ECH-31306: Consumer Decision Making – Lectures
Lecture 1: views on decision-making
Economics VS psychology
Economics Psychology
Assumptions about human behaviour Research about human behaviour
Aggregated behaviour macro Individual behaviour micro
Normative theory calculations with Descriptive theory
numbers
Deviations (anomalies) from theory ‘separate’ theories (occasional theories) for
one big/general theory, the deviations deviations
are put aside No one big/general theory, there are separate
theories for everything. Every little behaviour
has his own theory
Assumptions of economic theory
Complete information about choice alternatives = market transparency
Correct calculation of utility of combinations
Individualism, self-interest people are selfish
Knowledge about short-term and long-term utility
Stable preferences
Maximisation or optimisation of utility
No role for emotion
Economics
Rational economic man
Unlimited information processing
Maximization of own outcomes (greed)
Incredible willpower people are able to make decisions over time
Because the rational economic man is not really realistic, economists did corporate
psychology in their theory.
Economics and psychologists now work together and try to make theory better to
predict behaviour = behavioural economics
Decisions
Decisions are important:
Since resources are limited
To adjust to one’s environment
Since they may have a large influence on both an individual’s happiness and society
Decision = a moment in an ongoing process of evaluating alternatives for meeting an
objective, at which expectations about a particular course of action impel the decision maker
to select that course of action most likely to result in attaining (bereiken) the objective.
,If something is a decision is no yes or no question some things are less clearly a decision
and some things are more clearly a decision
Something becomes a decision when you have to choice when you have to take action
Important distinctions
Judgment VS decision-making
o Judgment is the cognitive part of decision making, a judgment requires a
choice to become a decision
Problem-solving VS decision-making
o Problem-solving may or may not require action
o Large overlap between problem solving and decision-making
o Both can contain multiple decisions
o Problem solving: more focus on analysing the problem
o Decision-making: more focus toward the end of the process
Decision VS decision-making
o A decision is one moment in a larger process of decision-making
The decision-making process
o Gathering information
Problem definition (current situation-goal)
Criteria, weight of criteria
Creating alternative options
Assessing (possible) consequences of alternatives
o Evaluation
Judging the options (for all criteria)
Designing/calculating outcomes
o Action
Deciding/choosing
o Implementation
Executing the decision (bijv. paying for the product you buy)
o Evaluation frequently something that is not done, but very important
Lecture 2: Heuristics, biases & bounded awareness (1)
Information overload use of cognitive heuristic cognitive biases
Availability heuristic
Availability heuristic = assessing the frequency or probability of an event by the ease with
which occurrences can be brought to mind (bijv. we think that the profit for brands we know
better/are more in contact with, is higher) people think that what they can remember is a
good representation of the existing situation
Ease of recall based on vividness, recency, imaginable
Retrievability based on memory structures
o Number of examples that come to mind
o Ease with which examples come to mind
When you think of one thing, other things that are connected/associated with this (in the
network in our mind) come up very easy
,Representativeness heuristics
Representativeness heuristic = assessing the likelihood of A by the degree to which A is
representative of B, that is, resembles B
Insensitivity to base rates
(bijv. Jan is 35 years old, extrovert, social and likes attention. Is Jan a programmer or
a hotel receptionist? Most people say hotel receptionist, because of the stereotypes
and the associations people have with these jobs people ignore the base rate: bijv.
there are more programmers than hotel receptionists)
Insensitivity to sample size = people ignore the fact that large samples are less
likely to deviate from the mean than small samples large samples are more
representative to the bigger population
Misconceptions of chances = people forget that earlier results are irrelevant in
chance events Gambler’s fallacy = the belief that a series of independent trails
with the same outcome will soon be followed by an opposite outcome. Things should
‘look’ random. what is random is real, doesn’t look random for us
The conjuction fallacy = overestimation of co-occurring events a conjunction
cannot be more probable than one of its constituents (bestanddelen)
Making conjunction errors is related to endorsement of conspiracy (= dat mensen
denken dat kans niet bestaat, maar dat dingen gebeuren om andere redenen. Bijv
global warming is a hoax = beetnemerij)
Copycatting
Other companies copy products from an A-brand in the sense of colours of the packaging,
text on the product, similarity in name of the products etc. the A-brand provide the image
of the product and the copycats are freeriding on this.
Greater similarity between copycat and leader implies a higher likelihood of brand confusion,
but when people are aware of the high similarity between the copycat and the leader brand
(due to comparative processing), they feel that they are being influenced by marketers
activation of persuasion knowledge = consumers’ intuitive theories about how marketers try
to influence them persuasion knowledge is more likely to be activated when manipulative
intent is more salient, people are sensitive to manipulative intent and when depth of
processing is high (wanneer je bijvoorbeeld tijd neemt voor het doen van de boodschappen).
When you are suspicioned (achterdochtig) about the marketer’s ulterior motives
(bijbedoelingen), you can be resistant to the persuasion.
When people are aware of the copycatting, they will ‘punish’ the copycat.
If you see the products next to each other, it is easy to see that the product is copycatted.
When you see the copycatted product isolated, this is more difficult to see.
People tend to underestimate the effect of luck when people have a very good first
impression of a good/service, they think that second use of the product/service will be the
same. However, first impression is true quality of the product/service + the effect of luck (bijv.
maybe the cook had a good day the first time, but not the second time)
, Confirmation heuristic
Confirmation trap = People tend to ask confirmatory questions. When they think
they know the rule, they ask questions that confirm this. So, people have the
tendency to ask questions for which the answer is ‘yes’ and alternative possibilities
are not asked. However, by asking questions for which the answer is ‘no’, you test if
your hypothesis is correct. people have the tendency to confirm what they know,
rather than disprove (weerleggen) it.
Hindsight bias / the curse of knowledge = after finding out whether or not an event
occurred, individuals tend to overestimate the degree to which they would have
predicted the correct outcome.
(bijv. advice of consultancy seems obvious, but in advance it may not be so obvious)
Conjunctive and disjunctive events =
o Conjunctive events = several events must occur together to obtain the
desired outcome people overestimate the probability
(bijv. each division has 90% probability of finishing on time, what is the
probability that the building is finished on time? People think 90%, but it is 0.9
x 0.9 x 0.9 x 0.9 x 0.9 = 59%)
o Disjunctive events = only one of many events needs to occur to obtain the
desired outcome people underestimate the probability
(bijv. what is the chance that two of you have the same birthday? 100% for
367 persons, 99% for 57 persons, 50% for 23 persons)
Lecture 3: Heuristics, biases & bounded awareness (2)
Anchoring
You start from an initial starting value = the anchor and there is insufficient adjustment (up
or down) even when you know the anchor is random, for very extreme anchors and by
experts
People anchor on accessible information this anchor is provided or self-generated (you
have a number in your head and base your decision on it)
Proposed explanations why do people anchoring?
Anchoring-and-adjustment: anchor serves as a reference for people to adjust the
boundary of the range of plausible (aannemelijk) values
Selective accessibility: confirmatory hypothesis testing you are given an answer
and you think about why it should the right answer
Attitude change: anchors serve as a cue or indirectly influence information processing
this is what I should be willing to pay, it changes your beliefs
Study: bonus packs and anchoring
Bonus packs are products with extra volume provided in the product for the same price
Consumers have difficulty processing numerical info bijv. 10% extra, what is that
exactly?
Lecture 1: views on decision-making
Economics VS psychology
Economics Psychology
Assumptions about human behaviour Research about human behaviour
Aggregated behaviour macro Individual behaviour micro
Normative theory calculations with Descriptive theory
numbers
Deviations (anomalies) from theory ‘separate’ theories (occasional theories) for
one big/general theory, the deviations deviations
are put aside No one big/general theory, there are separate
theories for everything. Every little behaviour
has his own theory
Assumptions of economic theory
Complete information about choice alternatives = market transparency
Correct calculation of utility of combinations
Individualism, self-interest people are selfish
Knowledge about short-term and long-term utility
Stable preferences
Maximisation or optimisation of utility
No role for emotion
Economics
Rational economic man
Unlimited information processing
Maximization of own outcomes (greed)
Incredible willpower people are able to make decisions over time
Because the rational economic man is not really realistic, economists did corporate
psychology in their theory.
Economics and psychologists now work together and try to make theory better to
predict behaviour = behavioural economics
Decisions
Decisions are important:
Since resources are limited
To adjust to one’s environment
Since they may have a large influence on both an individual’s happiness and society
Decision = a moment in an ongoing process of evaluating alternatives for meeting an
objective, at which expectations about a particular course of action impel the decision maker
to select that course of action most likely to result in attaining (bereiken) the objective.
,If something is a decision is no yes or no question some things are less clearly a decision
and some things are more clearly a decision
Something becomes a decision when you have to choice when you have to take action
Important distinctions
Judgment VS decision-making
o Judgment is the cognitive part of decision making, a judgment requires a
choice to become a decision
Problem-solving VS decision-making
o Problem-solving may or may not require action
o Large overlap between problem solving and decision-making
o Both can contain multiple decisions
o Problem solving: more focus on analysing the problem
o Decision-making: more focus toward the end of the process
Decision VS decision-making
o A decision is one moment in a larger process of decision-making
The decision-making process
o Gathering information
Problem definition (current situation-goal)
Criteria, weight of criteria
Creating alternative options
Assessing (possible) consequences of alternatives
o Evaluation
Judging the options (for all criteria)
Designing/calculating outcomes
o Action
Deciding/choosing
o Implementation
Executing the decision (bijv. paying for the product you buy)
o Evaluation frequently something that is not done, but very important
Lecture 2: Heuristics, biases & bounded awareness (1)
Information overload use of cognitive heuristic cognitive biases
Availability heuristic
Availability heuristic = assessing the frequency or probability of an event by the ease with
which occurrences can be brought to mind (bijv. we think that the profit for brands we know
better/are more in contact with, is higher) people think that what they can remember is a
good representation of the existing situation
Ease of recall based on vividness, recency, imaginable
Retrievability based on memory structures
o Number of examples that come to mind
o Ease with which examples come to mind
When you think of one thing, other things that are connected/associated with this (in the
network in our mind) come up very easy
,Representativeness heuristics
Representativeness heuristic = assessing the likelihood of A by the degree to which A is
representative of B, that is, resembles B
Insensitivity to base rates
(bijv. Jan is 35 years old, extrovert, social and likes attention. Is Jan a programmer or
a hotel receptionist? Most people say hotel receptionist, because of the stereotypes
and the associations people have with these jobs people ignore the base rate: bijv.
there are more programmers than hotel receptionists)
Insensitivity to sample size = people ignore the fact that large samples are less
likely to deviate from the mean than small samples large samples are more
representative to the bigger population
Misconceptions of chances = people forget that earlier results are irrelevant in
chance events Gambler’s fallacy = the belief that a series of independent trails
with the same outcome will soon be followed by an opposite outcome. Things should
‘look’ random. what is random is real, doesn’t look random for us
The conjuction fallacy = overestimation of co-occurring events a conjunction
cannot be more probable than one of its constituents (bestanddelen)
Making conjunction errors is related to endorsement of conspiracy (= dat mensen
denken dat kans niet bestaat, maar dat dingen gebeuren om andere redenen. Bijv
global warming is a hoax = beetnemerij)
Copycatting
Other companies copy products from an A-brand in the sense of colours of the packaging,
text on the product, similarity in name of the products etc. the A-brand provide the image
of the product and the copycats are freeriding on this.
Greater similarity between copycat and leader implies a higher likelihood of brand confusion,
but when people are aware of the high similarity between the copycat and the leader brand
(due to comparative processing), they feel that they are being influenced by marketers
activation of persuasion knowledge = consumers’ intuitive theories about how marketers try
to influence them persuasion knowledge is more likely to be activated when manipulative
intent is more salient, people are sensitive to manipulative intent and when depth of
processing is high (wanneer je bijvoorbeeld tijd neemt voor het doen van de boodschappen).
When you are suspicioned (achterdochtig) about the marketer’s ulterior motives
(bijbedoelingen), you can be resistant to the persuasion.
When people are aware of the copycatting, they will ‘punish’ the copycat.
If you see the products next to each other, it is easy to see that the product is copycatted.
When you see the copycatted product isolated, this is more difficult to see.
People tend to underestimate the effect of luck when people have a very good first
impression of a good/service, they think that second use of the product/service will be the
same. However, first impression is true quality of the product/service + the effect of luck (bijv.
maybe the cook had a good day the first time, but not the second time)
, Confirmation heuristic
Confirmation trap = People tend to ask confirmatory questions. When they think
they know the rule, they ask questions that confirm this. So, people have the
tendency to ask questions for which the answer is ‘yes’ and alternative possibilities
are not asked. However, by asking questions for which the answer is ‘no’, you test if
your hypothesis is correct. people have the tendency to confirm what they know,
rather than disprove (weerleggen) it.
Hindsight bias / the curse of knowledge = after finding out whether or not an event
occurred, individuals tend to overestimate the degree to which they would have
predicted the correct outcome.
(bijv. advice of consultancy seems obvious, but in advance it may not be so obvious)
Conjunctive and disjunctive events =
o Conjunctive events = several events must occur together to obtain the
desired outcome people overestimate the probability
(bijv. each division has 90% probability of finishing on time, what is the
probability that the building is finished on time? People think 90%, but it is 0.9
x 0.9 x 0.9 x 0.9 x 0.9 = 59%)
o Disjunctive events = only one of many events needs to occur to obtain the
desired outcome people underestimate the probability
(bijv. what is the chance that two of you have the same birthday? 100% for
367 persons, 99% for 57 persons, 50% for 23 persons)
Lecture 3: Heuristics, biases & bounded awareness (2)
Anchoring
You start from an initial starting value = the anchor and there is insufficient adjustment (up
or down) even when you know the anchor is random, for very extreme anchors and by
experts
People anchor on accessible information this anchor is provided or self-generated (you
have a number in your head and base your decision on it)
Proposed explanations why do people anchoring?
Anchoring-and-adjustment: anchor serves as a reference for people to adjust the
boundary of the range of plausible (aannemelijk) values
Selective accessibility: confirmatory hypothesis testing you are given an answer
and you think about why it should the right answer
Attitude change: anchors serve as a cue or indirectly influence information processing
this is what I should be willing to pay, it changes your beliefs
Study: bonus packs and anchoring
Bonus packs are products with extra volume provided in the product for the same price
Consumers have difficulty processing numerical info bijv. 10% extra, what is that
exactly?
