Beliefs and Consumer Choice

Consumers’choices depend on preferences over outcomes and beliefs about how their choices map into these outcomes. While economic models typically assume some form of rational expectations or "perfect beliefs,” in reality consumers are often ill-informed or confused. In this paper, I elicit beliefs over the …nancial bene…ts and costs of higher or lower fuel economy using the Vehicle Ownership and Alternatives Survey, a new nationally-representative study of vehicle owners designed speci…cally for this project. Results show that beliefs are both highly noisy, consistent with imperfect information and bounded computational capacity, and systematically biased in a manner symptomatic of "MPG Illusion" (Larrick and Soll 2008). Conditional on these beliefs, I then estimate preferences in a discrete choice demand system for the US automobile market. In a counterfactual world with “perfect beliefs,” consumers would demand fewer vehicles at the extremes of the fuel economy distribution and welfare would increase by about $0.8 billion per year, about $3.60 per potential vehicle consumer. JEL Codes: D03, D12, D83, D84, L91, Q41. Keywords: Beliefs, bounded computational capacity, MPG Illusion, discrete choice models, automobile demand, energy e¢ ciency. — — — — — — — — — — — — — — — — — — — — — — — — — — — — I thank Stefano DellaVigna, Kenny Gillingham, John Hauser, Aprajit Mahajan, Charles Manski, Sendhil Mullainathan, Drazen Prelec, Alan Sorensen, Rich Sweeney, and seminar participants at the BECC conference, Harvard, MIT, and Northeastern for thoughtful comments. This idea originally grew out of joint work with Nathan Wozny and has bene…tted substantially from our collaboration. Thanks to Patrick DeHaan at GasBuddy for providing gasoline and diesel price data. Thanks also to Jeremy Freese, Penny Visser, and three anonymous referees at Time-Sharing Experiments for the Social Sciences. Hard work by Yelena Kruse, Poom Nukulkij, and others at Knowledge Networks in …elding the survey was essential to the project. Funding for this work and related projects was provided by the Sloan Foundation.