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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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Bibliographic Info

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. 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.
  2. Raj Chetty, 2009. "The Simple Economics of Salience and Taxation," NBER Working Papers 15246, National Bureau of Economic Research, Inc.
  3. Stefano DellaVigna, 2009. "Psychology and Economics: Evidence from the Field," Journal of Economic Literature, American Economic Association, vol. 47(2), pages 315-72, June.
  4. 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.
  5. David S. Lee & Thomas Lemieux, 2009. "Regression Discontinuity Designs in Economics," NBER Working Papers 14723, National Bureau of Economic Research, Inc.
  6. Amy Finkelstein, 2009. "E-ZTAX: Tax Salience and Tax Rates," The Quarterly Journal of Economics, MIT Press, vol. 124(3), pages 969-1010, August.
  7. Shleifer, Andrei & Mullainathan, Sendhil & Schwartzstein, Joshua, 2008. "Coarse Thinking and Persuasion," Scholarly Articles 11022284, Harvard University Department of Economics.
  8. Stefano DellaVigna & John A. List & Ulrike Malmendier, 2009. "Testing for Altruism and Social Pressure in Charitable Giving," NBER Working Papers 15629, National Bureau of Economic Research, Inc.
  9. David Hirshleifer & Sonya Seongyeon Lim & Siew Hong Teoh, 2009. "Driven to Distraction: Extraneous Events and Underreaction to Earnings News," Journal of Finance, American Finance Association, vol. 64(5), pages 2289-2325, October.
  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. Jennifer Brown & Tanjim Hossain & John Morgan, 2010. "Shrouded Attributes and Information Suppression: Evidence from the Field," The Quarterly Journal of Economics, MIT Press, vol. 125(2), pages 859-876, May.
  12. 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.
  13. repec:feb:framed:0087 is not listed on IDEAS
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Blog mentions

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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. Gillingham, Kenneth & Palmer, Karen, 2013. "Bridging the Energy Efficiency Gap: Policy Insights from Economic Theory and Empirical Evidence," Discussion Papers dp-13-02-rev, Resources For the Future.
  2. Engström, Per & Forsell, Eskil, 2013. "Demand effects of consumers’ stated and revealed preferences," Working Paper Series 2013:6, Uppsala University, Department of Economics.
  3. 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.
  4. 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).
  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. Victor Stango & Jonathan Zinman, 2011. "Limited and Varying Consumer Attention: Evidence from Shocks to the Salience of Bank Overdraft Fees," NBER Working Papers 17028, National Bureau of Economic Research, Inc.
  7. 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.
  8. 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.
  9. 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..
  10. 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.
  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, vol. 122(3), pages 511-521, July.
  12. 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.

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