Economy Often Leads Us Down Wrong Path The spate of bad economic news has changed the way we make economic decisions. NPR's Yuki Noguchi visits a used car dealership where drivers are trying to unload their gas guzzlers. Then, economist Dan Ariely discusses why so many of us make economic decisions that are so wrong.
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Economy Often Leads Us Down Wrong Path

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Economy Often Leads Us Down Wrong Path

Economy Often Leads Us Down Wrong Path

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From NPR News, it's ALL THINGS CONSIDERED. I'm Andrea Seabrook.

It's the end of another brutal week for the economy. Inflation up, Wall Street down, the job market even tighter. The average price of regular gas hit a Fourth of July weekend record of 4.10 a gallon. All this is making a lot of us change the way we act. Call it our economic behavior.

We're going to start today's program with a look at what we're doing differently in this slumping economy, whether it might actually be forcing us to make smarter decisions. Here's one change: Triple-A reports that long-distance travel this holiday weekend is down 1.3 percent, and now drivers are flocking to car lots, not to buy but to unload gas-guzzling trucks and SUVs.

So we sent NPR's Yuki Noguchi to Sterling, Virginia to check out business at CarMax, a used car dealer. There, the wholesale prices of trucks and SUVs dropped by 25 percent in the first three months of this year.

YUKI NOGUCHI: Jeff Brown(ph) drives up to the CarMax in a shiny black Dodge Ram. It's bigger than its parking space and taller than an adult. Its V8 engine could tow a small house, and it gets 13 miles to the gallon, which has Brown thinking about every move he makes in it.

Mr. JEFF BROWN (SUV Owner): I might spend five bucks just driving to the grocery store. You know, do I need to go to get that Slurpee or whatever it is, you know, that kind of stuff. Just simple little things like that.

NOGUCHI: Simple things that add up, so now he wants to trade it for something smaller and more efficient. He bought it new three years ago for $30,000. He's now guessing he'll get half that.

Mr. BROWN: Especially with this market, you know, people are going to offer you next to nothing. You know, I mean, just don't want to deal with all that. It's like a leaky pipe; just cut it and move on. As gas goes up, the truck goes down.

NOGUCHI: Brown waits in a small room for the appraiser's verdict. When it comes back it's for $11,000, 3,000 below what he'd expected. Then he wanders off to consider the offer and check out a Honda Civic. Meanwhile, some of the CarMax associates do a kind of post-game analysis.

Tim Dillistin is purchasing manager.

Mr. TIM DILLISTIN (Purchasing Manager, CarMax): So, he's going to wait...

NOGUCHI: He's going to wait.

Mr. DILLISTIN: ...and roll the dice. Because if he comes back a month from now, it may appraise for 11; it may go down.

Unidentified Man: That is very true.

Mr. DILLISTIN: It really depends on what happens with the market.

Unidentified Man: Exactly.

NOGUCHI: I'm feeling more and more like I'm in Vegas.

Except I think you can get better odds at the casino. Associate Sherry DeGraff talks about SUV owners going upside down. That's when a car depreciates so fast it's worth less than the loan.

Ms. SHERRY DeGRAFF (Sales Associate, CarMax): I had a customer that came in seven weeks ago and within seven weeks they had it reappraised and they thought, oh well, it's not going to go down. And it went down from 10,000 to 6,500 in seven weeks.

NOGUCHI: The associates track car values like some people follow baseball statistics. These days, small cars are most valuable players. The Toyota Corollas and Honda Fits get good gas mileage and they hold their value; sometimes they even appreciate, which until now was pretty much unheard of. Then there's the Ford Explorer. Sales associate Sultan Mahmoud(ph).

Mr. SULTAN MAHMOUD (Sales Associate, CarMax): Ford Explorer was number one selling vehicle, period.

NOGUCHI: When was that?

Mr. MAHMOUD: Two years ago.

NOGUCHI: And now?

Mr. MAHMOUD: Now, I don't think we're selling at all.

(Soundbite of laughter)

Mr. MAHMOUD: It's tough.

NOGUCHI: Tim Dillistin and his team tap into a database of thousands of cars bought and sold every day so they're pretty aware of the exact worth of every car. Still, in a market like this it's risky.

Mr. DILLISTIN: It's easier when a market is somewhat static to know what a car is worth. And if you're wrong, you're wrong by $500. If you're wrong on a gas guzzler right now and you're way wrong, you could be wrong by thousands.

NOGUCHI: Just then a white 2007 Cadillac Escalade SUV with gold trim pulls up right in front of the entrance. Buster Siganoff(ph) and his cousin David get out and sit in the lobby. I asked Siganoff why this car, which cost $70,000 new a year ago, is here for an appraisal.

Mr. BUSTER SIGANOFF (Car Shopper): Basically, on account of gas it's too much, way too expensive. So, that's basically the reason why we're trading it in.

NOGUCHI: So, it didn't matter last year when you bought it?

Mr. SIGANOFF: No. It really didn't. Gas prices was at 3 and 3.20. Now they're up to 4.50. Then, it definitely does matter.

NOGUCHI: The Siganoffs are in a jam. They have another Escalade at home plus another even more expensive car. And now Buster Siganoff says they're trying to unload them all.

Mr. SIGANOFF: The prices are killing us, especially with the payment and everything. And we're in over our heads so...

NOGUCHI: What's your monthly payment on the car?

Mr. SIGANOFF: Over 13.

NOGUCHI: For this car alone?

Mr. SIGANOFF: Yeah, for this car alone.

NOGUCHI: Let's take a wager. What do you think the number is going to come in at?

Mr. SIGANOFF: I'm going to hope at 53,000. That's what I'm hoping for.

NOGUCHI: And then an associate summons Siganoff into a small room.

Unidentified Man #2: Okay. I'm going to present the appraisal right here on the computer.


Unidentified Man #2: Okay.

NOGUCHI: How are you feeling right now, Buster.

Mr. SIGANOFF: Scared.

(Soundbite of laughter)

Unidentified Man #2: And clearly right here, purchasing department has written right here: high gas prices directly affects the large SUV value. We can give you $31,000 for the car.

Mr. SIGANOFF: Wow, $31,000.

NOGUCHI: How do you feel about that?


(Soundbite of laughter)

NOGUCHI: The sales associate then offers a printout of the offer and leaves the room. Siganoff continues to stare into the middle distance at the computer screen.

Mr. SIGANOFF: Now we need to find out what's the payoff on it and see how much we owe on it. And then...

NOGUCHI: Do you think you might owe more than what it's worth?

Mr. SIGANOFF: Yeah, probably.

NOGUCHI: Siganoff decides to think it over. He crosses the showroom, returns to his Escalade and gets back on the road.

(Soundbite of vehicle moving)

NOGUCHI: Yuki Noguchi, NPR News, Washington.

(Soundbite of vehicle moving)

SEABROOK: A lot of us are having to make difficult decisions - how to fill the grocery cart without emptying the wallet, how to make the mortgage payment and avoid foreclosure, whether to take a $40,000 hit on that Escalade - okay. Well, not all of us are facing that choice.

Dan Ariely studies how we make these decisions. His field is called behavioral economics. He's author of the book "Predictably Irrational," and he's a professor at Duke University. Welcome, Dan Ariely. You're in Durham, North Carolina?

Professor DAN ARIELY (Fuqua School of Business, Duke University; Author, "Predictably Irrational: The Hidden Forces that Shape our Decisions"): Yes. And I'm very happy to be on the line with you.

SEABROOK: Great. So, we just heard from a guy who wants to sell his SUV. He paid $70,000 for it new last year and he's weighing an offer of just $31,000 now. What do you think he's thinking?

Prof. ARIELY: Well, you know, clearly he's very upset. But I think it's interesting to realize how much people are paying attention to the price of gasoline and asking whether in fact we're over-paying attention to this price. So, this guy that has the Escalade bought when the price of gasoline was 3.20 and now it's, let's say, 4.20.

So, the price of a gallon has gone up by a dollar. Let's say he consumes a thousand gallons per year. So, the price increase has cost him $1,000. Right? Because of the cost of gasoline has increased by $1,000, he's considering taking an offer that would cost him many, many more.

SEABROOK: Cost him close to $40,000.

Prof. ARIELY: That's right. And the reason he's considering this is because the price of gasoline is so painful for us, is so obvious. You know, I went over my finances in the last few weeks. I usually don't keep track of those things -I'm terrible.

SEABROOK: That's funny for an economist but go ahead.

(Soundbite of laughter)

Prof. ARIELY: Well, you know, I teach for a living, right?

(Soundbite of laughter)

Prof. ARIELY: Those who can't do teach. And I looked at all the things we spend on. I looked at heating and cooling of our house. I looked at medical expenses. I looked at grocery bills and I looked at gas bills. And from all of those categories, everything has gone up, but in my personal life, gasoline has gone up the least from all of those.

SEABROOK: Interesting. That's so...

Prof. ARIELY: But nevertheless I'm more attentive to it and I think it's a little bit because of the gas shopping process. So, here's what happen. You go to the gas pump, you stand next to it, and you have nothing to do but stare at the prices for five minutes.

(Soundbite of laughter)

Prof. ARIELY: What other category do you remember the price a month ago?

SEABROOK: That's true, that's true.

Prof. ARIELY: Imagine every time you went to the supermarket you stood next to the yogurt case and watched yogurt for five minutes.

(Soundbite of laughter)

Prof. ARIELY: In relative terms to the price of gasoline, I think there are other categories that are much more damaging and we're not paying enough attention to those.

SEABROOK: With the economy tight across all sectors - the prices of everything going up - are people in general making better economic decisions?

Prof. ARIELY: You know, the problem is what we study basically is how difficult it is to make correct decisions. And it turns out that money is incredibly complex and difficult. Like, think about it, every time you buy a cup of coffee, you should think to yourself about what pleasure you're getting from this cup of coffee...


Prof. ARIELY: ...and what are you giving up across all your possible consumptions in the future.

SEABROOK: There's just no way.

Prof. ARIELY: There's no way. So, what do you do instead? You rely on your habits. You think about what you've done before and you basically keep on doing those things as if you're saying to yourself, oh, I'm a smart person, I've done this thing before, this must mean that this is a great decision. Let me just repeat this again.

So, we're not designed to make good financial decisions as a species, right?


Prof. ARIELY: That's not part of what we are.

SEABROOK: So, if we're just destined to make bad decisions, who's supposed to pull us out?

Prof. ARIELY: You know, first of all, behavioral economics is a little bit depressing from this perspective because we find all these bad things that people do. We find that people are myopic and vindictive and easily confused. It's hard to think about money, it's hard to save and...

(Soundbite of laughter)

Prof. ARIELY: ...but I think the good news is that if you understand where people fail you can also think about how to fix things. And maybe a good example of this is to think about the subprime mortgage crisis.

Think about how difficult it is to figure out how much mortgage you should be taking. What's the right amount? I said I have no idea. I don't know how to even start figuring this out. So, what do people do? They go to the bank and they say how much would you lend me? The bank said I'll lend you 30 percent of your income.

Now, it's not the right question. People should ask how much should I borrow not how much I can borrow, not how much the bank would lend me.

SEABROOK: How much can I afford?

Prof. ARIELY: That's right. Then you would want to build a mortgage calculator that didn't help people figure out the max they could borrow but help them figure out how much they should be borrowing. This is just one example, but I think if we think about it more systematically: how do we help people overcome the things that are just difficult for them, for us, and maybe make electronic tools, calculators, all kinds of things that just help us be better.

SEABROOK: Dan Ariely is author of "Predictably Irrational: The Hidden Forces that Shape our Decisions." He teaches at Duke University. Thanks so much, Dan Ariely.

Prof. ARIELY: My pleasure. Thank you.

SEABROOK: You're listening to ALL THINGS CONSIDERED from NPR News.

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