A laboratory experiment on the heuristic switching model

We vary the costs of the stabilizing heuristic in the experiment and find that the predictions of the heuristic switching model are partially confirmed. For low costs the dynamics are stable. For high costs, the dynamics initially are unstable and exhibit the type of bubbles and crashes emblematic for the heuristic switching model. However, over time the pattern of bubbles and crashes disappears and the dynamics become more stable. We estimate a standard discrete choice model on aggregate choice data and observe that subjects have a tendency to become less sensitive to payoff differences when the environment is less stable, which has important implications for the application of heuristic switching models.