People falsely believe that equal increases in vehicles' fuel efficiency (e.g., miles per gallon (MPG)) will result in equal fuel savings. Whereas previous research on this “MPG illusion” has focused on people's biased choices of upgrading vehicle models, it has not examined a more common situation, namely, estimating a given vehicle's fuel efficiency based on the average of two efficiency values (e.g., in the city and on highways). In such situations, we find an additional bias in people's judgment and choice, the average fuel‐efficiency fallacy, in which people falsely believe that the combined fuel efficiency (e.g., of city and highway MPG) is a simple—instead of a harmonic—mean of the two values. Owing to the curvilinear relationship between fuel efficiency and fuel consumption, the combined fuel‐efficiency value would always be lower than the simple average, resulting in consistent overestimations of the actual fuel efficiency. In a series of studies, we demonstrate how this fallacy of overestimating combined fuel efficiency leads to suboptimal choices between vehicles. In addition, we find that the solution prescribed for the MPG illusion—using gallons per 100 miles—does reduce, but not eliminate, the average fuel‐efficiency fallacy, and that comprehension of the gallons per 100 miles measure is a precursory condition for this nudge to have any effect. Copyright © 2016 John Wiley & Sons, Ltd.