Lecture 1
Antonides 2008: Comparing models of consumer behaviour
System 2 types of models
Economic models
Assuming decision making is rule-based, analytic and using all available
information for the optimal choice. 2 models are especially relevant:
Theory of demand
- Based on the maximization of utility subject to time and budget
constraints.
- Consumers derive utility/pleasure from the consumption of goods
- Utility maximization results in preferences for the goods yielding the
highest utility.
- Consumer demand has been explained from income and prices of goods
and services; decreasing marginal utility of consumption, equal marginal
utility of expenditures for all goods consumed
- From this theory, several useful predictions can be made: Engel Curves
show the quantified relationships between budget shares spent on
particular good and the income, they show expenditures are related to
income.
Another set of predictions are the income elasticity’s; percentage
change in demand due to a percentage change in income.
Consumer demand is also influenced by price changes; price elasticity=
percentage change in demand due to percentage change in price. It shows
how demand will change after a price change
Yet this tells nothing about the nature of
different goods and therefore there is another approach:
- Characteristics approach: assumes that consumer demand is based on
the attributes or characteristics of consumer goods. Very similar to choice
modelling.
Hedonic price functions are estimated resulting in implicit marginal prices
of product characteristics.
,Economic life-cycle models
- Assumes a striving for permanent level of spending, equal to the average
income over the entire life-cycle of a household.
- The highest income is not immediately achieved; the income at a younger
age will be lower than the life-cycle average--- borrowing. At a later age,
income is usually higher than the life-cycle average---saving.
- This model enables predictions concerning borrowing and wealth
management at different consumer life-cycle stages.
- Shortcomings of this model: under consumption at lower ages, under-
saving at middle ages, under-consumption at higher ages. The level of
spending is tracking the level of income earned rather than being stable.
Psychological models
These models capture mental processing of information in an optimal way.
Theory of planned behaviour
- Attitude models: differentiated valuations based on beliefs and
evaluations of particular aspects of situations.
- Theory of reasoned action: Behaviour is explained from intentions to
perform an act which depend on attitudes and social norms. Social norms
are pressure from the social environment to behave in a certain way.
Consumers hold normative beliefs about how to behave.
Attitudes are summed beliefs about a number of relevant attributes of an
object, weighted by the evaluations of these attributes.
- Perceived behavioural control: person’s perceived ease or difficulty of
performing certain behaviour.
- The extended model of reasoned action = theory of planned
behaviour: predicts behaviour quite well due to the high degree of
similarity in the measures of intention, attitudes, social norms and
perceived control. By measuring these concepts in a detailed way, one can
, estimate the influence of each aspect separately.
Consumer expectations:
- Expectations are cognitive constructs concerning future circumstances like
income and consumption.
- Consumer satisfaction is dependent on expectations about a product
performance and the actual product performance. When it meets/exceeds
expectations, consumers are satisfied. When it doesn’t meet expectations,
consumers are dissatisfied.
System 1 types of models
Heuristics
Due to massive supply of goods and services and consumer’s limited information
capacity, consumers frequently show satisficing behaviour/simplified information
processing= use of heuristics.
Heuristics become more and more important with the increasing freedom of
choice in the marketplace.
Simplified judgements of goods and services
Especially with time constraints and information overload; people then deviate
from the theory of planned behaviour. These simplified judgments include:
- Affect referral: Acting on first impression or familiarity with the product
with no further thinking
- Conjunctive decision: using the minimally required values of product
characteristics to select the first product meeting the minimal
requirements of the consumer
- Disjunctive decision rule: using one or more outstanding product
characteristics as a basis for choice
, - Lexicographic decision rule: judging product characteristics in order of
their importance ranking. This results in a choice of a product with the
highest values on the most important characteristics.
- Sequential elimination: eliminating products not meeting one’s minimal
requirements
- Additive differences: making pairwise products comparisons based on
the differences between product attributes.
Contrast and compromise effect
Products comparisons may help to select the best product alternative; the
downside to this is that consumers tend to prefer products more if they are
contrasted with an inferior choice alternative. The contrast effect makes the
product appear as a good buy, in isolation it would be considered less attractive.
Adding a third choice alternative to a set of two products makes the middle
option relatively attractive due to the fact that consumers compromise in that
they dislike choosing an extreme option.
Focusing on easy to evaluate attributes
Especially when products are evaluated in isolation, this occurs. These attributes
are for example are the state of a products, product design, sound quality,
number of… etc.
Mental accounting
= Categories of transactions which are psychologically separated from other
transactions. When a particular budget becomes exhausted at the end of a
period, people tend to spend less within that particular category; they try to
close each account with a positive balance.
Judging series of events
The optimal way of evaluating series of events is to evaluate each event
separately, then take the average of all evaluations. This however seems to be
too complicated for consumers, they instead judge the most extreme and the
final outcome, then average their judgments= peak-end rule.
Loss aversion
Loss aversion is due to the experience of negative emotion when consumers
evaluate choice alternatives that deviate negatively from a reference point.
The aversion of loss is twice as strong as the attractiveness of a gain with the
same value.
Risk preferences differ between gains and losses. A value function has a concave
shape for gains and a convex shape for losses.
Loss aversion has implications for:
- Asymmetric risk preferences: the shape of the value function has
several consequences for consumer behaviour.
, Since the function is concave in the gain area, consumers are risk averse
for positive outcomes (like consumption benefits and income gains) and
risk seeking for negative outcomes (lost money in gambling, loss of time).
- Endowment effect: this results in a higher preference for goods that
people own than for goods that they do not own. This dramatically
influences the value of non-market goods.
- Status quo bias: the general preference for status quo (standard
options) as compared to alternative options.
- Mental accounting: hedonic editing: predicts that people evaluate
choice options in line with the asymmetric shape of the value function.
According to this, people would prefer separating gains, adding losses,
adding smaller losses to larger gains and separating small gains from
larger losses.
But people prefer to spread out losses over time rather than experiencing
multiple losses at the same time.
- Sunk cost effect: losses are painful and hard to accept thus people try to
compensate for prior losses even when such actions do not maximize
utility.
Subjective discounting
Consumers are highly impatient and thus they prefer present consumption to
future consumption at a rate which is higher than market interest rates.
Subjective discount rates capture the personal rates of discounting future
outcomes which vary across consumers and situations.
Psychophysics
- Studies the quantified relationships between objective and subjective
stimuli: between the magnitude of product attributes and subjective
experience value: it captures the largely unconscious processes of
stimulus evaluation.
- Deals with the nature of relationships between objective stimulus inputs
and subjective experiences without paying attention to mental processing
of incoming stimuli.
- Prospect theory: objective probabilities are subjectively weighted such
that small probabilities were overweighed whereas intermediate
probabilities were underweighted generally.
Learning by conditioning
- Rather unconscious process
Antonides 2008: Comparing models of consumer behaviour
System 2 types of models
Economic models
Assuming decision making is rule-based, analytic and using all available
information for the optimal choice. 2 models are especially relevant:
Theory of demand
- Based on the maximization of utility subject to time and budget
constraints.
- Consumers derive utility/pleasure from the consumption of goods
- Utility maximization results in preferences for the goods yielding the
highest utility.
- Consumer demand has been explained from income and prices of goods
and services; decreasing marginal utility of consumption, equal marginal
utility of expenditures for all goods consumed
- From this theory, several useful predictions can be made: Engel Curves
show the quantified relationships between budget shares spent on
particular good and the income, they show expenditures are related to
income.
Another set of predictions are the income elasticity’s; percentage
change in demand due to a percentage change in income.
Consumer demand is also influenced by price changes; price elasticity=
percentage change in demand due to percentage change in price. It shows
how demand will change after a price change
Yet this tells nothing about the nature of
different goods and therefore there is another approach:
- Characteristics approach: assumes that consumer demand is based on
the attributes or characteristics of consumer goods. Very similar to choice
modelling.
Hedonic price functions are estimated resulting in implicit marginal prices
of product characteristics.
,Economic life-cycle models
- Assumes a striving for permanent level of spending, equal to the average
income over the entire life-cycle of a household.
- The highest income is not immediately achieved; the income at a younger
age will be lower than the life-cycle average--- borrowing. At a later age,
income is usually higher than the life-cycle average---saving.
- This model enables predictions concerning borrowing and wealth
management at different consumer life-cycle stages.
- Shortcomings of this model: under consumption at lower ages, under-
saving at middle ages, under-consumption at higher ages. The level of
spending is tracking the level of income earned rather than being stable.
Psychological models
These models capture mental processing of information in an optimal way.
Theory of planned behaviour
- Attitude models: differentiated valuations based on beliefs and
evaluations of particular aspects of situations.
- Theory of reasoned action: Behaviour is explained from intentions to
perform an act which depend on attitudes and social norms. Social norms
are pressure from the social environment to behave in a certain way.
Consumers hold normative beliefs about how to behave.
Attitudes are summed beliefs about a number of relevant attributes of an
object, weighted by the evaluations of these attributes.
- Perceived behavioural control: person’s perceived ease or difficulty of
performing certain behaviour.
- The extended model of reasoned action = theory of planned
behaviour: predicts behaviour quite well due to the high degree of
similarity in the measures of intention, attitudes, social norms and
perceived control. By measuring these concepts in a detailed way, one can
, estimate the influence of each aspect separately.
Consumer expectations:
- Expectations are cognitive constructs concerning future circumstances like
income and consumption.
- Consumer satisfaction is dependent on expectations about a product
performance and the actual product performance. When it meets/exceeds
expectations, consumers are satisfied. When it doesn’t meet expectations,
consumers are dissatisfied.
System 1 types of models
Heuristics
Due to massive supply of goods and services and consumer’s limited information
capacity, consumers frequently show satisficing behaviour/simplified information
processing= use of heuristics.
Heuristics become more and more important with the increasing freedom of
choice in the marketplace.
Simplified judgements of goods and services
Especially with time constraints and information overload; people then deviate
from the theory of planned behaviour. These simplified judgments include:
- Affect referral: Acting on first impression or familiarity with the product
with no further thinking
- Conjunctive decision: using the minimally required values of product
characteristics to select the first product meeting the minimal
requirements of the consumer
- Disjunctive decision rule: using one or more outstanding product
characteristics as a basis for choice
, - Lexicographic decision rule: judging product characteristics in order of
their importance ranking. This results in a choice of a product with the
highest values on the most important characteristics.
- Sequential elimination: eliminating products not meeting one’s minimal
requirements
- Additive differences: making pairwise products comparisons based on
the differences between product attributes.
Contrast and compromise effect
Products comparisons may help to select the best product alternative; the
downside to this is that consumers tend to prefer products more if they are
contrasted with an inferior choice alternative. The contrast effect makes the
product appear as a good buy, in isolation it would be considered less attractive.
Adding a third choice alternative to a set of two products makes the middle
option relatively attractive due to the fact that consumers compromise in that
they dislike choosing an extreme option.
Focusing on easy to evaluate attributes
Especially when products are evaluated in isolation, this occurs. These attributes
are for example are the state of a products, product design, sound quality,
number of… etc.
Mental accounting
= Categories of transactions which are psychologically separated from other
transactions. When a particular budget becomes exhausted at the end of a
period, people tend to spend less within that particular category; they try to
close each account with a positive balance.
Judging series of events
The optimal way of evaluating series of events is to evaluate each event
separately, then take the average of all evaluations. This however seems to be
too complicated for consumers, they instead judge the most extreme and the
final outcome, then average their judgments= peak-end rule.
Loss aversion
Loss aversion is due to the experience of negative emotion when consumers
evaluate choice alternatives that deviate negatively from a reference point.
The aversion of loss is twice as strong as the attractiveness of a gain with the
same value.
Risk preferences differ between gains and losses. A value function has a concave
shape for gains and a convex shape for losses.
Loss aversion has implications for:
- Asymmetric risk preferences: the shape of the value function has
several consequences for consumer behaviour.
, Since the function is concave in the gain area, consumers are risk averse
for positive outcomes (like consumption benefits and income gains) and
risk seeking for negative outcomes (lost money in gambling, loss of time).
- Endowment effect: this results in a higher preference for goods that
people own than for goods that they do not own. This dramatically
influences the value of non-market goods.
- Status quo bias: the general preference for status quo (standard
options) as compared to alternative options.
- Mental accounting: hedonic editing: predicts that people evaluate
choice options in line with the asymmetric shape of the value function.
According to this, people would prefer separating gains, adding losses,
adding smaller losses to larger gains and separating small gains from
larger losses.
But people prefer to spread out losses over time rather than experiencing
multiple losses at the same time.
- Sunk cost effect: losses are painful and hard to accept thus people try to
compensate for prior losses even when such actions do not maximize
utility.
Subjective discounting
Consumers are highly impatient and thus they prefer present consumption to
future consumption at a rate which is higher than market interest rates.
Subjective discount rates capture the personal rates of discounting future
outcomes which vary across consumers and situations.
Psychophysics
- Studies the quantified relationships between objective and subjective
stimuli: between the magnitude of product attributes and subjective
experience value: it captures the largely unconscious processes of
stimulus evaluation.
- Deals with the nature of relationships between objective stimulus inputs
and subjective experiences without paying attention to mental processing
of incoming stimuli.
- Prospect theory: objective probabilities are subjectively weighted such
that small probabilities were overweighed whereas intermediate
probabilities were underweighted generally.
Learning by conditioning
- Rather unconscious process
