Oh Boy!!!!! Did I hear someone say OUTSIDE??????? Yeah!!!!!
All kidding aside, the "selective hearing" is due to les than perfect training. I firmly believe that a truly well trained dog will respect his "leader" and will listen to and follow commands, no matter what distractions are present.
Unfortunately, I can't claim that my dogs are "well trained", because they do have selective hearing -- I like to call it "Yorkie Ears".