I should look into this. But if cars quickly lose value for rational reasons, such as people only selling recently bought cars if they are defective, than I don’t necessarily gain by buying a used car.
Rental car companies will sell cars that are fairly new for “no good reason” other than rebalancing their inventory and renewing their fleet with new cars.
I would certainly want a good explanation of why a very-nearly-new car was being sold, and indeed I think rather few used cars are very nearly new. For a car that’s at least a couple of years old, though, there seems little need for extreme suspicion, and so far as I know (note: I have no statistics on this) most used cars are not horribly defective, suggesting that hugely reduced price relative to new cars can’t be mostly about the risk of such defects. (If the used car is half the price of the new one, it would need something close to a 50% chance of being completely worthless for defect risk to justify the price difference. Somewhat less than that, of course, on account of inconvenience and the fact that an unknown defect is worse than a known one, but I think not hugely less.)
I suspect (with no evidence beyond casual observation) that it’s mostly a combination of:
Risk aversion. If you buy a new car, you can be pretty confident that it’s in good working order (and have recourse if it turns out not to be). If you buy a used car, usually it’s fine but there’s a nonzero chance that you get screwed.
It seems to me that most people are too risk-averse, in the sense that if they were able to disvalue risk less then (1) most would be happier overall and (2) aggregate happiness would be greater. If you are less risk-averse than most, you might value used cars higher relative to new ones.
Laziness. Reducing the risk of buying a lemon requires effort (and maybe getting help from someone else more expert).
If you don’t value your time at hundreds or thousands of dollars per hour, you should probably not see this as a compelling reason for buying a new car.
Signalling. If your car is intended (on some level) as a signal of what a nice car you can afford to drive, then a shiny new one is a better signal than a used one.
If you care less about signalling, or want to signal other things than willingness to spend, you might value used cars higher relative to new ones.
Sheer attraction to shininess. (Broadly understood.) New cars look nice. Buyers who don’t think explicitly about how much they value such things may be willing to pay many thousands of pounds/dollars/euros for this.
My guess is that scarcely anyone would defend this after considering carefully what they’re actually paying all that money for. (You can buy a lot of other nice shiny things for the difference in price between a new car and a merely newish one.)
You will gather from the spin on my comments that I am firmly in the “buy ’em used” camp. If you are more risk-averse than I am, value your time much more than I do mine, are keen to signal wealth, and find shiny cars especially attractive, then you may very reasonably make a different decision.
f the used car is half the price of the new one, it would need something close to a 50% chance of being completely worthless for defect risk to justify the price difference.
No, it would not. Part of the price difference is just depreciation; the car isn’t going to last as long, will need repairs sooner, etc. simply because it is older, and older cars are like that. The further price difference on top of that is the price difference that actually needs to be explained by the increased risk.
I think you’ve misunderstood me; my apologies for not being clearer and more explicit. I’ll try to fix that below.
The question I was trying to address was: How much of the explanation can defect risk be? And my answer was: Not much more than the expected cost of the defects, which in turn is probably rather less than Pr(serious defects) * value of car without defects, which for not-very-old cars is empirically quite a small fraction of the cost of the new car.
(The “used price = new price / 2” case was just an example.)
Since the difference between new and used prices is a large fraction of the cost of the new car, therefore, it seems unlikely that defect risk is most of the explanation—as I said,
suggesting that hugely reduced price relative to new cars can’t be mostly about the risk of such defects.
The context was James Miller’s suggestion (if I understood him correctly) that defect risk might in fact be a large fraction of the explanation for the big difference in price between new cars and used-but-not-very-old cars.
I don’t think that’s wrong, but I have another suggestion: Car prices may be subject to a variation of Goodhart’s Law. Defects may not be that likely in used cars, but attempting to act as though they are not likely would create incentives that would make them become likely.
This might require precommitment or superrationality on the part of the consumers, but a lot of “irrational” consumer behavior can be modelled as rational precommitment, even if the consumer doesn’t consciously realize that’s what it is.
That’s a very interesting idea. I’m pretty sure it’s too sophisticated to be consciously part of the reasoning of more than a tiny fraction of car buyers, so if it’s an important part of the explanation it must be (as you suggest) unconscious—presumably as a result of some general-purpose unconscious tendency to over-penalize risks of that general sort. This suggests some interesting psychology experiments; I wonder whether they’ve been done.
Why not buy a used car anyway? New cars often lose a lot of their value the moment you buy them.
I should look into this. But if cars quickly lose value for rational reasons, such as people only selling recently bought cars if they are defective, than I don’t necessarily gain by buying a used car.
Rental car companies will sell cars that are fairly new for “no good reason” other than rebalancing their inventory and renewing their fleet with new cars.
I would certainly want a good explanation of why a very-nearly-new car was being sold, and indeed I think rather few used cars are very nearly new. For a car that’s at least a couple of years old, though, there seems little need for extreme suspicion, and so far as I know (note: I have no statistics on this) most used cars are not horribly defective, suggesting that hugely reduced price relative to new cars can’t be mostly about the risk of such defects. (If the used car is half the price of the new one, it would need something close to a 50% chance of being completely worthless for defect risk to justify the price difference. Somewhat less than that, of course, on account of inconvenience and the fact that an unknown defect is worse than a known one, but I think not hugely less.)
I suspect (with no evidence beyond casual observation) that it’s mostly a combination of:
Risk aversion. If you buy a new car, you can be pretty confident that it’s in good working order (and have recourse if it turns out not to be). If you buy a used car, usually it’s fine but there’s a nonzero chance that you get screwed.
It seems to me that most people are too risk-averse, in the sense that if they were able to disvalue risk less then (1) most would be happier overall and (2) aggregate happiness would be greater. If you are less risk-averse than most, you might value used cars higher relative to new ones.
Laziness. Reducing the risk of buying a lemon requires effort (and maybe getting help from someone else more expert).
If you don’t value your time at hundreds or thousands of dollars per hour, you should probably not see this as a compelling reason for buying a new car.
Signalling. If your car is intended (on some level) as a signal of what a nice car you can afford to drive, then a shiny new one is a better signal than a used one.
If you care less about signalling, or want to signal other things than willingness to spend, you might value used cars higher relative to new ones.
Sheer attraction to shininess. (Broadly understood.) New cars look nice. Buyers who don’t think explicitly about how much they value such things may be willing to pay many thousands of pounds/dollars/euros for this.
My guess is that scarcely anyone would defend this after considering carefully what they’re actually paying all that money for. (You can buy a lot of other nice shiny things for the difference in price between a new car and a merely newish one.)
You will gather from the spin on my comments that I am firmly in the “buy ’em used” camp. If you are more risk-averse than I am, value your time much more than I do mine, are keen to signal wealth, and find shiny cars especially attractive, then you may very reasonably make a different decision.
No, it would not. Part of the price difference is just depreciation; the car isn’t going to last as long, will need repairs sooner, etc. simply because it is older, and older cars are like that. The further price difference on top of that is the price difference that actually needs to be explained by the increased risk.
I think you’ve misunderstood me; my apologies for not being clearer and more explicit. I’ll try to fix that below.
The question I was trying to address was: How much of the explanation can defect risk be? And my answer was: Not much more than the expected cost of the defects, which in turn is probably rather less than Pr(serious defects) * value of car without defects, which for not-very-old cars is empirically quite a small fraction of the cost of the new car.
(The “used price = new price / 2” case was just an example.)
Since the difference between new and used prices is a large fraction of the cost of the new car, therefore, it seems unlikely that defect risk is most of the explanation—as I said,
The context was James Miller’s suggestion (if I understood him correctly) that defect risk might in fact be a large fraction of the explanation for the big difference in price between new cars and used-but-not-very-old cars.
I don’t think that’s wrong, but I have another suggestion: Car prices may be subject to a variation of Goodhart’s Law. Defects may not be that likely in used cars, but attempting to act as though they are not likely would create incentives that would make them become likely.
This might require precommitment or superrationality on the part of the consumers, but a lot of “irrational” consumer behavior can be modelled as rational precommitment, even if the consumer doesn’t consciously realize that’s what it is.
That’s a very interesting idea. I’m pretty sure it’s too sophisticated to be consciously part of the reasoning of more than a tiny fraction of car buyers, so if it’s an important part of the explanation it must be (as you suggest) unconscious—presumably as a result of some general-purpose unconscious tendency to over-penalize risks of that general sort. This suggests some interesting psychology experiments; I wonder whether they’ve been done.