I should add that I highlight Data Modeler before trying to select my directories
Are you trying to set the "Default Reports Directory" field on the Data Modeler/Reports page of the Preferences?
Are there any errors in your log? (To see this select External Log from the View menu.)
I have selected Tools -> Preferences -> Data Modeler and tried to enter the directory path in "Default Reports Directory". -> Save. When I exit preferences and then go back in, the directory path that I entered has disappeared. A different issue but probably with the same underlying cause is that when I select File - > Reports and then select the Custom Tab. I can create Custom reports which last for the duration of my session but when I exit the session and go back in they have disappeared. In response to your final question when I try to view the external log I get a message "Unable to read external log file". I begin to suspect a problem with my installation but I am not sure where.
The external log is normally held in folder datamodeler\datamodeler\log of your Data Modeler installation (unless another directory has been set on the Environment/Log page of the Preferences).
Your error message would suggest that Data Modeler cannot create the log. Is the folder perhaps read-only?
The preferences for Data Modeler version 4.0.1 are normally held in file C:\Users\<your username>\AppData\Roaming\Oracle SQL Developer Data Modeler\system126.96.36.1996\o.datamodeler\product-preferences.xml.
Perhaps this is read-only?