Case study · Think clearly

The car, the loan and the salesperson

A case study for the end of "Think clearly": one used-car purchase, taken apart for anchoring, framing, risk figures, confirmation bias and availability.

Educational, not medical or mental-health advice.

Maya is buying her first car. The people, the dealer and the offers are made up, but each sales technique is a common one. This is practice in spotting thinking errors, not advice on buying a car. Work through the task yourself first, with the lessons open, then compare your answers with the solution step by step.

What happened at the dealer

The car's sign reads: "Was 14,500. Now 12,900."
The salesperson says: "Cars like this sell in a day. If you don't put a deposit down today, you'll miss out."
Maya has 2,000 for a deposit, so she would borrow 10,900. The dealer offers finance: "Just 199 a month" for 72 months.
Her bank has already offered her a loan of 10,900 at 7.9% a year over 48 months: about 266 a month.
The salesperson adds paint protection for 600: "It halves your chance of paint damage." When Maya asks, he says about 4 in 100 cars of this kind get paint damage in a year, and a typical repair costs about 300.

What Maya did before she went

She read three glowing reviews of this model and skipped the two negative ones ("probably unlucky owners").
She ruled out a rival model because her cousin's broke down on the motorway last summer.
Online, she found similar cars (same age, similar mileage) listed for 11,500 to 12,500.

Your task

Name the thinking error behind each of the four sales lines and Maya's two choices before she went.
Work out the total Maya would repay with the dealer's finance, and with the bank loan. Which costs more, and by how much?
Work out roughly what the paint protection is worth to Maya in a year, in money.
Write the three things Maya should do next, and run a short pre-mortem on buying this car.

Solution

Try the task first, then open one step at a time and compare.

Step 1: the price

"Was 14,500" is an anchor. It makes 12,900 feel like a bargain, but it is the dealer's own number. Maya's evidence says similar cars sell for 11,500 to 12,500, so 12,900 is above the top of the range.

She should start from her own figure, not theirs: offer around 11,800, with her reason ("similar cars are listed at 11,500 to 12,500").

Step 2: "you'll miss out"

"Sells in a day, you'll miss out" is a loss frame: it turns waiting into losing. Reframed as a gain: "If I wait a day, I keep my 2,000 and can compare offers." Taking the outside view: Maya found plenty of similar cars listed for sale, so if this one goes, others are available.

Step 3: the finance

"Just 199 a month" frames the loan by the monthly payment, which hides the total.

Dealer: 199 × 72 = 14,328 in total, so 3,428 in interest.
Bank: about 265.59 × 48 = about 12,748 in total, so about 1,848 in interest.

On these numbers, the dealer's finance costs about 1,580 more in total. Its rate is higher (worked backwards, about 9.5% a year against the bank's 7.9%), and it runs two years longer, so more interest builds up. Its monthly payments look lower only because they are spread over more months.

Step 4: the paint protection

"Halves your chance" is a relative risk. The absolute risk: from about 4 in 100 to about 2 in 100 a year.

Expected repair cost without it: 4 in 100 × 300 = 12 a year.
With it: 2 in 100 × 300 = 6 a year.
So it saves Maya about 6 a year on average, for 600 up front.

Even over several years, the cover costs far more than it saves on average.

Step 5: what Maya did before she went

Reading only the glowing reviews and dismissing the bad ones is confirmation bias (searching and interpreting).
Ruling out a model because of her cousin's breakdown is availability: one vivid story stands in for the real breakdown rate.

The fix for both: look at reliability figures based on many cars, such as surveys from motoring organisations or consumer groups, for both models.

Step 6: what next, and the pre-mortem

What Maya should do next:

Offer around 11,800, citing the listings, and be ready to walk away.
Compare the two loans on their totals: on these numbers the bank loan costs about 1,580 less, though its monthly payments are higher.
Weigh the paint protection on its expected value (about 6 a year saved for 600), and check both models' reliability figures before signing.

Pre-mortem: "A year from now this purchase went badly. Why?" Likely answers: the car needed costly repairs (fix: a pre-purchase inspection and the service history), she overpaid (fix: her own price range), or the payments squeezed her budget (fix: check 266 a month fits it before signing).

Check yourself

I named anchoring, a loss frame, framing by monthly payment, relative risk, confirmation bias and availability.
I worked out 14,328 for the dealer's finance and about 12,748 for the bank loan.
I worked out the paint protection saves about 6 a year on average.
I started Maya's offer from the evidence, not from "was 14,500".
I wrote a pre-mortem with at least two reasons and a fix for each.

Nothing here is graded or saved.