Irrational Sensitivity to Gas Prices

By Harry Sit

Speaking of inflation, I noticed that people have irrational sensitivity to gas prices.

Warehouse club Costco stores in my area also sell gas. The price is usually a little cheaper than the price at other gas stations. I can tell by the length of the lines how much cheaper it is. If it’s five cents cheaper, the lines are very short or non-existent. If it’s cheaper by 10 cents or more, the lines are long. You have to wait good 10-15 minutes.

Is it worth it?

My car has a 16-gallon tank. A fill-up is usually a little over 14 gallons. Saving 10 cents a gallon only saves $1.50 or so. I’m pretty sure there are better ways to save $1.50 a week than waiting in line for cheaper gas.

So why do you think people have this irrational sensitivity to gas prices? Dan Ariely, a behavior economics professor at Duke University and author of the book Predictably Irrational says it’s because people stare at the meter for too long.

I think it’s because it’s a sure thing. Waiting in line for 10-15 minutes will save $1.50 for sure. Buying tomatoes from a different store may or may not save money because stores don’t post tomato prices high up there.

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Posted on June 29, 2011 under Spending.

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Comments

6 Comments on Irrational Sensitivity to Gas Prices

  1. Wai Yip Tung on June 29, 2011
     

    Very irrational indeed. Note that the unit of price they are comparing against is basically cents. People give no thought when they spend a few bucks on coffee. Only when it comes to gas will they be penny pinching.

    Contrast this to fuel efficiency. Even though the attitude is changing these days, people still pay little attention to fuel efficiency. Consider a 20 mpg car v.s. a 30 mpg car. If you get a 30 mpg car, you spend 40% less on fuel compare to the other car, no matter what the prevalent gas price goes. Strange that few people shop for fuel efficient car (to save money) with the same passion as they shop for cheap gas.

  2. Dave on June 30, 2011
     

    You forgot to mention something – how frequently some people fill their gas tank. $1.50 saved every three weeks (my rate of filling it up) doesn’t work. But my sister – who appraises houses for a living probably fills her car up 2-3 times a week, meaning she’ll save maybe $12 for every $1.50 I do.

    Nothing irrational about that!

  3. Michael S on June 30, 2011
     

    How about going into Costco or Sam’s immediately before or after the fill up and dropping $300

  4. Wai Yip Tung on June 30, 2011
     

    @Dave, the math still does not work. It is another penny wise example.

    So her save $12 after filling the tank 8 times. Assuming the gas price is $3.5, she would have already spent 3.5*14*8 = $392, which amounts to 3% saving. Besides she has to get in line 8 times, spending 80 to 120 minutes so that she can earn $12.

    A fuel efficient car will be a big win for her financially.

  5. Wai Yip Tung on June 30, 2011
     

    @Michael,

    Good point. It is could be a loss leader. The discount is a bait.

  6. Denver Todd on July 15, 2011
     

    Here is a different way to look at shopping for gas:

    The choice isn’t between two sellers with a difference of 10 cents. The actual choice may be more like 10 sellers with a spread of 30 cents, since you drive by that many gas stations on your way from A to B, and there are many high priced sellers. So savings that last few cents is just icing the cake, and total savings is enough to buy your overpriced coffee.

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