Economics, Behavioural Economics, Cars and Car Clubs

Today, the car club firm Zipcar, which acquired another car club firm, Streetcar in April 2010, is withdrawing its cars from Brighton and Hove and re-deploying them to London: good news for Londoners, and good news for City Car Club, which is now the only car club in Brighton and Hove. As a transitional deal, Zipcar is providing a year’s free membership to City Car Club. And Zipcar members will still be able to hire Zipcars in other locations, both around the UK and in Canada and the US.
Thinking about Zipcar’s departure from Brighton got me pondering how conventional economics and behavioural economics could help explain what’s going on here. Conventional economics would explain that providing a service like a car club (sometimes known as car share) means sweating the assets to the max – the costs are mainly fixed (capital cost of the car, insurance, cost of the parking bay etc), which makes it important to hire out the cars for as many hours a day as possible. It’s clear from Zipcar’s decision that this is going to be easier when the cars are parked in London. So why weren’t the people of Brighton and Hove using the Zipcars more often?

Behavioural economics (which I teach) can help explain this. A car club is a substitute for owning a car. But giving up your car is not easy: we hate to give things up. Human beings are loss-averse - psychologically, the “pain” we suffer from a loss is more than twice as much as the benefit we feel from an equivalent gain.  Adam Smith (picture from wiki), the man on the back of the £20 note, is sometimes described as a prototypical behavioural economist. In the Wealth of Nations he said, "we suffer more... When we fall from a better to a worse situation, than we ever enjoy when we rise from a worse to a better.” Consumers view parting with an already owned good to be a greater loss than the potential gain from acquiring another good of equal value.

In 1979 Daniel Kahneman and Amos Tversky published Prospect Theory: An Analysis of Decision Under Risk.’ This seminal work of behavioural economics charted objective and subjective gains and losses with respect to a reference point, as opposed to the standard utility function of conventional economic theory. The shape of the curves using Prospect Theory illustrates that we focus on what we might lose, rather than what we might gain - thinking about selling something, we think about the things we'll miss, rather than the hassles of ownership. Combined with the status quo bias, this means that people prefer situations to remain static and unchanged. Change of ownership would disrupt the status quo, causing unease.

“Giving up” something like a car feels like a big loss: studies show that the perceived benefits need to be at least double the perceived losses to persuade people to give something up. A consequence of loss aversion is that people tend to place a higher value on a good that they own compared with an object of identical value that they do not own. This is called the endowment effect, and it means that people value things differently depending on whether they are gaining or losing them. Loss tends to be felt more keenly than gain.

And the latter means that ownership weaves it’s own spell, making it even harder to let go: people become attached to objects that are in their possession and are reluctant to part with them, even if they would not have particularly desired the objects had they not been endowed with them.

And there’s something else. Zipcars were pretty discreet. Nice cars, usually VW Golfs. You had to look hard to spot that they were Zipcars. No doubt it was a marketing decision to put them on the street practically unbranded. City Car Club cars are different: the company logo is emblazoned on the side. They get noticed. Unlike Zipcars, they are salient. And salience, the extent to which something stands out from its surroundings, translates in behavioural economics to a tendency to over-weight certain phenomena, which may then account for bias in decision making.  Zipcars, lacking salience, weren’t “front of mind.” So maybe fewer people were aware of them, fewer people who might join up and use them, which meant less sweating of those assets. Which was where we came in… And, as far as Brighton is concerned, where Zipcar goes out.