Thursday, October 30, 2014

How people who can't do math get shafted.

I have a car (an Accord, if you must know) that is 17 months old.  When I bought the car, the dealer offered me a car loan at 0 percent interest for 36 months, so I took it.  Even in the world of very low discount rates, accepting the loan allowed me to get a further small effective discount on the car.

The dealer called me today, saying I could trade the car in for a new car and not increase my payment; the payment would simply reset for 36 months.  I told him I needed to do a little math before calling him back.  The math I did was as follows:

Value of Old Car from Kelly Blue Book + PV of 36 months of payments = Cost of New Car.

Cost of New Car - Edmunds Value of New Car = $6000.

Yes, the dealer was trying to fool me into paying $6000 for...nothing.   In my particular case, he could not profit from informational asymmetry.  But for the person with the average math skills in the US?  That might be a different story.  We know this selling tactic must work sometimes, because otherwise I would not have gotten the call.

The first lesson from all this is we really need to do a better job teaching math.

The second lesson is that, in the meantime, we need to protect consumers from these sorts of practices.


2 comments:

Michael Banner said...

20610Richard: Trust me, if you lived in a low income or communities of color, you would get these calls all of the time.

Anonymous said...

There are two possible conclusions from your anecdote:

* Car buyers are innumerate.
* You don't know anything about cars.

Your assumption is that your current car and the new model are fungible. This isn't the case. Automakers are highly innovative and the differences between model years can be very substantial.

You may not care about those innovations but others do. People who do care buy new cars much more frequently than other consumers and these consumers are who the dealer targets with offers like this.

I think your lack of reflection on this and your haste to ascribe innumeracy to consumers is an interesting observation about you.