Experimental and Behavioural Economics Seminar Series - Yiming Liu (WZB Berlin)

Title: Model-Directed Attention and the Persistence of Wrong Mental Models: Evidence from Firm Pricing

Abstract: We show a way that wrong mental models can persist in data-rich market environments: By remaining silent about data features they cannot explain, which directs attention away from disconfirming patterns. Studying 13,000 gas station managers, we show that 40 percent articulate a simple model — discounts raise sales — that is silent about intertemporal substitution (IS) by regular customers in response to pre-announced temporary discounts, evident in the data as sales dips before and after. Managers who neglect IS show measurable inattention to these dips when explaining the data, believe fuel demand is more elastic, and set lower prices. We also contribute evidence on how managers acquire the wrong model in the first place, finding that it partly reflects newer managers absorbing it from peers and mentors. Online experiments confirm the causality involved in the model-directed attention explanation, in both directions: exposure to the simple peer model reduces attention to IS patterns, while a targeted attention intervention raises recognition of those patterns and induces switching to the correct model.