Testing Alternative Learning Theories: Evidence From Subscription Contracts

Analyzing panel data of 32,650 checking-account holders facing a menu of three-part tariff contracts, we document several findings that indicate that subscribers use simple heuristics to learn about the desirability of the contracts they have chosen. Our main findings are: subscribers change contracts in a direction that diminishes the probability of re–experiencing the trigger for switching; subscribers exhibit recency effects in switching; and after switching the majority of switchers systematically pay higher fees than they did before. We argue that directional learning theory best explains why consumers behave in a manner that yields suboptimal economic outcomes.