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[Egan_BW]

...Nope, it's page 00101000.

[Reelya]

One thing about the TCO thing or car loans costing more than the up front costs, those aren't necessarily economically irrational or short-sighted choices.

E.g say with loans you say someone "wasted" 5000 to get a 30000 car, you have to take opportunity costs into account. If you wait to save for the whole car then you "save" 5000 .... but what income are you missing out on, and do you have to pay for buses, delivery fees, ubers, taxis during the time while saving up?

Also if you buy upfront then you lose out on any potential earnings that the same money could make you. E.g. perhaps the 30k could be a downpayment on a house, (or mortgage reoayments, having a knock on effect far greater than 5000), so now you no longer need to pay rent, saving a lot of money. You can't view the car purchase in isolation as an economically irrational choice, just because of TCO.

[wierd]

Flipsid argument:

You save the money by driving your old car longer, are more mindful of unneeded travel to avoid breakdowns and fuel use, and make use of the recently increased fed interest rates to allow your savings to grow by making interest work for you rather than against.

To be fair, that requires meticulous planning and execution to pull off and stay ahead, but if you are a cinsumate savings person, you can accrue enough from normal conservation to greatly increase your rates of return when saving for the vehicle. (Many banks offer high yield savings plans for patrons with a relationship holding over a certain amount, because those holdings are used to determine how much the bank can loan out. After a certain threshold, the bank pays you more to keep your money in THEIR bank, and if you pretend that money does not exist, for the purposes of your planned major expense, your efficiency at using the bank to add to your finances via interest increases.) increases in the fed rate result in increases in these interest rates due to completion. While the current fed rate is still shot compared to 90s figures, it is going up, and is projected to increase this Dec.

To have a good plan for that, you need specifics, and a general post like this is not a good vehicle for it, but such planning is possible in a nontrivial number of cases.

[Reelya]

Sure, I concur. But that's in line with my main point that it's wrong to view an economic choice in isolation without looking at the holistic situation.

There's also another point however: often the people getting these small loans aren't actually good at managing cash money in their lives. If that's true, then locking themselves into loan repayments could in fact be a way that they enforce some fiscal discipline on themselves. They could be aware that they'd actually fritter away more than $5K while trying to save the $30K, whereas getting the car loan then repaying $35K over 48 months would enforce strict budgeting. And some of those stricter budgeting habits could in fact carry over after the loan is paid off, leaving them more financially capable as a result of the repayment experience.

It's also annoying when as an individual you can reduce commuting, buy an electric car, whatever, and then you see a garbage truck belching black sooty smoke down the street, which just basically erased every action you took.

I have an issue with this statement too. It's a gut feeling but not really much more than that.

Your actions have a measurable reduction on emissions. If you eat hamburgers or steak you are in fact undoing what you gained by buying the electric car (cows fart methane, 25 times worse than CO₂). The truck was going to happen whether or not you emitted anything. If you didn't reduce your emissions it would be you plus the truck. And electric garbage trucks are coming. Since emissions are entirely cumulative every little bit helps.

[McTraveller]

It's also annoying when as an individual you can reduce commuting, buy an electric car, whatever, and then you see a garbage truck belching black sooty smoke down the street, which just basically erased every action you took.

I have an issue with this statement too. It's a gut feeling but not really much more than that.

I'm totally with you on this one - personal efforts do indeed matter, but I was just observing one of the factors that is tied in with the "well all it takes is a single truck or whatever to undo my things" feeling of futility on individual actions, especially in western individualistic cultures where people make personal sacrifices and see others not making those sacrifices and then wonder why they even bother.

Also, the argument about steak or whatever is the same as the garbage truck - An individual that is going to eat steak anyway but buys an electric vehicle instead of a hydrocarbon vehicle is going to have a net reduction, just the same as "the garbage truck was going to be there anyway."  But if you say a person has to stop eating steak, that runs afoul of that "feeling of high personal cost" I initially mentioned.

Also - yeah, the economics discussion about payments isn't always simple - but the general rule of economic discussion is "all else equal". So throwing in "but if you have to save for a car instead of buying one means you get a lower-paying job, etc." is not keeping all else equal.

[Reelya]

Also - yeah, the economics discussion about payments isn't always simple - but the general rule of economic discussion is "all else equal".

No, sorry, these are dependent variables / opportunity costs, we're talking about. Externalities and opportunity costs to a decision are a very real thing, and they are important to consider in any economic decision. If you're not taking these into account, even the ones that affect the decision maker themselves, and are completely known variables, then it's only a student-level textbook math puzzle that's not designed to model the real world. What you're saying is equivalent to a physics student saying "well the general rule of physics discussion is that we treat all masses as points with no friction". That's correct that you can simplify thinking about things by assuming most of reality doesn't exist, but it's not a valid counter-argument against engineers taking those things into account.

If you get a home loan, you don't have to pay rent, so any cost/benefit analysis of the decision to get a loan to buy a home is severely flawed if it doesn't take that into account (the rent payments are opportunity cost).

If you get a car loan, you don't have to take whather transport options you did before you had the car, which needs to factor into the economic case. Also, if you sold your old car to get the new one then the money not spent on things like needed repairs on the old car need to be factored into the economic decision, that's a dependent variable, because money that you're not spending because of the decision under question is not an "all else equal" variable: if your old car was kaput and needs $5000 of engine work to remain roadworthy, then clearly whatever alternative choice you have to repairing it is $5000 more attractive.

If you get a car, you can also secure employment. That's not an independent variable, it's a dependent variable: the car isn't incidental in that. Or, if you're self-employed and having the new vehicle means you can expand your business, it would just be wrong economically to not consider that in the decision.

Also, as for saving up, "skill at saving up" is a relevant dependent variable. By locking into repayments, fiscal discipline is enforced where it's lacking. This is not an all-else-equal variable either: the amount you save by belt-tightening is dependent on the size of the repayments.

[McTraveller]

That's a slightly different definition for externality than I'm used to(1) - but I follow you on opportunity cost.  The rest is... well it feels like a distraction from the general point which is that in general people are bad about figuring costs (you hinted at this with the notion of "skill at saving up" - which is, after all, a measure of how well people allocate their personal resources.

Anyway, back to cost of alternative energy - for those of us who don't like being tied to monthly payments (that is definitely a non-monetary cost associated with financing of all forms - even the crazy madness we have now with, say, 0% interest automobile loans has that cost of being in a contract), the minimum buy-in price for most effective energy alternatives is still quite high.  Hopefully technology developments (especially batteries) will bring that minimum cost to enter down enough to make it more attractive without turning it into a rent proposition.


(1) The definition of externality is essentially "costs that are incurred by parties not involved in a direct economic transaction". I'm not sure how that applies in the discussion above.

[Reelya]

Yeah i was a bit wrong using that exact term but what I meant was clear, the idea of additional cost/benefits not captured in a simplistic straightfoward assessment. You need to calculate all consequences of the decision when deciding whether it's a good idea or not.

However in this case I was arguing that it's wrong to cite that as an example where people didn't figure out the true costs. If you are making monthly repayments of exactly X, for Y months, people are perfectly capable of multiplying the two numbers together. We're just infantilizing them to assume that paying additional interest over the base price is "irrational".

It isn't irrational because those people are factoring in their own situation and abilities into the decision about whether the costs are worth it, something our simplistic analysis of "what they should do" entirely misses out. It's actually irrational to hold that a "rational economic actor" wouldn't buy the car on credit because of some abstract equation we've worked out. It's just silly to not take reality into account here. If the repayments are over two years, the choices are to suck up paying the interest, or to wait 2 years to get a car. And two years without a car is not a very rational decision.

[McTraveller]

If the repayments are over two years, the choices are to suck up paying the interest, or to wait 2 years to get a car. And two years without a car is not a very rational decision.

I feel like there are some inconsistent assumptions here - if a person is a rational economic actor, there is no choice to "suck up paying the interest or wait 2 years...without a car".  A rational actor would either intentionally finance because they could get a higher return on their cash than they are paying for the financing (and don't care about being tied to a loan contract) or if they had an incident that wrecked their car they either had it insured or have sufficient savings to cover it.  At the very least, a person (like me) who doesn't like to finance a car will pay themselves car payments over the life of their current vehicle so they can purchase a replacement outright after the planned useful period of the current one.

It sounds like your assumption is a person with no savings who is trying to decide to finance or not, or has previously been able to pay for public transport but would suffer without a car for 2 years for some reason if they didn't finance.  In that limited situation then, yes, financing is a very rational choice.

Otherwise - I'm not sure what I'm missing?  It might be something straightforward, but I admit I can get stuck behind a certain point of view and suffer a bit of tunnel vision.

[wierd]

Again, Reelya kinda lamplit the whole "simplified academic reasoning -vs- reality" situation.

The vast majority of people live nearly hand to mouth, as a result of widening economic disparity. That circumstance precludes the prospect of a large savings slush fund in most cases.

As such, the "cash strapped person looking for a new car, and suitable financing options" approach to this is the most reasonable, real-world wise.  In terms of sensible economic policy, you are correct-- people should keep personal safety nets in their savings accounts.  Hard to do that when wages do not keep pace with inflation, people are married, and have children with recurring, large costs.

[Maximum Spin]

rational economic actor
insured

hahahahahahahahahahaha

[wierd]

Vehicle insurance is a good idea, considering the hazard level of operating a motor vehicle. (it is quite high. Vehicles kill more people than just about anything else.)

Vehicular insurance companies have to use some pretty strange modelling to evaluate risk factors in insured drivers in order to stay profitable, and also stay competitive.  Insurance is by and large, something that really shouldnt be needed (Ideally, people would not drive dangerous death machines, and would not drive like lunatics on cocaine-- and should keep enough personal finances to cover accidents themselves as part of responsible motor vehicle ownership), but due to actual real world circumstances, it is a necessary evil.  Acknowledging that, and keeping a sensible insurance plan, is indeed an action of a rational actor. (the threat is not that you will crash your vehicle, it is that some other asshole will total your vehicle for you, and not have insurance or money to cover damages.)

However, it becomes a defacto tax/government backed industry as soon as the government mandates that people MUST have the insurance, so there is a bit of grey there.

[Reelya]

Let's re-rail that to electric cars vs petrol cars. An electric car has a higher up-front cost but lower costs later on compared to a petrol car. Here's an analysis that puts the break-even point at 8-9 years.
http://www.wisebread.com/how-long-does-it-take-break-even-with-an-electric-car

The car costs an extra $7700 up-front but you save $900 a year on operating costs after that. However several things aren't considered:

- depreciation on the additional $7700 value of the electric car vs of the petrol car
- needing to take out a bigger loan to pay the $7700 means additional interest payments
- more expensive insurance on the expensive vehicle
- or, if you didn't need the loan, opportunity costs of not getting the interest on $7700 in savings for X years (well you'd have recouped half the money in half the time, so 12 years of interest on ~$3800)

So, you'd be realistically looking at a break-even point of around 12 years I'm guessing, and most people won't keep the same car for that long. So it's perfectly rational to keep petrol cars for now.

Front-loading all the costs also carries greater risks because you're basically gambling that nothing goes wrong before the investment pays you back, so any change in your circumstances between now and 12 years from now would be an additional risk in buying a more expensive car to save money then.

[wierd]

You can offset that mentally by considering the externalities to the environment associated with petrol vehicle use though.  The typical operator of a motor vehicle drops several hundred pounds of carbon into the atmosphere yearly. That toxic waste has real economic impact, which can equate to much larger than the disparity of 8-10 year break-even, vs your proposed 12yr break-even--- especially when EVERYONE decides that operating the petrol powered vehicle is the better option, and suddenly climate change comes home for dinner, and the economy dries up like an egyptian mummy.

[Reelya]

Sure, it's a "tragedy of the commons" dilemma. Each person acting in their own sensible economic interests unwittingly hurts each other. If everyone agreed to buy electric cars however, the economics for everyone individually would actually be better off, even though, paradoxically, everyone chose to spend more money.

That's the thing, it's *not* about people making individually silly decisions, it's that each person making sensible decisions for themselves leads to everyone being worse off. And that's why it's an intractable problem. Mischaracterizing this as "people aren't good at making decisions" misses the point of why these things are so hard to solve. Individual education doesn't solve this, because with perfect information, the individual is always better off making the sub-optimal decisions.

Here's another hypothetical:

- you live in a boarding house building with 3 other people. All electric bills are split. You have little interaction with the other tenants.

 If you buy a certain widget it that you put in your room, it costs $3 to run, but saves $4 in electricity. You will save $1 on your share of the electric bill, but have spent $3. Should you buy the widget?

Conversely, you can buy another widget, but this one consumes $4 worth of electricity but makes $3 worth of bitcoins. You will make a net profit of $2 per widget by owning it. Should you buy this widget?

Based on rational economic choices, you shouldn't buy the energy-saving widget, but you should buy the energy-wasting widget. In fact, going off purely ratonal economic logic, everyone should in face keep accumulating more and more energy-wasting widgets until the entire house collapses. There's never a point at which buying an individual energy-waster widget will cost you more than it makes.