The Psychology of Gas Prices

August 4, 2015

Exactly how much was the last gallon of milk you bought? How about the last loaf of bread or cup of coffee? Even though these are items most of us purchase on a regular basis, it’s hard to recall what the exact price was down to the penny.

Now think about how much you paid per gallon of gas the last time you filled up your car. Gas prices, though likely to fluctuate between visits to the pump, are something we can recite with some accuracy. Not only do we remember these prices, but many have an emotional reaction when they rise or fall. While we might not think twice about a loaf of bread priced $1 higher than usual, an uptick in gas prices of ten cents a gallon can quickly make us irritated and worried about the hit to our wallets.

In the bigger picture, ten cents a gallon is only between $1-2 more for the average sized tank – so why are we so emotionally attached to prices that we know will change from year to year, month to month and even day to day?

Gas prices are in our face

Every other purchase we make or bill we pay has some time lag in between. Therefore, we might know that our electric bill is between $20 and $30 every month, but because we don’t know the exact number and there is a month between bills, we might not be too perturbed if one month it’s $23 and the next month it’s $26.

Gas prices, however, are something we see in large bold numbers on street corners and in shopping malls all around us. We can’t help but notice the steady uptick – even if it’s just a few cents here and there.

Duke University economics professor Dan Ariely points out that the hang up also comes when we see the dollars tick away at the pump – something we wouldn’t notice if the way in which we purchase gas were different.

“Imagine if every night I came up with a tanker and filled your car and three months later gave you a bill. Would you really know how much it costs? [With gas, consumers feel] the pain of paying when we see the specific cost…and we feel much worse about it.”

We don’t look at the bigger picture

When gas prices plummeted a few months ago, consumers were thrilled to be paying significantly less at the pump. But when they began to creep past the $2 and $2.50 mark, it suddenly seemed like we were back to feeling the crunch.

In order to anchor the price in our minds, we use recent data about gas prices – where they were a month ago or a week ago – instead of thinking about the bigger picture. For instance, according to a chart at GasBuddy.com, gas prices were topping off at around $4 per gallon in summer of 2008. In comparison, $2.50 a gallon seems cheap – but we don’t remember that far back, nor do we think it’s necessarily relevant to today.

A Bloomberg Business article explored this topic with behavioral economist George Lowenstein from Carnegie Mellon University:

“’People tend to respond to things in a comparative fashion. The salient comparison for gas prices is what they were in the recent past, not the real price historically.’ When we do think about the past, he says, we remember that gas was cheaper but don’t recall that our salaries were smaller, too.”

It brings financial pressures to the forefront

Living paycheck to paycheck is already a struggle, but watching gas prices increase can just exacerbate the issue further and bring financial pressures to light. After all, gas is generally a requirement to get to the job which will allow you to make money to pay the bills – it’s a necessity for most.

It can have a trickle-down effect for many, and we’ve become all too aware of its impact when prices are stuck at a high point for a long period of time.

A study conducted by Wayne Hochwarter, a professor at Florida State University’s College of Business, found that 45% of respondents reported having to cut back on debt repayments because of high gas prices. Another 52% have reconsidered vacation plans for the same reason.

Even if there are more pressing matters than rising gas prices, the feeling of powerlessness over how much you pay at the pump can quickly make the rest of your financial situation seem hopeless as well.

Do you pay attention to gas prices? Why?