summary decision making for marketing for IBA

Decision Making in Marketing –
Lecture Slides
Lecture 1. Heuristics & Biases
Bounded rationality: we are constraint in our decision making
 Decisions are often complex and difficult
 Individuals / consumers are bounded rational, they have to make decisions under several
constraints
o Limited knowledge/information
o Limited cognitive resources (time/attention/memory)
o Limited
 Use of heuristics: cognitive shortcuts to make decisions quickly and efficiently
o E.g. the default effect (People are more likely to accept default options)  opt in
versus opt out

Decoy effect: putting things in context
 Choices are made in a context: relative to other alternatives rather than based on absolute
preferences
 Decoy effect = the choice of one option over the other changes when a third (asymmetrically
dominated) option is introduced
 Asymmetrically dominated = inferior in all properties to one option, but only inferior in some
properties to the other option (i.e. an irrelevant alternative)
 Managerial relevance: adding an irrelevant alternative helps consumers decide  upselling
 “choices are made relative to other alternatives rather than being based on absolute
preference”

Anchoring and adjustment
 Anchoring and adjustment = making an estimation based on a process of anchoring on a
salient number and adjusting up or down
 Problem: adjustments are typically insufficient, estimation is biased towards the anchor
 Managerial relevance:
o General: negotiations, price expectations
o Specifically: sales techniques (990  950)

Mental accounting: different pockets matter
 Mental accounting = people keep track of their expenses in different mental accounts (i.e.
categories); these mental accounts influence the decision making process
 Managerial & policy relevance: individuals / consumer spend money differently depending
on the ‘account’ they pay from (e.g. birthday money, bonuses)

The IKEA effect: effort increases love
 Ikea effect = consumers place more value on products they have (at least) partially created
o Important: only if they actually finish the product
 Managerial relevance: integrating consumers in the production process increases valuation
(however, too much effort can have adverse effects)

,Framing effect: preferences about framed problems
 Framing effect = the frame of a message influences the decision; i.e. people react differently
depending on how a message is presented
 Two effects:
o People prefer positive outcomes over negative outcomes
o People are risk averse over gains, but risk seeking over losses
 Managerial & policy relevance: firing vs saving employees / health treatments

Expected utility vs prospect theory
 Expected utility theory = utility as a function of absolute wealth  marginal utility decreases
as wealth increases
 Prospect theory = reference dependence (value is measured in gains and losses relative to a
point)
o Diminishing sensitivity: marginal value of
gains and losses decreases with their size
o Loss aversion: losses loom larger than gains
 Managerial & policy relevance: loss aversion
(potential losses motivate more than potential
gains), losses make people risk seeking

Consumer decision making matters for
Netflix
 Matching preferences – targeting (top picks)
 Variety seeking – trending now
 Social proof – if others like it (popular)
 Foot in the door – commitment (continue watching

, Lecture 2. Social influences in decision making
Social influence: we influence others and are influenced by others
 Weapons of influence: techniques to persuade people / consumers
o Reciprocity & Door-in-the-face
o Commitment & Foot-in-the-door
o Social proof
o Scarcity

Reciprocity: give to receive
 Based on the social norm to repay what another person has given us
 Across cultures people are taught to live up to this social norm, resulting in distaste for
people who violate the norm
 Problem: exploitation of the rule as it enforces uninvited debt and can trigger unequal
exchange
 Managerial relevance: sales techniques

Indirect reciprocity: slamming the door in the face (DITF)
 DITF = getting compliance to a request by starting with a large (or unreasonable) request
o If rejected, a concession will be offered (a smaller / reasonable request)
 Managerial & policy relevance: social settings, sales prices
o Works best when request is made by the same person & immediately > 1 st request

Commitment and consistency: stuck with a choice
 After making a commitment, people are more likely to agree with requests in-line with this
commitment  people feel pressure to behave consistently with their choice/commitment,
as personal consistency is highly valued by society and facilitates decision making
 FITD: getting compliance to a large request by first getting agreement to a small request
o The 1st agreement creates commitment and increases the need to be consistent
when faced with the large request
o 2 requests need to be similar in nature (consistent)
 Managerial relevance: grow their own legs (add justifications to support a prior commitment)

Social proof: I do what everybody else does
 People who determine what to do by finding out what other people do in the same situation
 Most effective (1) under uncertainty and (2) with people similar to the decision maker
 Managerial & policy relevance: peer recommendations and peer observations
o Problem: the ‘safety in numbers’ might fail

Scarcity
 People assign more value to opportunities when they are less available  loss aversion
 Explanation: (1) things that are difficult to obtain appear more valuable / of higher quality
and (2) restrictions reduce freedom, perceived loss of freedom creates the need for more
freedom
 2 levers: amount and time
 Managerial relevance: limited editions, limited stock, expiration of coupons
o Contagious competitiveness: people are most attracted to scarce resources when
they compete with others for them
o No constant effectiveness, the drop from abundance to scarcity > constant scarcity