APPLIED MICRO: Professor David Benjamin Huffman (Cornell Univesity)

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

We document a mechanism through which wrong mental models survive in data-rich environments: by remaining silent about the patterns they deem irrelevant, wrong models direct attention away from the patterns that refute them. We examine this in firm pricing under consumer intertemporal substitution (IS), where shifts in purchase timing produce a sales spike on the discount day and dips before and after. A simple model in which low prices raise sales is silent about the dips and attributes the spike entirely to new demand. In survey and administrative data from 13,000 gas station managers, over 40 percent neglect or underestimate IS, and those holding the simple model perceive demand as more elastic, set lower prices, and earn lower profits. Online experiments provide causal evidence: holding the data fixed, assigning the wrong model rather than the correct one lowers recall of the dips and raises IS-neglect, while prompting attention to the dips restores recall and lowers neglect. Encountering the correct model later dislodges the wrong one, though not completely, while encountering the wrong one after the correct model has no effect.