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A laboratory experiment on the heuristic switching model. (English) Zbl 1401.91039

Summary: We present results from the first laboratory experiment on the seminal heuristic switching model introduced by W. A. Brock and C. H. Hommes [Econometrica 65, No. 5, 1059–1095 (1997; Zbl 0898.90042); J. Econ. Dyn. Control 22, No. 8–9, 1235–1274 (1998; Zbl 0913.90042)]. Subjects choose between two alternatives, a sophisticated and stabilizing, but costly, heuristic, and a destabilizing, but cheap, heuristic, and are paid according to the performance of the chosen heuristic. Aggregate choices determine the evolution of a state variable and, consequently, the performance of both heuristics. Theoretically, an increase in the costs for the stabilizing heuristic generates instability and leads to endogenous fluctuations in both the state variable and the fraction of agents using that heuristic. We vary the costs of the stabilizing heuristic in the experiment and find that the predictions of the heuristic switching model are partially confirmed. For low costs the dynamics are stable. For high costs, the dynamics initially are unstable and exhibit the type of bubbles and crashes emblematic for the heuristic switching model. However, over time the pattern of bubbles and crashes disappears and the dynamics become more stable. We estimate a standard discrete choice model on aggregate choice data and observe that subjects have a tendency to become less sensitive to payoff differences when the environment is less stable, which has important implications for the application of heuristic switching models.

MSC:

91A90 Experimental studies
91B69 Heterogeneous agent models

Software:

ORSEE; Z-Tree
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Full Text: DOI Link

References:

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