Do consumers ever learn? Analysis of segment behavior in experimental markets

Economists argue that, despite cognitive limitations, economic agents arriv e at optimal choice rules by learning. The assumption is that consumers, fo r example, are adaptively rational. Adaptive rationality raises a host of i ssues. We address three of these in the context of experimental markets: do consumers differ on the basis of learning; how do these differences, when aggregated, affect market efficiency; and how do consumers learn? Analysis of our experimental data reveals the following. First, multiple segments of consumers exist on the basis of learning. Second, the largest segment cons ists of subjects who do not learn despite timely feedback and motivation. T hird, although some consumers do learn to make optimal choices, the effect of this segment on market efficiency is cancelled by an equal number of sub jects who 'learn' false relations. Finally, although subjects do not learn strict rationality even with experience, they are in the aggregate not so i rrational as to allow highly suboptimal brands to survive. Further analysis of how consumers learn, specifically on the cues (signals) and the rules c onsumers employ in making choices over time leads to the following two conc lusions. First, some signals make learning more easy than others: for examp le, providing market share information improves learning but not as much as providing quality information does. Second, people employ different rules depending upon the type of information they have. For example, consumers ma king decisions based only on price information are more likely to use a heu ristic like 'buy a medium-priced product provided it has not failed in the past'. Consumers making decisions based on price and quality information ma y employ a heuristic such as 'buy top quality products regardless of price' . We discuss the implications of these findings for theory and practice. Co pyright (C) 2000 John Wiley & Sons, Ltd.