Decision Making Michael J. Kalsher MGMT 4460/6962 Summer 2014

Chapter Objectives When you finish this chapter, you should understand why: Consumer decision making is a central part of consumer behavior, but the way we evaluate and choose products varies widely. A decision is actually composed of a series of stages that results in the selection of one product over competing options. Decision making is not always rational.

Chapter Objectives (continued) Our access to online sources is changing the way we decide what to buy. We often fall back on well-learned “rules-of-thumb” to make decisions. 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 Richard is fed up with his old B&W TV Information Search He surfs the Web to learn about TVs Evaluation of Alternatives He compares models on reputation & features Product Choice He chooses a TV with features appealing to him Outcomes 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: exposed to a different or better quality product; changes person’s standard of comparison. Example: running out of a product or buying a deficient product.

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

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