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Why are we outraged over high gas prices?

Marketplace Contributor Feb 27, 2012

Kai Ryssdal: Crude oil close down today — first time in a week that’s happened. Gas prices, though? Yeah, still goin’ the other way, despite what Eve Troeh was telling us earlier about New Gingrich’s plans. And yes, gas prices are crazy making, I grant you that. But do a little math with me for a second. A gallon of regular unleaded costs 14 cents more today than it did last week. So say your tank is 16 gallons, you fill up once a week, that means net out-of-pocket increase to you is $2.24. Just about what you might spend at Starbucks every day. And yet, gas prices are… just one of those things. Sendhil Mullainathan teaches behavioral economics at Harvard University. Here’s here to talk about that a little bit. Sendhil, how are you?

Sendhil Mullainathan: Good Kai. You ever wonder why there’s such furor about gas prices recently?

Ryssdal: No. Because gas is expensive man and I have to fill up the minivan and it costs me $60. That’s why there’s a furor.

Mullainathan: First of all, you shouldn’t have a minivan Kai. But we can talk about that some other time. It is interesting because it’s only one price out of so many prices out there. And it’s funny that we end up focusing so much on this particular one.

Ryssdal: Well, so here’s my theory. Right? And you’re the behavioral economist. But it’s because we see it all the bleepin’ time, right? I mean, I can tell you chapter and verse what gas is on my way to work, but I don’t necessarily know what the price of a dozen eggs is.

Mullainathan: I think that’s exactly right and I think that’s the most interesting part of this story. So they do these amazing stories where they catch people coming out supermarkets. And they take the receipt and they look at them and say, ‘You know, you just bought some toothpaste. How much did it cost?’ People have no idea.

Ryssdal: Not a clue, yeah.

Mullainathan: People go shopping, we spend on so many things, and we just don’t know. We don’t know the prices of things. But gasoline, even when you’re not buying, it’s staring you in the face. Psychologists call this salience. And the salience of gas prices, I think, makes it such a focal point in the debate.

Ryssdal: Does salience literally mean how present it is in society or how salient it is to our lives? ‘Cause if I’m taking mass transit in Manhattan, I don’t care how gas prices are. Right?

Mullainathan: It’s both how present it is and how important it is. For example, low-income people know the prices of everything they buy because it matters to them. Middle income and higher-income people, we can afford not to know. And so it’s partly that. But partly it’s amazing — even when the $100 doesn’t take a big bite of paycheck because I know you’re getting wealthy off of public radio.

Ryssdal: Public radio, that’s right.

Mullainathan: It’s still being able to see it repeatedly. So there are some great studies on alcohol: If you add the taxes before and you see it in the sticker price, people respond to it. But if it’s added after, people don’t really respond as much. So there is just an ‘Is it there at all’ that’s pretty important.

Ryssdal: Here’s another question though: How come, and we’re seeing now in California, we are seeing $4.35. I saw $4.39 for regular on the way in, which is approaching where it got the last time it hit the highs. So I’m aware of it, I’m seeing it, but I’m not outraged yet. But when it hits $4.75, people are going to be PO’d. You know what I mean? What’s the thing about we’ve seen this price before, it’s not a big deal; but a new high is a new high?

Mullainathan: I think there are two elements here. One is the new high and in many, many places there sort of reference points get set. Once you see a house get sold at $500,000, selling it back at $475,000 is hard. But the other element of is there are these discrete points. $5 is… It’s almost like the stock market — ‘Oh wow, we’ve broken through $5.’ In marketing, you definitely see this. Things that price at $4.99 sell very differently than things that price at $5.

Ryssdal: Are we better consumers if the price of toothpaste was in 8-inch-high letters of the shelves? Would that make us smarter and better?

Mullainathan: I think in a very narrow sense it would. And that’s what I think some economists think of it as — oh, now I pay attention to prices. But if you zoom back a little bit and think of it almost like a behavioral economist and say, ‘I have a limited amount of attention, is that how I really want to focus on it?’ And even gas prices, you often wonder about that. For somebody for whom they’re going to buy a certain amount of gas irrespective of the price, should they really spend so much time thinking about the price of gas? It doesn’t affect anything they do.

Ryssdal: Right. You gotta buy gas, you gotta buy gas. Right?

Mullainathan: Exactly.

Ryssdal: Sendhil Mullainathan, he teaches behavioral economics at Harvard. Sendhil, thanks a lot.

Mullainathan: Thank you, Kai.

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