conversableeconomist

Left-Number Bias in Used Car Prices

Left-number bias is when you pay disproportionate attention to the number on the left. It\’s the reason why you see so many more prices at, say, $69.99 than at $70.01. When buying a used car, left-number bias manifests itself on the odometer: that is, car buyers view the difference between, say, 67,000 and 68,000 miles as of only modest importance, but the difference between 69,000 and 70,000 miles as quite important. Nicola Lacetera, Devin Pope, and Justin Sydnor Heuristic explore this topic with a with a data set of 22 million used car transations in \”Heuristic Thinking and Limited Attention in the Car Market.\” It\’s NBER Working Paper No. 17030, but these papers are gated unless your institution has a membership. 

For a short overview of the paper in the NBER Digest by Lester Picker, see here. I quote from that overview: \”[T]he authors document significant price drops at each 10,000-mile threshold from 10,000 to 100,000 miles, ranging from about $150 to $200. For example, cars with odometer values between 79,900 and 79,999 miles, on average, are sold for approximately $210 more than cars with odometer values between 80,000 and 80,100 miles, but for only $10 less than cars with odometer readings between 79,800 and 79,899. The authors also find price drops at 1,000-mile thresholds, but these changes are smaller.\”

Here is an illustrative figure. the horizontal axis shows miles on the odometer of the used car, rounded down to the nearest 500. The vertical axis shows average sale price. As you would expect, cars with more mileage on average sell for less. But look at what happens at each 10,000-mile level. Instead of price dropping in a more-or-less smooth line, there is a discrete price drop at each 10,000 mile level, showing the left-number bias at work.

Picker\’s overview in the NBER Digest also says: \”This apparent left-digit bias not only influences wholesale prices but also affects supply decisions. If sellers are savvy and are aware of these effects, then they will have an incentive to bring cars to auction before the vehicle\’s mileage crosses a threshold. Indeed, the authors show that there are large volume spikes in cars before 10,000-mile thresholds.\”

Here\’s a figure showing this effect on the supply side.Again, the horizontal axis shows mileage on the odometers of used cars. This time, the vertical axis shows volume of cars sold with that mileage. As one would expect, relatively few cars are sold with extremely low mileage. But look at the line at the 10,000-mile intervals from 60,000 to 100,000. There is an extra little blip of more cars being sold just before they cross over into the next mileage category. This is smart sellers, taking advantage of the left-number bias on the part of buyers.

conversableeconomist

More Herbert Hoover: Father of the New Deal

Last week I pointed out in Herbert Hoover, Deficit Spender that, contrary to a widespread belief, Hoover didn\’t cut spending or seek to balance the budget. Instead, Franklin Roosevelt ran in 1932 on promise to balance the budget, a promise which he abandoned a few months after taking office. The next day Steven Horwitz published a Cato Briefing Paper called \”Herbert Hoover: Father of the New Deal,\”  with a broader treatment of the actual Herbert Hoover. Here are some tastes of the Horwitz argument (footnotes and citations omitted):
\”The version of Hoover presented in the media’s narrative of Hoover as champion of laissez faire bears little resemblance to the details of Hoover’s life, the ideas he held, and the policies he adopted as president. …\”
\”Hoover had long believed that it was necessary to `transform the structure of the U.S. economy from one of laissez-faire to one of voluntary cooperation.\’ In her biography Herbert Hoover: Forgotten Progressive Joan Hoff Wilson summarizes Hoover’s economic views this way:

Where the classical economists like Adam Smith had argued for uncontrolled competition between independent  economic units guided only by the invisible hand of supply and demand, he talked about voluntary national economic planning arising from cooperation between business interests and the government. . . . Instead of negative government action in times of depression, he advocated the expansion of public works, avoidance of wage cuts, increased rather than decreased production—measures that would expand rather than contract purchasing power.

Hoover was also a long-time critic of international free trade, and favored `increased inheritance taxes, public dams, and, significantly, government regulation of the stock market.\’”
Horwitz provides chapter and verse on how Hoover, as president, increased spending and intervened in the economy. Here\’s an editorial cartoon from 1930 criticizing Hoover for his flood of increased spending. 
As Horwitz points out, leading intellectuals of the Roosevelt administration recognized that Hoover had set the stage for their policies:

\”Rexford G. Tugwell, one of the academics at the center of FDR’s `brains trust\’ said: `When it was all over, I once made a list of New Deal ventures begun during Hoover’s years as Secretary of Commerce and then as president. . . . The New Deal owed much to what he had begun.\’ Another member of the brains trust, Raymond Moley, wrote of that period: 

When we all burst into Washington . . . we found every essential idea [of the New Deal] enacted in the 100-day Congress in the Hoover administration itself. The essentials of the NRA [National Recovery Administration], the PWA [Public Works Administration], the emergency relief setup were all there. Even the AAA [Agricultural Adjustment Act] was known to the Department of Agriculture. Only the TVA and the Securities Act was drawn from other sources. The RFC [Reconstruction Finance Corporation], probably the greatest recovery agency, was of course a Hoover measure, passed long before the inauguration.

Late in both of their lives, Tugwell wrote to Moley and said of Hoover, “we were too hard on a man who really invented most of the devices we used.\”
Horwitz argues that Hoover\’s economic policies were deeply misguided. My point here is not to endorse his evaluation of Hoover\’s policies (I think some were more justifiable than others), but just to point out that as a matter of historical fact, it is incorrect to think of Hoover as a radical free market and budget balancer whose policies were overturned by FDR. Indeed, as Horwitz points out, FDR and others saw Hoover during the 1920s as a possible presidential candidate for the Democrats!
Thanks to Arnold Kling at the EconLog website for the pointer.