Does the Energy Paradox Apply to Heavy Trucks?
Are Heavy Truck Buyers “Econs” or “Humans”?
David L. Greene
Oak Ridge National Laboratory
Howard H. Baker, Jr. Center for Public Policy
The University of Tennessee
Energy Use and Policy in the US Trucking Sector
Resources for the Future
October 10, 2012
Washington, DC
The usual prima facie evidence for an energy paradox (underinvestment in energy efficiency) can be found in the NRC’s 2010 study.
(EPA standards call for 9% to 23% reductions in fuel consumption.)
Technological Potential to Reduce Fuel Use per Vehicle Kilometer for
Heavy-duty Vehicles by 2020 (NRC, 2010, p. 133)
Reduction in Fuel Consumption
60%
50%
$1.10
$4.20
$4.80
$2.70
$6.80
Weight
40%
$1.70
30%
Hybrid
Trans.
Roll. Res.
20%
Aerodyn.
10%
Engine
0%
Tractor
trailer
Straight box Pickup diesel Refuse truck Transit bus Motor coach
Behavioral psychology/economics <<101
Two modes of thinking:
• System 1:
• Operates automatically and quickly, with little or no effort and no sense
of voluntary control.
• Has vast resources of learned associations and skills.
• Continuously generates suggestions for system 2: impressions,
intuitions, intentions, and feelings.
• System 2:
• Associated with the subjective experience of agency, choice, and
concentration.
• When we think of ourselves, we identify with system 2.
• Allocates attention to the effortful mental activities that demand it,
including complex computations.
• Is lazy and not particularly alert; normally in low-effort mode.
• Most of the time adopts suggestions of system 1 with little or no
modification.
• “In summary, most of what you (your system 2) think and do originates in
your system 1, but system 2 takes over when things get difficult, and it
normally has the last word.” (Kahneman, 2011, p. 25)
In-depth interviews with 59 California households about fuel
economy and car choices found none who engaged system 2.
NONE. (Turrentine and Kurani, 2007, Energy Policy)
• Few households mentioned fuel economy when discussing vehicle
purchases.
• At least 14 households included one or more financial services
professionals or individuals with high quantitative skills.
• Asked about willingness to pay for a 50% increase in fuel economy:
▫ Many “…were not telling us what they were willing to pay…but were rather
guessing how much it would cost.”
▫ Nine admitted guessing or not understanding the question.
▫ Six based their answers on the cost of options or comparing types of vehicles.
▫ Some used the price premium for hybrids.
▫ A few offered large round numbers without explanation.
• Asked about payback periods:
▫ Almost two-thirds could not offer a payback period. “I would never have
thought about it that way.”
• System 1 often answers a related question when presented with a
question for which it has no answer.
Opinion Research Caravan Survey.
System 1 is loss averse.
• “When directly compared or weighted against
each other, losses loom larger than gains. This
asymmetry between the power of positive and
negative expectations or experiences has an
evolutionary history. Organisms than treat
threats as more urgent than opportunities have a
better chance to survive and reproduce.”
• (Kahneman, 2011. Thinking Fast and Slow, p. 282)
Choice of optimal fuel economy for a vehicle is a complex
problem with an important structure:
Net benefit = Future Benefit – Upfront Cost.
In general Net Benefit << Future Benefit or Upfront Cost.
Price and Value of Increased Fuel Economy to
Passenger Car Buyer, Using NRC Average Price Curves
$2,500
Constant 2000 $
$2,000
$1,500
Greatest net value
to customer at
about 36 MPG
$1,000
Fuel Savings
Price Increase
Net Value
$500
$0
28
30
32
34
36
38
40
42
44
46
Assumes cars driven 15,600
miles/ year when new, decreasing at
4.5%/year, 12%discount rat e, 14 year
vehicle life, $2.00/ gallon gasoline,
15%shortf all between EPA test and
on-road fuel economy.
-$500
Miles per Gallon
NRC, 2002, Effectiveness and Impact of Corporate Average Fuel Economy (CAFEE) Standards)
Your mileage may vary.
The label value is at best a mean.
Lin and Greene, 2011, SAE 11SDP-0014.
Future energy prices are also uncertain.
Econometrically speaking, oil prices have been a random walk.
Hamilton, The Energy Journal, 2009, v. 20, no. 2, pp. 179-206.
World Price of Crude Oil
$120
2009 $ per Barrel
$100
$80
After OPEC
$60
$40
Before OPEC
$20
$0
1950
1960
1970
1980
BP Statistical Review of World Energy 2012: World Crude Oil Prices, 1861-2011.
1990
2000
2010
Quantifying uncertainties about fuel prices, realized fuel
economy, vehicle use and vehicle life reveals paying up
front for fuel economy to be a risky bet.
Distribution of Net Present Value to Consumer of a
Passenger Car Fuel Economy Increase from 28 to 35 MPG
0.25
Relative Frequency
0.20
X <= $2941
95%
X <= -$1556
5%
0.15
0.10
Mean = $405
0.05
0.00
-$3,000
-$1,500
$0
$1,500
Greene, 2011, Energy Economics,
press.
2005inDollars
Greene, D.L., 2011, Energy Economics, v. 33, no. 4, pp. 608-616.
$3,000
$4,500
$6,000
“We concluded from many such observations that ‘losses loom larger than
gains’ and that people are loss averse.”
“The ‘loss aversion ratio’ has been estimated in several experiments and
is usually in the range of 1.5 to 2.5.” (Kahneman, 2011, p. 284)
“A bird in the hand is worth two in the bush.”
Consumer Loss Aversion Function
Perceived Value of Outcom e
$2,000
$1,000
$0
-$3,500 -$2,500 -$1,500 -$500
$500
$1,500 $2,500 $3,500 $4,500 $5,500 $6,500
-$1,000
-$2,000
-$3,000
Actual Value of Outcome
Integrating the loss aversion function with the probability distribution of
NPV causes the expected benefit to disappear.
There’s no “there”, there.
Net Present Value Distribution of Loss Averse Consumer
0.20
0.18
Relative Frequency
0.16
X <= -$1449
5%
X <= $1128
95%
0.14
0.12
0.10
0.08
0.06
0.04
Mean = -$32
0.02
0.00
-$3,000
-$1,500
$0
Greene, 2011, Energy Economics, in press.
2005 Dollars
Greene, D.L., 2011, Energy Economics, v. 33, no. 4, pp. 608-616.
$1,500
$3,000
Independent owner operators behave like “Humans”
but corporations might behave like “Econs”.
• “Organizations are better than individuals when
it comes to a avoiding errors because they
naturally think more slowly and have the power
to impose orderly procedures.
• “Whatever else it produces, an organization is a
factory that manufactures judgments and
decisions.”
(Kahneman, 2011. Thinking Fast and Slow, pp. 417-418)
• Or are corporate decision makers just people,
after all?
We don’t know.
• Maybe trucking firms base their decisions on
numerical calculations of optimal fuel economy,
based on expected net benefits but:
• There has been no standard fuel economy test
and their mileage will still vary.
• Fuel prices are still a random walk.
• Fuel economy is still a risky bet.
• And at least some truck buyers are “Humans”.
Thank you.
Uncertainty/loss aversion bias is also consistent with
manufacturers’ belief that consumers will pay for only
2-4 years of future fuel savings.
Price and Value of Increased Fuel Economy to
Passenger Car Buyer, Using NRC Average Price Curves
$2,500
Constant 2000 $
$2,000
$1,500
Fuel Savings
$1,000
Price Increase
Net Value
Greatest net value
to customer at
about 30 MPG
$500
$0
28
30
32
34
36
38
40
-$500
Miles per Gallon
42
44
Assumes a
simple
46 3-year payback
on-road fuel economy.
requirement.
Assumes cars driven 15,600
miles/year when new, decreasing at
4.5%/year, 12%discount rate, 14 year
vehicle life, $2.00/gallon gasoline,
15%shortfall between EPA test and