Shocks (NBER Working Paper No. 18248), Justine Hastings and Jesse Shapiro consider this type of mental accounting with data on purchases of gasoline. Using aggregate data covering 1990 to 2009 and data on purchases at a retailer for 2006 to 2009, the authors find a clear and positive effect of gasoline prices on the market share of regular gasoline, the lowest quality gasoline available. When the price of gasoline increases — typically by similar amounts at all quality levels — the market share of regular gasoline increases while the market share of higher quality gasoline falls.

The extent of this substitution from higher quality gasoline to regular gasoline cannot be explained by income effects alone. During the 2008 financial crisis, for example, the income effect would have predicted an increase in the purchases of regular gasoline and a decrease in the purchases of premium gasoline. In practice, the opposite occurred.

Moreover, the income effects necessary to explain the relationship between gasoline prices and quality choices are extremely high. Households adjusted their mix of gasoline purchases almost 20 times more to a reduction in their buying power because of an increase in gasoline prices than to an equivalent reduction in income from other sources.

Psychological models of decisionmaking may be able to help explain the buying patterns observed in the data. These findings also have interesting implications for retailer behavior — they indicate that consumers will put a higher premium on saving money on gas in high-gas-price times than in low-gas-price times. This implies that retailers will face more intense competition during high-price times. That prediction is borne out in data that shows lower retail margins on gasoline in periods when oil prices are high.

 

Do behavioral interventions have durable effects?

That’s the title of of a new paper by Hunt Allcott and Todd Rogers.

From the abstract:

Interventions to affect repeated behaviors, such as smoking, exercise, or workplace effort, can often have large short-run impacts but uncertain or disappointing long-run effects. We study one part of a large program designed to induce energy conservation, in which home energy reports containing personalized feedback, social comparisons, and energy conservation information are being repeatedly mailed to more than five million households across the United States.

We show that treatment group households reduce electricity use within days of receiving each of their initial few reports, but these immediate responses decay rapidly in the months between reports. As more reports are delivered, the average treatment effect grows but the high-frequency pattern of action and backsliding attenuates. When a randomly-selected group of households has reports discontinued after two years, the effects are much more persistent than they had been between the initial reports, implying that households have formed a new “capital stock” of physical capital or consumption habits. We show how assumptions about long-run persistence can be important enough to change program adoption decisions, and we illustrate how program design that accounts for the capital stock formation process can significantly improve cost effectiveness.

What does this mean? Well, I find it best to view as a stylized graph: 

Every time a mailing is made, electricity consumption drops a bit in response to the feedback about usage. While it has a tendency to tick back up over the next few days, the effect remains. Over many months, a new habit of electricity usage is formed. Once the mailers stop, the new, lower level of consumption remains.

This is the first such paper to look at the long-term, durable influence of such interventions, and it is reassuring to see that (at least in this case), the intervention does not only have a short-run influence on behavior, but also a long-term change in how the individual consumes.