CONSUMER BEHAVIOR
Short Summary
Lecture 1
Preferences
A preference is a degree of liking for something motivates choice.
Rational choice theory:
o We have stable, well-defined preferences
o We make decisions to satisfy preferences (after processing and weighing
information)
o Needs, goals and desires preferences consumer behaviour
File drawer model preferences are retrieved when needed
From papers:
o Preference reversals are common
o Preference construction (instead of true preference) inconsistent, labile,
subjective and not of our best interest
o Context matters (context influences preferences)
Theories
Theory is a
o System of ideas intended to explain something
o Model (no full reality)
Useful theories are:
o Internally consistent
o Testable predictions
o Empirically supported
Generality-specificity trade-off to define theories:
o General: covers many phenomena and behaviours
o Specific: able to predict behaviour with high precision
o E.g. gambler’s fallacy is high spec, low gen (one but good prediction of behaviour)
o N.B. highly specific tautologic (optimism bias) and doesn’t explain the why/
ultimate (only the how/proximate)
,Lecture 2 – Heuristics, biases, nudging
Influence of context:
Deviation from rational choice theory, people
o Construct their preferences in the moment
o Ignore or avoid relevant information
o Rely on irrelevant information
o Make mistakes
Compromise effect = option is chosen more often when its attributes are not at extremes
Attraction/decoy effect = option that clearly dominates (rationally) is chosen more often
Heuristics & biases
Heuristics & biases = low generality, high specificity (Tverksy & Kahneman)
o Heuristic = mental shortcut
o Bias = systematic deviation from rationality in behaviour
Labels for behaviour, not theories for explaining it (explanation = circular)
Biases:
o Endowment effect = value more when sense of ownership is felt
o Framing effect = preference shift based on how information is presented
o Sunk-cost fallacy = investing more when some amount or effort has already been
invested (recency of payment increases effect)
Heuristics (cause of bias):
o Availability heuristic = likelihood of events is judged by the availability in memory
(cognitive ease = people rely on things that come to mind easily)
o Anchoring and adjustment = using an initial value/anchor as starting point and
insufficiently adjusting to it
o Mental accounting = putting money into different ‘accounts’ (different values placed
on same amount of money)
Prospect theory
Value function:
o Reference point = important starting point as everything is
valued in comparison to it.
o Diminishing sensitivity = gain flattens out (less interest when you already have a lot)
o Steeper loss function = losses are felt more heavily than gains people are more
risk-seeking in loss
Prospect theory (behavioural/judgemental theory from Tversky & Kahneman):
o Disposition effect = selling stocks with financial gain too early and with loss too late
o Status-quo bias = stick with default/familiarity (even when it’s random)
o End-of-the-day effect = make up for losses by taking higher risks (after paper losses,
after realized losses gamblers are more risk-averse)
o Probability weighting function = over of low and underweighting of high probability
o Certainty effect = step from high probability to certainty has enormous psychological
effect compared to low to high probability
, Nudging = intervention that changes behaviour in a predictable way without forbidding or
significantly changing elements.
Problems:
o Limited access to relevant information
Increase visibility, easier interpretations, provide reference points
Decision information
o Limited capacity to evaluate and compare options
Use defaults, remove effort, structure and group to facilitate comparisons
Decision structure
o Limited attention & self-control
Provide reminders, facilitate commitment Decision assistance
Positives:
o They work (often)
o Can have large effects (when in uncertainty/ambivalent)
o Cheap and easy (except when testing is needed, other things work better or there are
unintended consequences)
o Preserve decision autonomy (debatable)
Takeaways:
o Work in some situations (cannot work miracles)
o Rigorous testing in real context is needed
o Not every manipulation/intervention is a nudge (no persuasive appeals)
o Nudges work better when in line with people’s intentions
o Ethicality is tricky
Short Summary
Lecture 1
Preferences
A preference is a degree of liking for something motivates choice.
Rational choice theory:
o We have stable, well-defined preferences
o We make decisions to satisfy preferences (after processing and weighing
information)
o Needs, goals and desires preferences consumer behaviour
File drawer model preferences are retrieved when needed
From papers:
o Preference reversals are common
o Preference construction (instead of true preference) inconsistent, labile,
subjective and not of our best interest
o Context matters (context influences preferences)
Theories
Theory is a
o System of ideas intended to explain something
o Model (no full reality)
Useful theories are:
o Internally consistent
o Testable predictions
o Empirically supported
Generality-specificity trade-off to define theories:
o General: covers many phenomena and behaviours
o Specific: able to predict behaviour with high precision
o E.g. gambler’s fallacy is high spec, low gen (one but good prediction of behaviour)
o N.B. highly specific tautologic (optimism bias) and doesn’t explain the why/
ultimate (only the how/proximate)
,Lecture 2 – Heuristics, biases, nudging
Influence of context:
Deviation from rational choice theory, people
o Construct their preferences in the moment
o Ignore or avoid relevant information
o Rely on irrelevant information
o Make mistakes
Compromise effect = option is chosen more often when its attributes are not at extremes
Attraction/decoy effect = option that clearly dominates (rationally) is chosen more often
Heuristics & biases
Heuristics & biases = low generality, high specificity (Tverksy & Kahneman)
o Heuristic = mental shortcut
o Bias = systematic deviation from rationality in behaviour
Labels for behaviour, not theories for explaining it (explanation = circular)
Biases:
o Endowment effect = value more when sense of ownership is felt
o Framing effect = preference shift based on how information is presented
o Sunk-cost fallacy = investing more when some amount or effort has already been
invested (recency of payment increases effect)
Heuristics (cause of bias):
o Availability heuristic = likelihood of events is judged by the availability in memory
(cognitive ease = people rely on things that come to mind easily)
o Anchoring and adjustment = using an initial value/anchor as starting point and
insufficiently adjusting to it
o Mental accounting = putting money into different ‘accounts’ (different values placed
on same amount of money)
Prospect theory
Value function:
o Reference point = important starting point as everything is
valued in comparison to it.
o Diminishing sensitivity = gain flattens out (less interest when you already have a lot)
o Steeper loss function = losses are felt more heavily than gains people are more
risk-seeking in loss
Prospect theory (behavioural/judgemental theory from Tversky & Kahneman):
o Disposition effect = selling stocks with financial gain too early and with loss too late
o Status-quo bias = stick with default/familiarity (even when it’s random)
o End-of-the-day effect = make up for losses by taking higher risks (after paper losses,
after realized losses gamblers are more risk-averse)
o Probability weighting function = over of low and underweighting of high probability
o Certainty effect = step from high probability to certainty has enormous psychological
effect compared to low to high probability
, Nudging = intervention that changes behaviour in a predictable way without forbidding or
significantly changing elements.
Problems:
o Limited access to relevant information
Increase visibility, easier interpretations, provide reference points
Decision information
o Limited capacity to evaluate and compare options
Use defaults, remove effort, structure and group to facilitate comparisons
Decision structure
o Limited attention & self-control
Provide reminders, facilitate commitment Decision assistance
Positives:
o They work (often)
o Can have large effects (when in uncertainty/ambivalent)
o Cheap and easy (except when testing is needed, other things work better or there are
unintended consequences)
o Preserve decision autonomy (debatable)
Takeaways:
o Work in some situations (cannot work miracles)
o Rigorous testing in real context is needed
o Not every manipulation/intervention is a nudge (no persuasive appeals)
o Nudges work better when in line with people’s intentions
o Ethicality is tricky
