I believe consumers systematically exaggerate the importance of gas prices to their budgets.I agree that it is clever by Chrysler to use this promotion, but for the reason of the Winner's Curse I posted before rather than a systematic bias. Are consumers systematically overstate fuel costs in their budgets? I doubt it, but I know of no literature directly on fuel costs and systematic bias showing one way or the other. Do consumers systematically overestimate how much fuel will cost them in the future? Since I haven't seen firms mass marketing oil futures to the general public, I doubt it. Do consumers systematically exaggerate the importance of gas prices to their budgets? I certainly think so, especially when talking with friends and journalists.
Side Note 1: In the contract period for $2.99 gas, I assign a prior probability of 5% that gas prices will fall in real terms. Over a longer horizon, I assign that prior to be 100%. The faster prices rise over the short-run, the shorter that longer horizon will have to be.
Side Note 2: My post on $2.99 gas drew me a comparison to Ricardo, and a quotation along side Levitt. By far the most successful post I have had.
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