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Heuristic Thinking and Limited Attention in the Car Market

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  • Nicola Lacetera
  • Devin G. Pope
  • Justin R. Sydnor

Abstract

Can heuristic information processing affect important product markets? Analyzing over 22 million wholesale used-car transactions, we find evidence of left-digit bias in the processing of odometer values, whereby individuals focus on the number's leftmost digits. The bias leads to discontinuous drops in sale prices at 10,000-mile odometer thresholds, along with smaller drops at 1,000-mile thresholds. These findings reveal that information-processing heuristics matter even in markets with large stakes and easily observed information. We model left-digit bias in an inattention framework and structurally estimate the inattention parameter. Empirical patterns suggest the results are driven by final customers rather than professional agents. (JEL D12, D44, D83, L81)

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 102 (2012)
Issue (Month): 5 (August)
Pages: 2206-36

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Handle: RePEc:aea:aecrev:v:102:y:2012:i:5:p:2206-36

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  2. Kaushik Basu, 2006. "Consumer Cognition and Pricing in the Nines in Oligopolistic Markets," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(1), pages 125-141, 03.
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  4. David S. Lee & Thomas Lemieux, 2009. "Regression Discontinuity Designs In Economics," Working Papers 1118, Princeton University, Department of Economics, Industrial Relations Section..
  5. Sendhil Mullainathan & Joshua Schwartzstein & Andrei Shleifer, 2008. "Coarse Thinking and Persuasion," The Quarterly Journal of Economics, MIT Press, vol. 123(2), pages 577-619, 05.
  6. Stefano DellaVigna & John List & Ulrike Malmendier, 2012. "Testing for altruism and social pressure in charitable giving," Natural Field Experiments 00137, The Field Experiments Website.
  7. Stefano DellaVigna, 2009. "Psychology and Economics: Evidence from the Field," Journal of Economic Literature, American Economic Association, vol. 47(2), pages 315-72, June.
  8. Stefano Dellavigna & Joshua M. Pollet, 2009. "Investor Inattention and Friday Earnings Announcements," Journal of Finance, American Finance Association, vol. 64(2), pages 709-749, 04.
  9. Hirshleifer, David & Lim, Sonya Seongyeon & Teoh, Siew Hong, 2006. "Driven to distraction: Extraneous events and underreaction to earnings news," MPRA Paper 3110, University Library of Munich, Germany, revised 16 Apr 2007.
  10. Raj Chetty & Adam Looney & Kory Kroft, 2009. "Salience and taxation: theory and evidence," Finance and Economics Discussion Series 2009-11, Board of Governors of the Federal Reserve System (U.S.).
  11. Pope, Devin G., 2009. "Reacting to rankings: Evidence from "America's Best Hospitals"," Journal of Health Economics, Elsevier, vol. 28(6), pages 1154-1165, December.
  12. Amy Finkelstein, 2009. "E-ZTAX: Tax Salience and Tax Rates," The Quarterly Journal of Economics, MIT Press, vol. 124(3), pages 969-1010, August.
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As found by EconAcademics.org, the blog aggregator for Economics research:
  1. When driving a mile can cost you $448
    by Brad Plumer in Ezra Klein's Wonkblog on 2013-02-25 21:03:00
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Cited by:
  1. Victor Stango & Jonathan Zinman, 2011. "Limited and varying consumer attention: evidence from shocks to the salience of bank overdraft fees," Working Papers 11-17, Federal Reserve Bank of Philadelphia.
  2. Eun-Ju Lee & Gusang Kwon & Hyun Shin & Seungeun Yang & Sukhan Lee & Minah Suh, 2014. "The Spell of Green: Can Frontal EEG Activations Identify Green Consumers?," Journal of Business Ethics, Springer, vol. 122(3), pages 511-521, July.
  3. Lin, C.-Y. Cynthia & Muehlegger, Erich J., 2013. "On the use of heuristics to approximate competitors’ private information," Journal of Economic Behavior & Organization, Elsevier, vol. 86(C), pages 10-23.
  4. Alasdair Brown & Fuyu Yang, 2013. "Limited Cognition and Clustered Asset Prices," University of East Anglia Applied and Financial Economics Working Paper Series 054, School of Economics, University of East Anglia, Norwich, UK..
  5. Silvia Prina & Heather Royer, 2013. "The Importance of Parental Knowledge and Social Norms: Evidence from Weight Report Cards in Mexico," NBER Working Papers 19344, National Bureau of Economic Research, Inc.
  6. Englmaier, Florian & Roider, Andreas & Sunde, Uwe, 2012. "The Role of Salience in Performance Schemes: Evidence from a Field Experiment," CEPR Discussion Papers 8921, C.E.P.R. Discussion Papers.
  7. Engström, Per & Forsell, Eskil, 2013. "Demand effects of consumers’ stated and revealed preferences," Working Paper Series 2013:6, Uppsala University, Department of Economics.
  8. Kenneth Gillingham & Karen Palmer, 2014. "Bridging the Energy Efficiency Gap: Policy Insights from Economic Theory and Empirical Evidence," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 8(1), pages 18-38, January.
  9. Keith M Marzilli Ericson & Amanda Starc, 2013. "How Product Standardization Affects Choice: Evidence from the Massachusetts Health Insurance Exchange," NBER Working Papers 19527, National Bureau of Economic Research, Inc.
  10. Meghan R. Busse & Nicola Lacetera & Devin G. Pope & Jorge Silva-Risso & Justin R. Sydnor, 2013. "Estimating the Effect of Salience in Wholesale and Retail Car Markets," NBER Working Papers 18820, National Bureau of Economic Research, Inc.
  11. Asmus Leth Olsen, 2013. "Leftmost-digit-bias in an enumerated public sector? An experiment on citizens' judgment of performance information," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 8(3), pages 365-371, May.
  12. Hackl, Franz & Kummer, Michael E. & Winter-Ebmer, Rudolf, 2014. "99 Cent: Price points in e-commerce," Information Economics and Policy, Elsevier, vol. 26(C), pages 12-27.

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