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American Economic Review: Vol. 101 No. 6 (October 2011)

AER Volume. 101, Issue 6 | Previous ArticleNext Article

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Searching and Learning by Trial and Error

Article Citation

Callander, Steven. 2011. "Searching and Learning by Trial and Error." American Economic Review, 101(6): 2277-2308.

DOI: 10.1257/aer.101.6.2277

Abstract

I study a dynamic model of trial-and-error search in which agents do not have complete knowledge of how choices are mapped into outcomes. Agents learn about the mapping by observing the choices of earlier agents and the outcomes that are realized. The key novelty is that the mapping is represented as the realized path of a Brownian motion. I characterize for this environment the optimal behavior each period as well as the trajectory of experimentation and learning through time. Applied to new product development, the model shares features of the data with the well-known Product Life Cycle. (JEL D81, D83, D92, L26)

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Download Data Set (39.40 KB) | Online Appendix (74.96 KB)

Authors

Callander, Steven (Knight Management Center, Stanford U)

JEL Classifications

D81: Criteria for Decision-Making under Risk and Uncertainty
D83: Search; Learning; Information and Knowledge; Communication; Belief
D92: Intertemporal Firm Choice and Growth, Financing, Investment, and Capacity
L26: Entrepreneurship