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Bayesian Learning in UnstableSettings: Experimental Evidence Based on the Bandit Problem

  • Élise PAYZAN LE NESTOUR

    (Swiss Finance Institute at the École Polytechnique Fédérale de Lausanne (EPFL))

We study learning in a bandit problem where the outcome probabilities of six arms switch (jump) over time a restless bandit. In the experiment, optimal Bayesian learning tracks the jumps through learning of the probability of a jump or direct jump detection and, once a jump has occurred, re-learns the outcome probabilities. Such Bayesian learning is much more complex than the natural alternative which learns through trial-and-error (adaptive expectations). Yet, when combined with a partially myopic decision rule, Bayesian learning better matches the behavior observed in the lab. This result suggests that agents may be less limited in their computational capacities than previously thought, and that complexity does not always hamper fully rational learning.

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Paper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 10-28.

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Length: 23 pages
Date of creation: Jun 2010
Date of revision:
Handle: RePEc:chf:rpseri:rp1028
Contact details of provider: Web page: http://www.SwissFinanceInstitute.ch

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