UEC-31306
Consumer Decision Making
Lecture #1 – 16 March 2020
Views on Decision Making
---------------------------------------------------------
Assumptions of economic theory
Complete information about choice alternatives (market transparency)
Correct calculation of utility of combinations
Individualism, self-interest
Knowledge about short-term and long-term utility
Stable preferences
Maximization or optimization of utility
No role for emotion
Rational Economic Man
The Rational Economic Man
o has access to unlimited information processing
o can maximize his own outcomes (greed)
o and can exercise incredible willpower
Some answers of economists
Maybe people are not rational, but they do act rationally (billiard players)
Irrational agents will become extinct (not true -> trade at stock market)
Aggregate behavior is more rational (not true -> systematic deviations)
It will even out in the long-run (not true -> systematic deviations)
If it’s about big money, people will become more rational (not true)
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
,What is a decision?
Ordering a meal at a restaurant
Starting a consultancy firm
Not quitting smoking
Solving a math problem
Inventing a new type of bicycle
Grading an exam
Innovation
“a decision is defined as 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 the objective”
Important distinctions
What is the difference between judgment and decision making?
What is the difference between problem-solving and decision-making?
What is the difference between a decision and decision making?
Judgment
o The cognitive part of decision making
o “a judgement requires a choice to become a decision”
Problem-solving
o “problem-solving may or may not require action”
Decision
One moment in a larger process (of decision making);
when alternatives are evaluated;
leading to the selection of one alternative;
aimed at a specific goal;
eventually leading to action
Problem-solving vs. Decision making
Large overlap
Both can contain multiple decisions
More focus on analyzing the problem in problem solving
More focus towards the end of the process in decision making
Decision making
1. Gathering information:
Problem definition
Criteria; weight of criteria
Creating alternative options
Assessing (possible) consequences of alternatives
2. Evaluation
Judging the options (for all criteria)
Designing/calculating outcomes
3. Action
Deciding/choosing
, 4. Implementation
Executing the decision
5. Evaluation of decision outcome
Lecture #2 – Wednesday March 18th 2020
Heuristics, biases & bounded awareness (1)
------------------------------------------------------------------------------
-------------
In this lecture
Why do these biases occur?
o More insight into underlying processes
What are the consequences?
o For consumer decision making
o For managers
What can we do to minimize bias?
o Should we minimize bias?
Availability heuristic
Assessing the frequency or probability of an event by the ease with which occurrences can
be brought to mind
o Ease of recall (based on vividness, recency, imaginable)
o Retrievability (based on memory structures)
Consumers assume that their recollections represent the larger pool of events that exist
Underlying processes of the availability heuristic are the associations in memory
o Number of examples that come to mind
o Ease with which examples come to mind
Retrievability
It has an effect on brand awareness; what do you retrieve from your memory when seeing a
brand?
Priming: the quicker recognition of a certain stimulus that has been observed before
Brand awareness
Brand awareness as a heuristic for choice
o Preference for high awareness brands
o Even when there are differences in quality and price
o Awareness effect is higher than price effect, though
When there is a high awareness brand
o People make faster decisions
o Fewer brands are being sampled
, Representativeness heuristic
The representative heuristic is used when we judge the probability that an object or event A
belongs to class B by looking at the degree to which A resembles B. When we do this, we
neglect information about the general probability of B occurring
o Take the following problem: Bob is an opera fan who enjoys touring art museums
when on holiday. Growing up, he enjoyed playing chess with family members and
friends. Which situation is more likely?
A. Bob plays trumpet for a major symphony orchestra
B. Bob is a farmer
Most people would pick A because of the stereotype Bob may hold. While in reality,
B is more likely to be true.
Insensitivity to base rates
This bias causes you to ignore the base rates of a certain aspect
o Think of Jan. He is an extrovert and likes attention. Is he a computer programmer or
a hotel receptionist? Most people would say receptionist, while in reality it is more
likely that Jan is a computer programmer because those odds are higher
Insensitivity to sample size
Consumers often ignore sample sizes
Samples are expected to be representative of their parent population irrespective of sample
size
People ignore the fact that large samples are less likely to deviate from the mean than small
samples
o “Four out of five dentists recommend this toothpaste”
How big is the sample size? 5? 10? 5000?
Misconception of chance
The phenomenon in which people extrapolate large-scale patterns to samples of a much
smaller size
o Which coin sequence has larger odds?
T-T-T, H-T-H or H-H-T
None, all of them are the same odds. People don’t expect the same sequence to
happen repeatedly and thus misinterpret the odds.
Gambler’s fallacy: the belief that a series of independent trials with the same outcome will
soon be followed by an opposite outcome. Things should ‘look’ random
o Think of roulette; when the ball landed on red 3 times in a row, you’d expect the
chance of it landing on black too be very likely. In reality, the odds of it landing on
red are the same as it landing on black.
Regression to the mean
Basically, what this means is that performances or events that are chance-related will always
end up regressing to the mean. High performers will perform worse (towards the mean) on
the next try. Low performers will perform better (also towards the mean) on the next try
The conjunction fallacy
An overestimation of co-occurring events
A conjunction cannot be more probable than one of its constituents
Consumer Decision Making
Lecture #1 – 16 March 2020
Views on Decision Making
---------------------------------------------------------
Assumptions of economic theory
Complete information about choice alternatives (market transparency)
Correct calculation of utility of combinations
Individualism, self-interest
Knowledge about short-term and long-term utility
Stable preferences
Maximization or optimization of utility
No role for emotion
Rational Economic Man
The Rational Economic Man
o has access to unlimited information processing
o can maximize his own outcomes (greed)
o and can exercise incredible willpower
Some answers of economists
Maybe people are not rational, but they do act rationally (billiard players)
Irrational agents will become extinct (not true -> trade at stock market)
Aggregate behavior is more rational (not true -> systematic deviations)
It will even out in the long-run (not true -> systematic deviations)
If it’s about big money, people will become more rational (not true)
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
,What is a decision?
Ordering a meal at a restaurant
Starting a consultancy firm
Not quitting smoking
Solving a math problem
Inventing a new type of bicycle
Grading an exam
Innovation
“a decision is defined as 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 the objective”
Important distinctions
What is the difference between judgment and decision making?
What is the difference between problem-solving and decision-making?
What is the difference between a decision and decision making?
Judgment
o The cognitive part of decision making
o “a judgement requires a choice to become a decision”
Problem-solving
o “problem-solving may or may not require action”
Decision
One moment in a larger process (of decision making);
when alternatives are evaluated;
leading to the selection of one alternative;
aimed at a specific goal;
eventually leading to action
Problem-solving vs. Decision making
Large overlap
Both can contain multiple decisions
More focus on analyzing the problem in problem solving
More focus towards the end of the process in decision making
Decision making
1. Gathering information:
Problem definition
Criteria; weight of criteria
Creating alternative options
Assessing (possible) consequences of alternatives
2. Evaluation
Judging the options (for all criteria)
Designing/calculating outcomes
3. Action
Deciding/choosing
, 4. Implementation
Executing the decision
5. Evaluation of decision outcome
Lecture #2 – Wednesday March 18th 2020
Heuristics, biases & bounded awareness (1)
------------------------------------------------------------------------------
-------------
In this lecture
Why do these biases occur?
o More insight into underlying processes
What are the consequences?
o For consumer decision making
o For managers
What can we do to minimize bias?
o Should we minimize bias?
Availability heuristic
Assessing the frequency or probability of an event by the ease with which occurrences can
be brought to mind
o Ease of recall (based on vividness, recency, imaginable)
o Retrievability (based on memory structures)
Consumers assume that their recollections represent the larger pool of events that exist
Underlying processes of the availability heuristic are the associations in memory
o Number of examples that come to mind
o Ease with which examples come to mind
Retrievability
It has an effect on brand awareness; what do you retrieve from your memory when seeing a
brand?
Priming: the quicker recognition of a certain stimulus that has been observed before
Brand awareness
Brand awareness as a heuristic for choice
o Preference for high awareness brands
o Even when there are differences in quality and price
o Awareness effect is higher than price effect, though
When there is a high awareness brand
o People make faster decisions
o Fewer brands are being sampled
, Representativeness heuristic
The representative heuristic is used when we judge the probability that an object or event A
belongs to class B by looking at the degree to which A resembles B. When we do this, we
neglect information about the general probability of B occurring
o Take the following problem: Bob is an opera fan who enjoys touring art museums
when on holiday. Growing up, he enjoyed playing chess with family members and
friends. Which situation is more likely?
A. Bob plays trumpet for a major symphony orchestra
B. Bob is a farmer
Most people would pick A because of the stereotype Bob may hold. While in reality,
B is more likely to be true.
Insensitivity to base rates
This bias causes you to ignore the base rates of a certain aspect
o Think of Jan. He is an extrovert and likes attention. Is he a computer programmer or
a hotel receptionist? Most people would say receptionist, while in reality it is more
likely that Jan is a computer programmer because those odds are higher
Insensitivity to sample size
Consumers often ignore sample sizes
Samples are expected to be representative of their parent population irrespective of sample
size
People ignore the fact that large samples are less likely to deviate from the mean than small
samples
o “Four out of five dentists recommend this toothpaste”
How big is the sample size? 5? 10? 5000?
Misconception of chance
The phenomenon in which people extrapolate large-scale patterns to samples of a much
smaller size
o Which coin sequence has larger odds?
T-T-T, H-T-H or H-H-T
None, all of them are the same odds. People don’t expect the same sequence to
happen repeatedly and thus misinterpret the odds.
Gambler’s fallacy: the belief that a series of independent trials with the same outcome will
soon be followed by an opposite outcome. Things should ‘look’ random
o Think of roulette; when the ball landed on red 3 times in a row, you’d expect the
chance of it landing on black too be very likely. In reality, the odds of it landing on
red are the same as it landing on black.
Regression to the mean
Basically, what this means is that performances or events that are chance-related will always
end up regressing to the mean. High performers will perform worse (towards the mean) on
the next try. Low performers will perform better (also towards the mean) on the next try
The conjunction fallacy
An overestimation of co-occurring events
A conjunction cannot be more probable than one of its constituents
