7/22/2010

MARK6012:
Understanding Buyer  Heuristics and Biases

Behaviour (UBB)  Availability, Representativeness, Anchoring

 Context Effects
 Loss Aversion, Framing, Response Mode,
Endowment, Trade-
Trade-off Contrasts
Week 5: Behavioural Decision Theory  Decision Rules
(a bag of tricks)

 The main heuristics that affect consumers’

Heuristic:
probability judgments are:
Mental processing simplification (a rule of thumb). It
aims at ‘good enough’ solutions.  Availability
Adv.:: reduced cognitive load,
Adv load increased speed of  Ease of recall affects judgments of probability.
response
 Representativeness
Disadv.: potential for error (bias) in solutions
 similarity of X to Y affects judgments of probability
that X belongs to category Y.
Bias:
 Anchoring
Systematic error in judgment or decision making (a cognitive
illusion). Generally, reduces decision quality.  Point of reference affects judgments of probability

 Mental availability is affected by factors other  Bias:

than frequency of observed events; e.g.:  Ease of item retrieval, as judgment of probability of
 Priming occurrence
 External internal cues automatically activate local network connections  E.g.: more likely rain or shine? judgment on a rainy day.

 Salience  Number of items retrieved in a mental search, as judgment of

 Cue competition implies that more salient cues are more likely to activate
probability of occurrence
their related network connections
 E.g.: more likely to die from a terrorist attack or a car
 Familiarity accident in Middle East?
 Strength of connections facilitates network activation  Ease of imagination, construction of instances, as judgment of
probability (also wishful thinking, overconfidence)
 Recency
 Connection strength decays over time if not reinforced, recent activation  E.g.: what’s more likely a star or a black hole in space?
reinforces current connections

1
 7/22/2010

 If something is easier to represent in a certain way,  Bias:

consumers will think that it is more likely that the  Insensitivity to prior probabilities (ignores base rates).
things are physically like the mental representation  E.g.: prior probabilities of diseases are often ignored when the patient
seems to fit a rare-disease description
 Metaphors  Insensitivity to sample size
 Similes  E.g.: few consistent observations may still be different from population
mean

 Catch phrases  Misconception of chance

 Consider HTHTHT to be more likely than HHHTTT or HHHHTH.
 Illusory correlation, confirmation bias (over-representation when data fits
with mental model)
 Conjunctive fallacy
 E.g.: more likely to be a bank teller or bank teller and single?

 Initial information, judgment or decision acts  Illustration of anchoring and adjustment effect

as a reference point for subsequent decisions. Set U

Confirmation
bias may
Subsequent judgments attempt to adjust from Set H|A1
Set T
lead to
the initial reference point (or anchor). Set A1
insufficient
adjustment
f
from a given
i
anchor,
 Implication: make a decision and stick with it; use because of
future information only to make slight adjustments reliance on
information
to original judgment. consistent
Set H|A2
with the
Set A2 hypothesis,
but not with
alternative.
10

 Context effects:  Cumulative Prospect Theory Gains

+U
 Judgments of probability or choices change as a A reference point
 Status quo, or actual state of being C
result of a change in the situation or context in Diminishing marginal utility
which the judgment or the choice is made.  +ve & -ve -x B
Loss aversion
-ve utility curve is steeper than +
+ve
ve +x
 Considered a bias because EUT decontextualises 
curve
decisions (objective probabilities and invariant A
utility estimates). A change in the reference point -U
affects evaluation of alternatives Losses
 However, evidence from psychology that utility
judgments are affected by the decision context.
Dan Gilbert video

Reference points and loss aversion are the main explanations for context effects

2
 7/22/2010

 Information display (e.g.: perceptual fluency)  The method of elicitation or the response
and description (e.g.: as gains v. losses) affects mode (e.g.: judgment v. choice) affects utility
utility of choice options evaluation and can lead to ‘preference
 Violation of the invariance axiom (alternative reversals’.
description of otherwise identical options should
have no effect on utility).  Compatibility hypothesis (the utility weight of an
input component is enhanced by its compatibility
 Perceptual fluency (easier description of the same
option receive higher utility)
with the output component).

 Loss aversion (description of an option as a gain

receives more utility than when represented as a loss)
Relation to the spreading activation network
Framing is most likely to lead to biased valuation in ambiguous situations. model of long-term memory?
Framing of decisions depends on language of presentation, nature of display,
other contextual information.

 Ownership affects utility  Changing the choice set affects utility of an

 Pre-ownership utility estimate in terms of a
option (violation of the independence of irrelevant
alternatives)
potential gain
 O e s p utility
Ownership ut ty estimate
est ate in te
termss of
o a loss
oss ((i.e.:
.e.:  Tradeoff Contrast:
shift in the reference point.  Comparing options relative to what’s available at
 Loss aversion, therefore not willing to sell an object for the moment (i.e.: local effect), or remembered from
the price that one would be willing to pay to obtain the past (i.e.: background effect).
that object.

 Local effects (in all strictness, probability of choice effects):  Similarity:

 Similarity effect [or uniqueness] (Tversky, 1972, Psychological Review) P( X | X , Y )  P(Y | X , Y ) Y

 Adding alternative S similar in features to X, enhances the utility of the P ( X | X , Y , S )  P (Y | X , Y , S )
unique features of Y.

 Asymmetric
y dominance effect [[aka attraction]] ((Huber,, Payne,
y , & Puto,, 1982,, Journal
J of
Consumer Research)
 Theoretical challenge:
 Adding alternative D clearly dominated by X, but not by Y, enhances the
utility of X.  Violation of S
independence of X
 Reference point effect (Tversky & Kahneman, 1991, Quarterly Journal of Economics) irrelevant alternatives.
 Starting evaluation from a reference point below Y, enhances the value of  Explained by elimination
Y over X; and vice versa.
by aspects. Attribute 1
 Compromise (extremeness aversion) (Simonson, 1989, Journal of Consumer Research)
 Middle option M preferred to extreme options X or Y

3
 7/22/2010

 Asymmetric Dominance:  Reference Point:

P( X | X , Y )  P( X | X , Y , D) Y P ( X | X , Y , Rx )  P(Y | X , Y , Rx ) Y
P ( X | X , Y , R y )  P (Y | X , Y , R y )
Ry

 Theoretical
h l challenge:
h ll  Theoretical
h l challenge:
h ll
 Violation of regularity.  Violation of IIA.
 Problematic for random  Explained by loss
utility models X aversion. Rx X
 Explained by loss D
aversion.
Attribute 1 Attribute 1
Dan Ariely video

 Compromise:  Situation dependent tradeoff between effort and accuracy

P (C | Y , C )  P(Y | Y , C ) Y
P (C | X , Y , C )  P (Y | X , Y , C )
%WADD)

WADD Situational demands on

the consumer determine
C EQW the relative importance of
Relative Accuracy (%

 Theoretical
h l challenge:
h ll accuracy v. effort goals.
 Violation of IIA. W?
 Explained by loss EBA
aversion. X
LEX Decision characteristics
determine the position of
Attribute 1
different decision rules in
RC the accuracy/effort space
0
Effort constraint 0
Effort (Total EIPs)