Abstract
Prospect theory, which was awarded the Nobel Prize in Economics in 2002, holds that human beings faced with a risky bet will tend to value potential losses about twice as much as potential gains. Previous research has demonstrated that prospect theory could be sufficient to explain an energy paradox in the market for automotive fuel economy. This paper analyzes data from four random sample surveys of 1,000 U.S. households each in 2004, 2011, 2012 and 2013. Households were asked about willingness to pay for future fuel savings as well as the annual fuel savings necessary to justify a given upfront payment. Payback periods inferred from household responses are consistent over time and across different formulations of questions. Mean calculated payback periods are short, about 3 years, but there is substantial dispersion among individual responses. Calculated payback periods do not appear to be correlated with the attributes of respondents. Respondents were able to quantitatively describe their uncertainty about both vehicle fuel economy and future fuel prices. Simulation of loss averse behavior based on this stated uncertainty illustrate how loss aversion could lead consumers to substantially undervalue future fuel savings relative to their expected value.