Case Study: Buying a Car
As a case study, consider a couple looking to buy a new car. He wants a sporty car with good performance that doesn't cost too much; she wants a car that is less polluting with a sunroof. Given their budget, they agree to limit their search to small cars. They consult ratings from Consumer Reports, but neither of them is sure the top-rated models really match their needs.
Eventually, they limit their search to just two models. One gets 25 miles per gallon; the other gets 40 miles per gallon but costs $6,000 more. Estimating that they drive 10,000 miles per year and that gasoline costs, on average, $4 per gallon, they calculate that the annual fuel costs for the first car will be $1,600 but for the second only $1,000. Thus at a savings of $600 per year in fuel costs, it would take 10 year to recoup their investment in the more efficient model. They decide to go with the less fuel-efficient model.
| Model A | Model B | |
|---|---|---|
| Price | x | X + $6,000 |
| MPG | 25 | 40 |
| Price per Gal. | $4 | $4 |
| Annual Fuel Cost | $1,600 | $1,000 |
Adding a sunroof would cost an additional $1,000. They discuss how often they would use a sunroof, and what else they might do with $1,000, such as take a trip to Florida. They note that a trip to Florida would happen only once, but that they would use the sunroof many times, perhaps 50 times a year. Thus over 5 years, it would cost just $4 per use to have the sunroof: about the cost of a latte. They also acknowledge that they decided against the more fuel-efficient and less polluting model she wanted. They decide to get the sunroof.
| No Sunroof | Sunroof | Trip to Florida | |
|---|---|---|---|
| Price | $0 | $1,000 | $1,000 |
| Uses | 0 | $0 | 1 |
| Cost per Use | $0 | $4 | $1,000 |
Some lessons from this case study:
- There is no single "right" choice.
- Different decision-makers have different priorities.
- The recommendations of an outside authority, while suggestive, don't always match the specific values of the decision-makers.
- Although there may be dozens or even hundreds of criteria to consider, in the end just a handful are significant enough to sway the decision one way or the other.
- Some costs and benefits can be quantified, even monetized, to help make a decision.
- Converting costs and benefits into tangible and comparable units helps makes it easier to evaluate their relative importance.
- Other costs and benefits are less tangible, but can be evaluated in terms of opportunities costs: What might be done instead?
- Focusing on the key trade-offs helps decision-makers reach agreement.
- Reaching a decision sometimes involves give and take.