Heuristic Thinking and Limited Attention in the Car Market

Nicola Lacetera, Devin Pope and Justin R. Sydnor

No 17030, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D03 D12 L62 (search for similar items in EconPapers)
Date: 2011-05
Note: IO PR
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Citations: View citations in EconPapers (11)

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.

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Journal Article: Heuristic Thinking and Limited Attention in the Car Market (2012)
Working Paper: Heuristic Thinking and Limited Attention in the Car Market (2011)
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