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Learning to Detect Change

38 Pages Posted: 2 Feb 2009 Last revised: 26 Nov 2014

Ye Li

University of California, Riverside (UCR) - Department of Management and Marketing; Center for Decision Sciences, Columbia University

Cade Massey

University of Pennsylvania - The Wharton School

George Wu

University of Chicago - Booth School of Business

Date Written: September 27, 2014

Abstract

People, across a wide range of personal and professional domains, need to detect change accurately. Previous research has documented systematic shortcomings in doing so, in particular, a pattern of over- and under-reaction to indications of change, resulting from a tendency to overweight signals of change at the expense of the environment that produces the signals. This investigation considers whether this pattern persists when participants are given the opportunity to learn. We find that the pattern of system neglect does persist, but that the impact of experience varies greatly across environments -- participants show reliable improvement in some conditions and virtually none in others. We explain this differential learning by formally characterizing environments in terms of the extent to which they: (i) provide consistent feedback; and (ii) tolerate non-optimal behavior. Whereas we find that learning is related to consistent feedback, the stronger -- and perhaps more surprising -- finding is that more learning occurs in environments that are more tolerant of non-optimal behavior.

Keywords: change-point detection, regime shifts, learning, overreaction, underreaction, Bayesian updating

JEL Classification: C91, D83

Suggested Citation

Li, Ye and Massey, Cade and Wu, George, Learning to Detect Change (September 27, 2014). Chicago Booth School of Business Research Paper No. 09-03. Available at SSRN: https://ssrn.com/abstract=1336724 or http://dx.doi.org/10.2139/ssrn.1336724

Ye Li (Contact Author)

University of California, Riverside (UCR) - Department of Management and Marketing ( email )

United States

Center for Decision Sciences, Columbia University

New York, NY
United States

Cade Massey

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

George Wu

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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