Decision Making

Michael J. KalsherMGMT 4460/6962 Summer 2014

Chapter ObjectivesWhen you finish this chapter, you should

understand why:1.Consumer decision making is a central part of

consumer behavior, but the way we evaluate and choose products varies widely.

2.A decision is actually composed of a series of stages that results in the selection of one product over competing options.

3.Decision making is not always rational.

Chapter Objectives (continued)4. Our access to online sources is changing the

way we decide what to buy.

5. We often fall back on well-learned “rules-of-thumb” to make decisions.

6. Consumers rely upon different decision rules when evaluating competing options.

Objective 1 – Consumer decision making is a central part of

consumer behavior, but the way we evaluate and choose products varies widely. No advance planning Impulse Different from what we intended

Objective 2 – Stages in Consumer Decision Making

Problem Recognition

Information Search

Evaluation of Alternatives

Product Choice

Outcomes

Richard is fed up with his old B&W TV

He surfs the Web to learn about TVs

He chooses a TV with features appealing to him

He compares models on reputation & features

Richard brings home the TV & enjoys his purchase

Decision-making Perspectives Rational perspective

Carefully weigh pluses/minuses

Purchase momentum Initial impulses increase likelihood of buying more

Constructive processing Satisficing

Behavioral influence perspective Environmental influences Learning principles

Experiential perspective Gestalt; affective responses

Continuum of Buying Decision Behavior

Selection Stages A decision is actually composed of a series of

stages that results in the selection of one product over competing options.

Steps in the Decision-Making Process

Problem recognition

Information search

Evaluation of alternatives

Product choice

Stage 1: Problem Recognition

Occurs when consumer sees difference between current state and ideal state Need recognition: actual state declines Opportunity recognition: ideal state moves upward

Problem Recognition

Example: running out of a product or buying a deficient product.

Example: exposed to a different or better quality product; changes person’s standard of comparison.

Stage 2: Information Search The process by which we survey the

environment for appropriate data to make a reasonable decision Intentional search (pre-purchase) vs. Ongoing

search (browsing) Internal (memory banks) vs. External search Directed Learning vs. Incidental learning (low-dose

advertising)

Learning Objective 3 Decision making is not always rational. Utility Model suggests that consumers will

continue to search for information as long as the benefits of doing so exceed the costs.

Overall, the amount of external search for most products is surprisingly small.

Symbolic items produce more external search (clothing), because of the high perceived risk.

Rational Search Processes and Brand Switching

Variety seeking: unpredictability can be rewarding to consumers

Brand switching tends to occur:• When people are in a good mood• As a form of stimulation when bored• In response to sensory-specific satiation

Brand switching is least likely when a decision situation is ambiguous or when there is little information available about competing brands

Biases in Decision-Making Process Mental accounting:

Framing problems as gains/losses influences our decisions Sunk-cost fallacy:

We are reluctant to waste something we have paid for Loss aversion:

We emphasize losses more than gains Losing is more painful than gaining

Prospect Theory We value gains that are more certain than larger gains

that are less certain, even when the expected value of each is the same.

The opposite is true for losses: we clutch at straws to avoid a certain loss even if it means taking even greater risks.

Research on Prospect Theory

Participants told to assume there is a disease affecting 600 people and they have two choices: • Program A, where 200 of the 600 people will be saved . • Program B, where there is 33% chance that all 600 people will be saved, and 66% chance that nobody will be saved.

Most people selected A, showing a preference for certainty.

They then offered them another choice:• Program C,  where 400 people will die. • Program D, where  there is a 33% chance that nobody will die, and 66% chance that all 600 people will die.

Most people now selected D, seeking to avoid the loss of 400 people.

Framing makes the difference. A and C are the same, and B and D are the same.

Prospect Theory: An Analysis of Decision under Risk Daniel Kahneman, Amos Tversky, Econometrica, Vol. 47, No. 2 (Mar., 1979), pp. 263-292

So what? How can we use it?

To get people to adopt a product or idea, focus on the gain.

To get them to reject something, focus on what they might lose.

Defending Self-Interests

In your own choices, beware of words leading you astray. Think in a balanced way about potential gains and losses.

Figure 8.6 Five Types of Perceived Risk

Monetary risk

Functional risk

Physical risk

Social risk

Psychological risk

Identifying and Considering Alternatives

Evoked Set Alternatives a consumer

knows about (mental models, schemas)

Consideration Set Alternatives actually

considered.

Marketers must focus on getting their brands in consumers’ evoked set We often do not give

rejected brands a second chance. Why?

Because it’s effortful!

Levels of Categorization

Product Choice: How Do We Decide? Once we assemble and evaluate relevant

options from a category, we must choose among them

Decision rules for product choice can be very simple or very complicated Prior experience with (similar) product Present information at time of purchase Beliefs about brands (from advertising)

Learning Objective 4 Our access to online sources changes the way

we decide what to buy.

Cybermediaries The Web delivers enormous amounts of

product information in seconds Cybermediary: helps filter and organize online

market information Examples: Shopping.com, BizRate.com

Which online sources of information are affecting your choices as a consumer? Online reviews and ratings Comments on social networks Other?

Learning Objective 5 We often fall back on

mental “rules-of-thumb” that lead to speedy decisions General: “higher-priced

products are higher-quality products”

Specific: buying the same brand your mother bought

Can lead to bad decisions due to flawed assumptions (especially with unusually named brands)

Heuristics

Product Signals

Market Beliefs

Country of Origin

Shortcut #1: Over-reliance on Product Signals

Observable product attributes are assumed to accurately predict underlying qualities Clean and shiny car = good mechanical

condition

Covariation (“halo” again!) We perceive associations among events

even if they are not really present. Product type/quality and country of

origin Consumers are poor estimators of

covariation, which leads to “self-fulfilling prophecy”: we see what we are looking for regardless of the reality.

Shortcut #2: Market Beliefs

Consumer hold assumptions about companies, products, and stores that become shortcuts for decisions Price-quality relationship: “We get what we pay

for” Other common marketing beliefs (see Table 9.3 for full

list): All brands are basically the same Larger stores offer better prices than smaller stores Items tied to “giveaways” are not a good value

Shortcut #3: Country-of-Origin

We tend to rate our own country’s products more favorably than do people who live elsewhere

Industrialized countries make better products than do developing countries

Attachment to own vs. other cultures Nationalists Internationalists Disengaged

Other Notable Shortcuts Zipf’s Law

Our tendency to prefer a number one brand to the competition

Consumer inertia (laziness) The tendency to buy a brand out of habit merely

because it requires less effort Can be offset by noticeably cheaper prices, point-

of-purchase displays, and extensive couponing Brand loyalty:

repeat purchasing behavior that reflects a conscious decision to continue buying the same brand

Learning Objective 6 Consumers rely on different decision rules

when they evaluate competing options. Compensatory vs. Non-Compensatory

Decision Rules

Noncompensatory Decision Rules Lexicographic rule

Consumers select the brand that is the best on the most important attribute

Elimination-by-aspects rule The buyer also evaluates brands on the most

important attribute Conjunctive rule:

Entails processing by brand

Compensatory Decision Rules Simple additive rule

the consumer merely chooses the alternative that has the largest number of positive attributes

Weighted additive rule the consumer also takes into account the relative

importance of positively rated attributes, essentially multiplying brand ratings by importance weights

Chapter Summary Decision making is a central part of consumer

behavior and decisions are made in stages Decision making is not always rational We use rules of thumb and decision rules to

make decisions more efficiently