Nothing Special   »   [go: up one dir, main page]

IDEAS home Printed from https://ideas.repec.org/a/aea/aecrev/v102y2012i5p2206-36.html
   My bibliography  Save this article

Heuristic Thinking and Limited Attention in the Car Market

Author

Listed:
  • 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)

Suggested Citation

  • 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 2206-2236, August.
  • Handle: RePEc:aea:aecrev:v:102:y:2012:i:5:p:2206-36
    as

    Download full text from publisher

    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.5.2206
    Download Restriction: Access to full text is restricted to AEA members and institutional subscribers.

    File URL: http://www.aeaweb.org/aer/data/aug2012/20100631_data.zip
    File Function: dataset accompanying article
    Download Restriction: no
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Xavier Gabaix & David Laibson, 2018. "Shrouded attributes, consumer myopia and information suppression in competitive markets," Chapters, in: Victor J. Tremblay & Elizabeth Schroeder & Carol Horton Tremblay (ed.), Handbook of Behavioral Industrial Organization, chapter 3, pages 40-74, Edward Elgar Publishing.
    2. Hossain Tanjim & Morgan John, 2006. "...Plus Shipping and Handling: Revenue (Non) Equivalence in Field Experiments on eBay," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 6(2), pages 1-30, January.
    3. Stefano DellaVigna & John A. List & Ulrike Malmendier, 2012. "Testing for Altruism and Social Pressure in Charitable Giving," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 127(1), pages 1-56.
    4. David S. Lee & Thomas Lemieux, 2010. "Regression Discontinuity Designs in Economics," Journal of Economic Literature, American Economic Association, vol. 48(2), pages 281-355, June.
    5. Raj Chetty & Adam Looney & Kory Kroft, 2009. "Salience and Taxation: Theory and Evidence," American Economic Review, American Economic Association, vol. 99(4), pages 1145-1177, September.
    6. Raj Chetty, 2009. "The Simple Economics of Salience and Taxation," NBER Working Papers 15246, National Bureau of Economic Research, Inc.
    7. David Laibson & Andrea Repetto & Jeremy Tobacman, 2005. "Estimating Discount Functions with Consumption Choices over the Lifecycle," Levine's Bibliography 784828000000000643, UCLA Department of Economics.
    8. Stefano DellaVigna, 2009. "Psychology and Economics: Evidence from the Field," Journal of Economic Literature, American Economic Association, vol. 47(2), pages 315-372, June.
    9. Sendhil Mullainathan & Joshua Schwartzstein & Andrei Shleifer, 2008. "Coarse Thinking and Persuasion," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(2), pages 577-619.
    10. Kandel, Shmuel & Sarig, Oded & Wohl, Avi, 2001. "Do investors prefer round stock prices? Evidence from Israeli IPO auctions," Journal of Banking & Finance, Elsevier, vol. 25(8), pages 1543-1551, August.
    11. Stefano Dellavigna & Joshua M. Pollet, 2009. "Investor Inattention and Friday Earnings Announcements," Journal of Finance, American Finance Association, vol. 64(2), pages 709-749, April.
    12. 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.
    13. Jennifer Brown & Tanjim Hossain & John Morgan, 2010. "Shrouded Attributes and Information Suppression: Evidence from the Field," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 125(2), pages 859-876.
    14. Frank Scott & Aaron Yelowitz, 2010. "Pricing Anomalies In The Market For Diamonds: Evidence Of Conformist Behavior," Economic Inquiry, Western Economic Association International, vol. 48(2), pages 353-368, April.
    15. repec:feb:framed:0087 is not listed on IDEAS
    16. 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.
    17. Amy Finkelstein, 2009. "E-ztax: Tax Salience and Tax Rates," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 124(3), pages 969-1010.
    18. 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, March.
    19. Bradley, Daniel J. & Cooney, John W. & Jordan, Bradford D. & Singh, Ajai K., 2004. "Negotiation and the IPO Offer Price: A Comparison of Integer vs. Non-Integer IPOs," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 39(3), pages 517-540, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Xavier Gabaix, 2017. "Behavioral Inattention," NBER Working Papers 24096, National Bureau of Economic Research, Inc.
    2. Reto Foellmi & Stefan Legge & Lukas Schmid, 2016. "Do Professionals Get It Right? Limited Attention and Risk‐taking Behaviour," Economic Journal, Royal Economic Society, vol. 0(592), pages 724-755, May.
    3. Scharf, Kim & Smith, Sarah, 2010. "Rational Inattention to Subsidies for Charitable Contributions," CAGE Online Working Paper Series 02, Competitive Advantage in the Global Economy (CAGE).
    4. Zemin (Zachary) Zhong, 2022. "Chasing Diamonds and Crowns: Consumer Limited Attention and Seller Response," Management Science, INFORMS, vol. 68(6), pages 4380-4397, June.
    5. Koichiro Ito, 2014. "Do Consumers Respond to Marginal or Average Price? Evidence from Nonlinear Electricity Pricing," American Economic Review, American Economic Association, vol. 104(2), pages 537-563, February.
    6. Johannes Abeler & Simon Jäger, 2013. "Complex Tax Incentives - An Experimental Investigation," CESifo Working Paper Series 4231, CESifo.
    7. Abeler, Johannes & Huffman, David B. & Raymond, Collin, 2023. "Incentive Complexity, Bounded Rationality and Effort Provision," IZA Discussion Papers 16284, Institute of Labor Economics (IZA).
    8. Johannes Abeler & David Huffman & Colin Raymond, 2023. "Incentive Complexity, Bounded Rationality and Effort Provision," Economics Series Working Papers 1012, University of Oxford, Department of Economics.
    9. Quinn Keefer & Galib Rustamov, 2018. "Limited attention in residential energy markets: a regression discontinuity approach," Empirical Economics, Springer, vol. 55(3), pages 993-1017, November.
    10. Stefano DellaVigna, 2009. "Psychology and Economics: Evidence from the Field," Journal of Economic Literature, American Economic Association, vol. 47(2), pages 315-372, June.
    11. Florian Englmaier & Arno Schmöller & Till Stowasser, 2018. "Price Discontinuities in an Online Market for Used Cars," Management Science, INFORMS, vol. 64(6), pages 2754-2766, June.
    12. Emmanuel Farhi & Xavier Gabaix, 2020. "Optimal Taxation with Behavioral Agents," American Economic Review, American Economic Association, vol. 110(1), pages 298-336, January.
    13. Raj Chetty & Adam Looney & Kory Kroft, 2009. "Salience and Taxation: Theory and Evidence," American Economic Review, American Economic Association, vol. 99(4), pages 1145-1177, September.
    14. Dmitry Taubinsky & Alex Rees-Jones, 2018. "Attention Variation and Welfare: Theory and Evidence from a Tax Salience Experiment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 85(4), pages 2462-2496.
    15. Sunde, Uwe & Roider, Andreas & Englmaier, Florian, 2012. "The Role of Salience in Performance Schemes: Evidence from a Field Experiment," CEPR Discussion Papers 8921, C.E.P.R. Discussion Papers.
    16. Sebastien Bradley & Naomi E. Feldman, 2020. "Hidden Baggage: Behavioral Responses to Changes in Airline Ticket Tax Disclosure," American Economic Journal: Economic Policy, American Economic Association, vol. 12(4), pages 58-87, November.
    17. Florian Englmaier & Andreas Roider & Uwe Sunde, 2017. "The Role of Communication of Performance Schemes: Evidence from a Field Experiment," Management Science, INFORMS, vol. 63(12), pages 4061-4080, December.
    18. Tom Blake & Sarah Moshary & Kane Sweeney & Steve Tadelis, 2021. "Price Salience and Product Choice," Marketing Science, INFORMS, vol. 40(4), pages 619-636, July.
    19. Ulrike Malmendier, 2016. "The Bidder's Curse: Reply," American Economic Review, American Economic Association, vol. 106(4), pages 1195-1213, April.
    20. Englmaier, Florian & Roider, Andreas & Sunde, Uwe, 2014. "The Role of Communication of Performance Schemes," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 507, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.

    More about this item

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • L62 - Industrial Organization - - Industry Studies: Manufacturing - - - Automobiles; Other Transportation Equipment; Related Parts and Equipment

    Lists

    This item is featured on the following reading lists, Wikipedia, or ReplicationWiki pages:
    1. Heuristic Thinking and Limited Attention in the Car Market (AER 2012) in ReplicationWiki

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:aea:aecrev:v:102:y:2012:i:5:p:2206-36. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Michael P. Albert (email available below). General contact details of provider: https://edirc.repec.org/data/aeaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.