The psychology of why we overpay for used cars—study points to left-digit bias

The psychology of why we overpay for used cars—study points to left-digit bias Gaby Clark Scientific Editor Andrew Zinin Chief Editor Consumers routinely ignore information when making purchases. They overlook the tax attached to a price, skim past ingredient lists and often fail to process exact numbers with any precision. This kind of inattention is well documented. What is less well understood is how businesses exploit this behavior. Assistant professor Andreas Kraft of the University of Chicago Booth School of Business and University of Texas professor Raghunath Rao explored a specific form of inattention known as left-digit bias, which is among the most reliably documented quirks in consumer psychology. Their study, focused on the used-car market, suggests that dealerships systematically attract more inattentive buyers and profit handsomely as a result—and also that this bias could be hard to address with increased disclosure or transparency. Consumers anchor heavily on the leftmost digit when they evaluate a number. Prices such as $1.99 or $1.90 exploit this tendency. Left-digit bias, and the fact that people possess it in varying degrees, creates a distinct dynamic in the used-car market. Inattentive buyers at a dealership see a car with 49,800 miles (80,100 kilometers) and mentally register something closer to 40,000 miles (64,400 kilometers). That misperception inflates both what they think the car is worth and what they think they would pay for an equivalent car in the private market, the researchers explain. Their study analyzed prices and odometer readings in every title submission to the Texas Department of Motor Vehicles between 2014 and 2021—a data set that captured roughly 10% of all vehicle transactions in the United States during this period. Inattentive buyers tend to purchase used cars from dealerships rather than private sellers, according to the researchers, who add that dealers are generally more aware of left-digit bias and able to capitalize on it. Dealerships always command a premium over private markets but charge even more for cars near favorable mileage thresholds. To inattentive buyers, those prices can still appear attractive because they perceive the car as having lower mileage than it really does and therefore overestimate what a comparable car would cost elsewhere. Attentive buyers, by contrast, more accurately determine what a 49,800-mile (80,100-kilometer) car should cost, recognize the dealership premium and go elsewhere. Kraft and Rao find that dealership customers, based on the prices they paid, were about twice as inattentive to exact mileage as customers who shopped in the private market. This sorting mechanism has clear financial consequences. In a process the researchers call "behavioral skimming," dealerships charged significantly more for vehicles with odometer readings just below a 10,000-mile (16,100-kilometer) threshold than for comparable cars just above. Kraft and Rao find the difference in profit ranged from roughly $46 to $168 per vehicle across the various thresholds, with the sharpest effects between 60,000 miles (96,600 kilometers) and 100,000 miles (160,900 kilometers), where the bulk of dealership transactions occurred. How dealerships profit from left-digit bias For the 14 cutoffs they examined between 10,000 miles (16,100 kilometers) and 140,000 miles (225,300 kilometers), the average profit on vehicles 1,000 miles (1,600 kilometers) below the threshold was nearly 11% higher than profit on vehicles 1,000 miles (1,600 kilometers) above the threshold. And while raising prices reduces sales volume in most markets, the opposite occurred in this setting. Because the elevated price attracted a pool of inattentive buyers willing to pay, dealerships bid more aggressively on the supply side. Vehicles with odometer readings just below a 10,000-mile (16,100-kilometer) threshold were up to 4% more likely to be sold through a dealership than in the private market. They also sold faster. Cars just below 90,000 miles (144,800 kilometers) spent about two fewer days on the lot than those just above, translating to 6% less time in inventory. These lower inventory costs on top of higher margins compounded the benefits. Competition between dealers didn't erode this advantage, as standard economic models suggest it should. Conversely, the researchers find, inattention among dealership customers was 40% higher in the most competitive markets (as measured by inventory levels) compared with the least competitive markets. The researchers argue this is because attentive and inattentive buyers essentially create separate markets, while competitive markets make dealership customers even less attentive. More competition ends up making consumers worse off overall. These results hold troubling implications for disclosure requirements and pricing transparency. Policies that center on these mechanisms assume consumers will respond logically to the cut-and-dried nature of numbers, but many people only skim what's in front of them. Disclosing the exact odometer reading in big print doesn't help a buyer who's going to anchor on the leftmost digit. A subtler but equally significant policy implication is that estimates of consumer inattention drawn from one segment of the market may misrepresent the population as a whole. Because inattentive consumers tend to make dealership transactions, a researcher studying only private sales would underestimate inattention among buyers overall; a researcher studying only dealership sales would overestimate it. Provided by University of Chicago