Freakonomics Radio - 36. Hey Baby, Is That a Prius You're Driving?

Episode Date: July 6, 2011

"Conspicuous conservation" is about showing off your environmental bona fides. In other words, if you lean green, there's extra value in being seen leaning green.

The British Prime Minister, David Cameron, when he was leader of the opposition, he was trying to get elected. He wanted to convince people that he was a soft, caring guy, and he installed a little windmill on his house. Tim Harford is an economist and writer who lives in London. His first book was called The Undercover Economist. His latest is Adapt, and it's about how success often starts with failure. Now, it turns out wind power can be pretty effective, but you need a really, really big windmill in a really windy location to be efficient. These little windmills, especially in an urban environment

where you don't get a consistent flow of wind, they generate an incredibly small amount of energy, really, really ineffective. Indeed, there's a fantastic example from the British physicist David Mackay, who points to building top windmills in Japan that actually have little electric motors in them to keep them spinning around,

because otherwise they would look really stupid on top of the building and not actually moving. So these windmills actually cost energy. From APM American Public Media in WNYC, this is Freakonomics Radio. Today, hey baby, is that a Prius you're driving? Here's your host, Stephen Dubner. You will note that David Cameron did get elected Prime Minister of the UK. Whether his little windmill had anything to do with it, tough to say. But while it may not always be easy being green, these days it's certainly attractive.

Rooftop windmills, those I-am-not-a-plastic-bag reusable shopping bags, and a certain make of automobile. Hey there, Richard. Oh, hey, Gerald. New car? Yeah, it's a hybrid. I just couldn't sit back and be a part of destroying the earth anymore. Well, good for you. Oh, thanks. That's from the TV show South Park, poking fun at how some people get a little sanctimonious when they start driving a hybrid car. In this episode, the car is called a Pius.

A little bit like a Prius, maybe? The message is clear. Helping the planet is nice, but being seen helping the planet is really nice. So here's a question for you. How much value do people who lean green place on being seen leaning green? My name is Steve Sexton. I am a Ph.D. student at UC Berkeley studying agricultural and resource economics. I'm Allison Sexton. I'm a Ph.D. student at the University of Minnesota studying health and information economics.

All right. So I'm a little suspicious. Share a last name you've related to each other, perhaps. We are. We also shared a womb. One for Twin Powers, activate! That's right. Allison and Steve Sexton are twins, and they're both budding economists. Guess what their parents do? Yep, economists. Oh, it was very exciting, as you might imagine. All of our friends couldn't wait to come over for dinner with us.

We like to joke that we have a family plan to become a one-family consulting firm, kind of like the Partridge family for economics. Allison Sexton worked briefly for the Federal Reserve Bank in Minneapolis. Steve Sexton has a somewhat less sedentary hobby. Yes. In addition to trying to finish up my PhD here at Berkeley, I'm also training for the London Olympics as a triathlete. How good are you? Like when you say training for the Olympics, that means there's reasonable expectation that you might actually be there? Yes. I ended 2010 as the third American in the Olympic points rankings, and we get to take three people.

So that's by no means have I made it yet, but I certainly have a shot at it. As economists in training, the Sextons know all about the economic behavior known as conspicuous consumption. Thorsten Veblen coined the phrase more than 100 years ago. More and more Americans were growing rich, and it became important to show off that wealth. Today, there's still plenty of conspicuous consumption, but the Sextons noted a trend that updates the old model. That is not showing off your flashy car or flashy jewelry, but showing off your environmental bona fides by, say, driving a car that's plainly a hybrid. Psychologists have defined competitive altruism as sort of a keeping up with the Joneses type

concept, but applied to pro-social behavior or efforts to make society better. So I will be competing with my neighbors to donate to a charity, for instance, or to reduce energy conservation or environmental impacts. Or, as the Sexans call it, conspicuous conservation. Right, because conspicuous consumption, they're investing in products that provide the same functionality as cheaper alternatives, but they're flashier just because they cost more or what have you. And so that can be wasteful and leave nobody better off.

But in this case with conspicuous conservation, because the costly effort that individuals are undertaking is providing benefits to society, this rat race could actually be a good thing. Talk to me for just a minute about how the idea came about. There are two of you, even though you're twins, I gather you don't exactly share every single thought or maybe, I don't know, maybe you do. Was it as you pulled into a Whole Foods parking lot and saw that, you know, half the cars were Priuses or Prii? How did it happen? Well, I think that part of it did come from Steve who lives in Berkeley and he did notice a lot of Priuses on the road and didn't notice a whole lot of other hybrid cars such as Honda Civics and wondered why. And there's been surveys of Prius owners asking them why they buy the

Prius and far more common they answer that it says something about them than mention the fuel efficiency of it. So Steve was actually back visiting me last year for Easter, and we were talking about this idea of signaling your environmental concerns by driving a Prius and how we could create an economic model to test for it and see if that signal exists. This might not sound like something that economists study, how people signal their environmental concerns. But in fact, they've written reams on what's called signaling theory. Here's Robin Hanson from George Mason University. Signaling theory is another way of talking about showing off or trying to present your best face. It's all about what we do to look

good, or at least not to look bad. No offense to you or your fellow economists, but why are you guys looking at this? Don't you have other more economics-themed problems to be solving? Why have you guys gotten involved in this and maybe even good at figuring out signaling? So managing our appearance is actually a lot of what we humans do. Trying to understand business, trying to understand jobs, school, even medicine. If you don't realize that people are trying to manage their image, you miss out on a lot of what's going on. So the Sexton twins were looking to measure the signal sent out by people who drive hybrid cars.

By their count, there were 24 different hybrids on the market. But the Prius was a market hog, the runaway winner with a whopping 48% of the hybrid market. Why? The Honda Civic hybrid looks like a regular Honda Civic. The Ford Escape hybrid looks like a regular Honda Civic. The Ford Escape hybrid looks like a Ford Escape, except that these cars have a small badge on them that indicates their type as a hybrid. But the styling of the car is identical, whether it's a hybrid version of the model or the conventional drive version of the model. But Toyota's Prius doesn't look like any other Toyota

or any other car, period. And so our hypothesis is that if the Prius looked like a Toyota Camry or a Toyota Corolla, that it wouldn't be as popular as it is. And so what we set out to do in this paper is to test that empirically. Okay, so how do you do that? The paper the Saxons would end up writing is called Conspicuous Conservation, The Prius Effect and Willingness to Pay for Environmental Bonafides. The first step, pick a different hybrid car to act as a control against the Prius. It's comparably priced to the Honda Civic Hybrid. And so throughout sort of thinking

about this project, we've kind of used the Honda Civic Hybrid as our control for the Prius. It doesn't have that unique signal, but it's otherwise very similar. Not a perfect control, but it's very similar to the Prius, except that it doesn't have a unique design. Okay, similar price, similar fuel efficiency, but different design. So what's the Prius's unique design worth as a signal to the outside world that you are burning less fuel than everyone else? So if your neighbors care about the environment, then sending that signal can be very valuable. But if your neighbors don't care about the environment, then why do you care to send a signal to them that you care about the environment? And so you can think about whether you'd rather drive a Prius in Berkeley or in Crawford, Texas, for example.

Keep in mind that before the Sextons came up with this idea, South Park was all over it. Dad, we feel that your new car is changing you. Yes, it certainly is. We're thinking that a lot of people in town are starting to take offense at your actions. We feel like you're starting to become alienated from some of your friends. Well, I totally agree, Kyle. You do? Yes. A lot of people in town just aren't ready to drive hybrid cars.

Right. Okay, good. And that's why I've talked it over with your mother and we've decided to move! What? We need to be where everyone is motivated and progressive like us. Start getting your things packed, boys. The Broflovsky family is moving to San Francisco. In other words, if you're a green-leaning person, the signal of a Prius might be more valuable if you live in a green-leaning neighborhood than if you live in a place where environmentalism isn't such a big deal. The Sextons wanted to know if, A, this is true, and B, if so, just how valuable is the Prius signal?

Coming up, measuring the Prius effect. And how much did Toyota know about conspicuous conservation when it designed the Prius? When somebody thinks about hybrids, they think of Prius now. It is the standard for what hybrids should be. I'm riding slow in my Prius, all leather, tinted windows. You can't see us. Everybody's trying to park. You can feel the tension. I'm in electric mode. Can't even hear the engine. From WNYC and APM, American Public Media, this is Freakonomics Radio. Here's your host, Stephen Dubner. So the young twin economists, Allison and Steve Sexton, set out to gather some data on hybrid car sales in different places. They chose Colorado and Washington, two states with a lot of political diversity,

and they got hold of vehicle registration data and voting records. Now, the vehicle data told them what kind of cars were being bought where, and the voting records stood as a proxy for how green each part of the state was. The idea being that greener communities vote more Democrat than Republican. When the Sextons looked at the numbers, they found that hybrids indeed sold disproportionately well in the greener zip codes in Boulder and Seattle, for instance. But was that true for all hybrids? What about the Honda Civic hybrid, the Sexton's control car? We did tests to see if the market share for Honda Civics also increased in greener

zip codes. And we found no statistical effect. And in fact, in a few of the regressions, we found a negative effect. But the Prius, those green zip codes were crawling with Priuses. And through our econometric model, we're able to determine what share of the Prius's market share is due to its unique styling, the Prius signal, or the conspicuous conservation effect. And then using other studies that have determined how responsive vehicle demand is to prices, we're able to basically trace out a demand curve and estimate the willingness to pay for that single attribute of the Prius. That is how much people are willing to pay just

to signal that they are green. Right. So how big is the effect? How big is the conspicuous conservation effect then in these places? So for Colorado, we measure that it accounts for about between 21 and 33 percent of the market share. And in Washington, we measure that it accounts for about between 21 and 33 percent of the market share. And in Washington, we measure that it accounts for about 10 to 17 percent of the market share. So this translates into a willingness to pay in Colorado for between about $1,000 and $4,000. And in Washington, a willingness to pay between $500 and $1,300. All right, this needs a bit of clarification. The market share numbers the Sextons are talking about,

that's not how much of the market the Prius has. It's how much additional market share the Prius has because of its unique hybrid look. And that willingness to pay figure they're talking about, that doesn't mean people actually pay that much more for the Prius. They don't. Willingness to pay is just economist speak for how much the Prius effect is worth to people in terms of feeling good about themselves, being seen by others in a positive light, things like that. What do you know about how intentional the Prius design was in terms of setting itself apart as an obvious hybrid?

In other words, did Toyota understand conspicuous conservation well before you guys even ever thought to look into it? I think there is evidence that Toyota understood conspicuous conservation before we did. They instructed their car designers to make the Prius unique and said that they didn't care what it looked like so long as it looked different. It suggested they did expect that they could count on this conspicuous conservation effect to drive sales. Well, that's right. I mean, the design is everything about Prius, right? Everybody understands that the car is both efficient and it has a unique design that stands out. Nothing else looks like it on the road. That's Doug Coleman, the Prius product manager at Toyota USA.

You see a Prius, you know what it is. You know it stands for hybrid. And there's really no other car that stands for hybrid. So having something that's unique is really important to our buyers. The Sextons, convinced that the Toyota Prius represents the height of conspicuous conservation, went looking for other examples. One of the more common ones that we see here in California is people putting solar panels up on their house. And in fact, there's a number of cited cases where people will put solar paneling on a shadier side

of their house because it's the street side, so people will be able to see it. Now, do you think the consultant or installer says to them, this is not going to really do as much as if you'd put it on the sunny side of your house? Do you think those conversations happen? We know that they do. You know, I haven't been at those conversations, but do understand that those conversations go on, that the experts advise, here's how to maximize the benefit from your solar panels. And homeowners say, well, no, I actually want it on that side of the house. In other words, the side where my neighbors will see that I have solar panels. On the street side of the house, right.

And again, we don't judge that. That's fine. We don't take a position on that. But if that kind of an effect is occurring, then it has implications for both firms that might want to market these types of products, as well as for governments that might want to maximize the benefit

from investment in those types of products. Could it be that people are engaging in conspicuous conservation instead of doing less visible but more pragmatic things? Like, you know, instead of putting solar panels on the shady side of my house, I could better insulate my walls and doors, which would actually be very effective, but nobody's going to see it. So is that kind of the problem that you're trying to address?

Sure. The conventional wisdom among energy economists is that the low-hanging fruit, the easiest way to achieve energy conservation is through those inconspicuous investments that you talked about in boosting the insulation in the home, window ceiling treatments, energy-efficient appliances, and so forth. Those are the most cost-effective ways to reduce energy consumption. But of course, none of those can be seen by one's neighbors unless they're brought into the house, but they're certainly not visible from the street side. But if you consider that there's a high concentration of greens in the Bay Area, where it's foggy most of the summer, the sun doesn't even really come out much here in Berkeley.

And in fact, that's why I try and get out of Berkeley every summer that I can. But the sun does shine on the rooftops of all the Republicans or the, for lack of a better term, Browns that live in the Central Valley. They get a lot of sun during the summer, but they're going to be less inclined to install the rooftop solar panels on their homes. So we might like to imagine a creative program whereby your Berkeley Green, who doesn't get very much sun in the summer, could pay to install rooftop solar on the home of a Bakersfield Brown and therefore, again, maximize the effectiveness of those conservation dollars or get more energy conservation or I guess energy production in this case out of the solar panels. The problem with this, of course, is that then that Berkeley Green

isn't able to demonstrate to their neighbor that they're making this investment in conservation. Well, then you just have to be able to buy a big billboard in your yard that says, my solar panels are on a Republican's house in Bakersfield. And then everybody would be happy? So the answer is no. What are the implications of your research then for policy? Do you want to encourage or incentivize more inconspicuous conservation since you know that the conspicuous stuff will take care of itself? So right now the government has subsidies for a number of different types of conservation acts, some policy should focus on the inconspicuous, such as window ceilings and air fans, and that perhaps we can provide privately the conspicuous conservation efforts.

In other words, the conspicuous stuff, like the Prius, will take care of itself. Because in a way, it offers its own reward. You're trying to enhance your reputation or attain some kind of status by undertaking these personally costly actions that benefit others. And what's interesting about these conceptions of altruism, both competitive altruism and reputational motivations for altruism, is that they're fundamentally selfish. And so they are consistent with traditional neoclassical economics. They aren't fundamentally altruism in the purest sense. What do you guys drive? I have, for most of my graduate school career and

before I was without vehicle, I just this Christmas got a hand-me-down Toyota Camry from my mom. Not a hybrid. Not hybrid. It was before hybrids. I drive an Audi A4. Wait, wait, wait, wait a minute. I'm sorry. I knew I got myself in trouble there.

You're a PhD student. Were you selling crack for a few years between? Is triathlononing very profitable? In fact, no. I was fortunate to get a number of scholarships in my undergraduate studies, and my parents essentially turned over what was left of my college fund to me, and I blew it on a car in my first year of grad school. Awesome.

It's not a hybrid, correct? No, it is not. I drive a Miata. A Miata? Yeah, a sports car. That's Robin Hanson again, our signaling economist. I think it's easy to pick on, say, the conspicuous consumption of a conservationist image and say, well, these people are driving a Prius because they're trying to seem one way. But of course, all the other cars are trying to seem some other way too. Right. What are you trying to signal to the world when you drive your Miata?

Well, I'm fun. I'm spontaneous. I don't mind whizzing around. Maybe I'm a little aggressive sometimes. I like to get places fast. I like the wind in my hair. Is that all true? I think it's, yeah, roughly true. I'm happy to admit a lot of what I do is to manage my image. You mentioned your Miata, Robin. I wonder what are some other, if we could climb deep inside the control center for Robin Hansen's brain and his signaling activity, what else do we see? What's some other signaling activity that you engage in? Economists like to point out there's almost no chance that your vote is going to determine an election. So one of the things economists like to do to show off that

they're a clever economist is to not vote and to say to everybody, hey, I'm smarter than all the rest of you. See, I understand that by voting, it's not going to make any difference anyway. And we do a little of that too often, say you might not tip at a restaurant because you say, you know, I'm never coming back to this restaurant again. And so economists often do things like that. They sort of think through the strategy and they go out of their way to maybe be a little rude or a little thoughtless in the usual language in order to show, hey, I understand the strategy of this. And I got to admit, I do that sometimes. I tip at restaurants. I'll tell you that, but still.

Do you vote? Sometimes. Are you more likely to vote in a local election than a national election or vice versa? Probably more likely to vote in a national election, but that's also a common bias in a sense. In a sense, local elections matter more for your lives. Well, also your vote is much more likely to influence an outcome. So why do you go the opposite then?

Because, like most other people, voting in an actual election helps you talk about it. So when you want to sit around and talk with your friends and colleagues, you tend to talk about national politics. And so the voting is a way to help you talk about it and to brag about your insight. Do me a favor.

Don't go hating on Robin Hanson just because he votes for his sake and not out of civic duty. And don't go hating on the Sextons just because they've pointed out that you might drive a Prius for reasons that aren't 100% altruistic. Or that neither they nor Hansen drive hybrids themselves and therefore consume gallons and gallons of gas that they don't have to. We should at least be grateful they're not sitting around consuming gallons and gallons of... milk?

Back to our British friend, Tim Harford. Here's the problem. It's really easy for us to fool ourselves about what is actually good for the planet. It's surprisingly difficult to pin down exactly what is going to help and what is not. Let me give you an example. You think to yourself, I'm worried about climate change, therefore I'm worried about carbon dioxide emissions

because carbon dioxide is a major greenhouse gas. Therefore I'm worried about climate change. Therefore, I'm worried about carbon dioxide emissions because carbon dioxide is a major greenhouse gas. Therefore, I'm worried about energy consumption. So I need to reduce my energy consumption because I'm worried about climate change. So you look around your kitchen and you're just about to make a couple of pieces of toast. You say to yourself, I'm not going to make that toast. The toaster is going to consume electricity.

That's bad for the planet. I'm going to have an alternative breakfast. So you open the fridge. You grab some milk. You pour yourself some milk on your cornflakes. You eat the cornflakes and you think to yourself, well, I didn't have to make anything get hot. I didn't have to use any energy.

So that's good for the planet. Actually, when you do the math, and I have done the math, you realize, well, the machine to produce milk is called a cow. Cows also produce a lot of methane, and methane is a really powerful greenhouse gas. And in fact, the glass of milk is much worse for the planet than the toast. So there you go. If you want to save the planet, go ahead and drive the Prius if you have to.

But what you've really got to do is eat some toast. All the world is green. Pretend that you... We'll be right back. You can subscribe to our podcast on iTunes or go to Freakonomics.com, where you'll find lots of radio, a blog, the books, and more. He's balancing a diamond On a blade of grass