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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? We explore whether the tendency to focus on the left-most digit of a number affects how used car buyers incorporate odometer values in their purchase decisions. Analyzing over 22 million wholesale used-car transactions, we find substantial evidence of this left-digit bias; there are large and discontinuous drops in sale prices at 10,000-mile thresholds in odometer mileage, along with smaller drops at 1,000-mile thresholds. We obtain estimates for the inattention parameter in a simple model of this left-digit bias. We also investigate whether this heuristic behavior is primarily attributable to the final used-car customers or the used-car salesmen who buy cars in the wholesale market. The evidence is most consistent with partial inattention by final customers. We discuss the significance of these results for the literature on inattention and point to other market settings where this type of heuristic thinking may be important. Our results suggest that information-processing heuristics may be important even in markets with large stakes and where information is easy to observe.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17030.

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Date of creation: May 2011
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Publication status: published as Nicola Lacetera & Devin G. Pope & Justin R. Sydnor, 2012. "Heuristic Thinking and Limited Attention in the Car Market," American Economic Review, American Economic Association, vol. 102(5), pages 2206-36, August.
Handle: RePEc:nbr:nberwo:17030

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  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. Englmaier, Florian & Roider, Andreas & Sunde, Uwe, 2012. "The Role of Salience in Performance Schemes: Evidence from a Field Experiment," IZA Discussion Papers 6448, Institute for the Study of Labor (IZA).
  2. Engström, Per & Forsell, Eskil, 2013. "Demand effects of consumers’ stated and revealed preferences," Working Paper Series, Uppsala University, Department of Economics 2013:6, Uppsala University, Department of Economics.
  3. 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.
  4. 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.
  5. Hackl, Franz & Kummer, Michael E. & Winter-Ebmer, Rudolf, 2010. "99 cent: Price points in e-commerce," ZEW Discussion Papers, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research 10-022, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  6. 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.
  7. 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," American Economic Review, American Economic Association, American Economic Association, vol. 103(3), pages 575-79, May.
  8. Lin, C.-Y. Cynthia & Muehlegger, Erich J., 2013. "On the use of heuristics to approximate competitors’ private information," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 86(C), pages 10-23.
  9. Gillingham, Kenneth & Palmer, Karen, 2013. "Bridging the Energy Efficiency Gap: Policy Insights from Economic Theory and Empirical Evidence," Discussion Papers, Resources For the Future dp-13-02-rev, Resources For the Future.
  10. 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, Society for Judgment and Decision Making, vol. 8(3), pages 365-371, May.
  11. 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, Springer, vol. 122(3), pages 511-521, July.
  12. Alasdair Brown & Fuyu Yang, 2013. "Limited Cognition and Clustered Asset Prices," University of East Anglia Applied and Financial Economics Working Paper Series, School of Economics, University of East Anglia, Norwich, UK. 054, School of Economics, University of East Anglia, Norwich, UK..

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