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

2. 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.

3. 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.

4. 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

5. 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

6. 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

7. Continuum of Buying Decision Behavior

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

9. Steps in the Decision-Making Process
Problem recognition
Information search
Evaluation of alternatives
Product choice

10. 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

11. 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.

12. 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)

13. 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.

14. 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

15. 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.

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

17. 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.

18. Figure 8.6 Five Types of Perceived Risk
Monetary risk
Functional risk
Physical risk
Social risk
Psychological risk

19. 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!

20. Levels of Categorization

21. 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)

22. Learning Objective 4
Our access to online sources changes the way we decide what to buy.

23. 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?

24. 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)

25. Heuristics
Product Signals
Market Beliefs
Country of Origin

26. 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.

27. 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

28. 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

29. 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

30. Learning Objective 6
Consumers rely on different decision rules when they evaluate competing options.
Compensatory vs. Non-Compensatory Decision Rules

31. 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

32. 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

33. 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