Consumer Inertia, Choice Dependence, and Learning from Experience in a Repeated Decision Problem

Abstract Understanding when and how individuals think about real-life problems is a central question in economics. This paper studies the role of inertia (inattention), state dependence, and learning. The empirical setting is a tariff experiment, when optional measured tariffs for local telephone calls were introduced unanticipatedly. We find that consumers tend to align their choices of tariff and telephone use levels correctly. Despite low potential savings, mistakes are not permanent, as individuals actively engage in tariff switching in order to reduce the monthly cost of telephone service. Ignoring unobservable heterogeneity and the endogeneity of past choices would have reversed these results.

[1]  David I. Laibson,et al.  Costly Information Acquisition: Experimental Analysis of a Boundedly Rational Model , 2006 .

[2]  C. Sims.  Implications of rational inattention , 2003 .

[3]  Glenn Ellison,et al.  Search, Obfuscation, and Price Elasticities on the Internet , 2004 .

[4]  Markku Rahiala,et al.  Panel Data , 2011, International Encyclopedia of Statistical Science.

[5]  A. Lusardi.  Planning and Saving for Retirement , 2003 .

[6]  Eugenio J. Miravete.  Estimating Demand for Local Telephone Service with Asymmetric Information and Optional Calling Plans , 2000 .

[7]  Eugenio J. Miravete,et al.  Sinking, Swimming, or Learning to Swim in Medicare Part D. , 2012, The American economic review.

[8]  Pierre-André Chiappori,et al.  Testing for Asymmetric Information in Insurance Markets , 2000, Journal of Political Economy.

[9]  R. Bhaskar,et al.  How to decide how to decide , 1983 .

[10]  Daniel A. Ackerberg,et al.  Endogenous Matching and the Empirical Determinants of Contract Form , 2001, Journal of Political Economy.

[11]  Michael D. Grubb,et al.  Selling to Overconfident Consumers , 2008 .

[12]  Erik Brynjolfsson,et al.  Frictionless Commerce? A Comparison of Internet and Conventional Retailers , 2000 .

[13]  Brigitte C. Madrian,et al.  Reinforcement Learning and Savings Behavior , 2007, The Journal of finance.

[14]  Austan Goolsbee,et al.  Does the Internet Make Markets More Competitive? Evidence from the Life Insurance Industry , 2000, Journal of Political Economy.

[15]  M. Osborne,et al.  Cellular Service Demand: Biased Beliefs, Learning, and Bill Shock , 2012 .

[16]  Janet L. Yellen,et al.  Rational Models of Irrational Behavior , 1987 .

[17]  Do Consumers Choose the Right Credit Contracts? , 2006 .

[18]  Miguel A. Costa-Gomes,et al.  Cognition and Behavior in Two-Person Guessing Games: An Experimental Study , 2003 .

[19]  Eugenio J. Miravete.  Choosing the Wrong Calling Plan? Ignorance and Learning , 2003 .

[20]  F. Knight.  The economic nature of the firm: From Risk, Uncertainty, and Profit , 2009 .

[21]  Do Consumers Choose the Right Credit Contracts? , 2006 .

[22]  Giuseppe Moscarini,et al.  The Law of Large Demand for Information , 2000 .

[23]  R. Spiegler.  Bounded Rationality and Industrial Organization , 2011 .

[24]  Eugenio J. Miravete.  The Welfare Performance of Sequential Pricing Mechanisms , 2005 .

[25]  E. Streller.  [De gustibus (non) est disputandum]. , 1962, Rontgen- und Laboratoriumspraxis.

[26]  Miguel A. Costa-Gomes,et al.  Cognition and Behavior in Normal-Form Games: An Experimental Study , 1998 .

[27]  Andrew Caplin,et al.  Wealth Accumulation and the Propensity to Plan , 2002 .

[28]  Robert E. Lucas,et al.  Adaptive Behavior and Economic Theory , 1986 .

[29]  Dhananjay K. Gode,et al.  Allocative Efficiency of Markets with Zero-Intelligence Traders: Market as a Partial Substitute for Individual Rationality , 1993, Journal of Political Economy.

[30]  L. J. Savage,et al.  The Foundations of Statistics , 1955 .

[31]  J. Gruber,et al.  Choice Inconsistencies Among the Elderly: Evidence from Plan Choice in the Medicare Part D Program , 2009, The American economic review.

[32]  G. Becker,et al.  Irrational Behavior and Economic Theory , 1962, Journal of Political Economy.

[33]  Steven R. Lerman,et al.  The Estimation of Choice Probabilities from Choice Based Samples , 1977 .

[34]  Ulrike Malmendier,et al.  Paying Not to Go to the Gym , 2006 .

[35]  B. Kőszegi,et al.  Competition and Price Variation When Consumers Are Loss Averse , 2008 .

[36]  George A. Akerlof,et al.  The Economic Consequences of Cognitive Dissonance , 1982 .

[37]  Laura L. Veldkamp,et al.  Information Choice Technologies , 2012 .

[38]  Barton L. Lipman.  MODELING LIMITED RATIONALITY , 1991 .

[39]  W. Newey,et al.  The asymptotic variance of semiparametric estimators , 1994 .

[40]  M. Arellano,et al.  Another look at the instrumental variable estimation of error-components models , 1995 .

[41]  Iwao Hirose,et al.  Arrow, Kenneth J. , 2014 .

[42]  N. Mankiw,et al.  Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve , 2001 .

[43]  Pradeep K. Chintagunta,et al.  The role of self selection, usage uncertainty and learning in the demand for local telephone service , 2007 .

[44]  David I. Laibson,et al.  The 6D Bias and the Equity-Premium Puzzle , 2001, NBER Macroeconomics Annual.

[45]  George J. Stigler,et al.  De Gustibus Non Est Disputandum , 2010 .

[46]  Florian Zettelmeyer,et al.  Internet Car Retailing , 2000 .

[47]  G. Moscarini.  Limited information capacity as a source of inertia , 2004 .

[48]  Eva Ascarza,et al.  The Perils of Proactive Churn Prevention Using Plan Recommendations: Evidence from a Field Experiment , 2015 .

[49]  Barton L. Lipman.  How to Decide How to Decide How to. . . : Modeling Limited Rationality , 1991 .

[50]  Raquel Carrasco,et al.  Binary choice panel data models with predetermined variables , 2003 .

[51]  D. Lindley.  Savage, Leonard J , 2006 .

[52]  M. Rabin,et al.  A Model of Reference-Dependent Preferences , 2006 .

[53]  K. Arrow.  Rationality of Self and Others in an Economic System , 1986 .

[54]  Lones Smith,et al.  The Optimal Level of Experimentation , 2000 .

[55]  Sendhil Mullainathan,et al.  Comparison Friction: Experimental Evidence from Medicare Drug Plans , 2011, The quarterly journal of economics.

[56]  D. McFadden,et al.  Mind the Gap! Consumer Perceptions and Choices of Medicare Part D Prescription Drug Plans , 2007 .

[57]  Andrew W. Moore,et al.  Reinforcement Learning: A Survey , 1996, J. Artif. Intell. Res..