Heuristic Thinking and Limited Attention in the Car Market
University of Toronto - Strategic Management; University of Toronto at Mississauga - Department of Management; National Bureau of Economic Research (NBER)
Devin G. Pope
University of Chicago - Booth School of Business
Justin R. Sydnor
Case Western Reserve University
May 24, 2010
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 market settings with large stakes and where information is easy to observe.
Number of Pages in PDF File: 52
Keywords: Heuristic Thinking, Inattention, Automobiles, Behavioral Economics
JEL Classification: D4, L1, L62
Date posted: September 24, 2010 ; Last revised: September 30, 2010
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