Abstract

http://ssrn.com/abstract=2065921
 


 



Learning from Experience, Simply


Song Lin


Massachusetts Institute of Technology (MIT) - Sloan School of Management

Juanjuan Zhang


Massachusetts Institute of Technology (MIT) - Sloan School of Management

John R. Hauser


MIT Sloan School of Management

May 29, 2014


Abstract:     
There is substantial academic interest in modeling consumer experiential learning. However, (approximately) optimal solutions to forward-looking experiential learning problems are complex, limiting their behavioral plausibility and empirical feasibility. We propose that consumers use cognitively simple heuristic strategies. We explore one viable heuristic - index strategies, and demonstrate that they are intuitive, tractable, and plausible. Index strategies are much simpler for consumers to use but provide close-to-optimal utility. They also avoid exponential growth in computational complexity, enabling researchers to study learning models in more-complex situations.

Well-defined index strategies depend upon a structural property called indexability. We prove the indexability of a canonical forward-looking experiential learning model in which consumers learn brand quality while facing random utility shocks. Following an index strategy, consumers develop an index for each brand separately and choose the brand with the highest index. Using synthetic data, we demonstrate that an index strategy achieves nearly optimal utility at substantially lower computational costs. Using IRI data for diapers, we find that an index strategy performs as well as an approximately optimal solution and better than myopic learning. We extend the analysis to incorporate risk aversion, other cognitively simple heuristics, heterogeneous foresight, and an alternative specification of brands.

Number of Pages in PDF File: 87

Keywords: dynamic consumer learning, structural models, cognitive simplicity, index strategies, heuristics, multi-armed bandit problems, restless bandits, indexability

working papers series





Download This Paper

Date posted: May 24, 2012 ; Last revised: July 25, 2014

Suggested Citation

Lin, Song and Zhang, Juanjuan and Hauser, John R., Learning from Experience, Simply (May 29, 2014). Available at SSRN: http://ssrn.com/abstract=2065921 or http://dx.doi.org/10.2139/ssrn.2065921

Contact Information

Song Lin
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
100 Main Street
E62-582
Cambridge, MA 02142
United States
HOME PAGE: http://songlin.mit.edu/
Juanjuan Zhang
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
Cambridge, MA 02142
United States
HOME PAGE: http://jjzhang.scripts.mit.edu
John R. Hauser (Contact Author)
MIT Sloan School of Management ( email )
International Center for Research on the Mngmt Tech.
Cambridge, MA 02142
United States
617-253-2929 (Phone)
617-258-7597 (Fax)
Feedback to SSRN


Paper statistics
Abstract Views: 1,327
Downloads: 305
Download Rank: 57,105
Paper comments
No comments have been made on this paper

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo1 in 0.344 seconds