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NUS-Tsukuba Joint-Online-Workshop on”Sustainable Management and Data Sciences”

Choices & DecisionsBehavioral Insights in Consumer Research

15 March 2021

Leonard Lee

NUS Business School & Lloyd’s Register Foundation

Institute for the Public Understanding of Riskleonard.lee@nus.edu.sg

Puzzle 1: Organ DonationAustriaGermany

12% donors 99% donors !!

Do not Donate Organs1%

Donate Organs12 %

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72%0%

28%

43%

57%

Source: Kivetz, R., Netzer, O., & Srinivasan V. (2004). Alternative Models for Capturing the Compromise Effect. Journal of Marketing Research, 31(3), 237-57.

Puzzle 2: Magazine Subscription

Puzzle 3: Which line is longer?

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Behavioral EconomicsIllusions as a Metaphor

What is a Behavioral Insight?

• insight noun \ˈin-ˌsīt\1: the power or act of seeing into a situation2: the act or result of apprehending the inner nature of

things or of seeing intuitively

Source: Merriam-Webster Dictionary

fact/truthbelief/value/

attitude/need

behavioroccurrence

phenomenon

observationunderstanding interpretation

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What is a Behavioral Insight?

• A statement, observation, or finding about people’s behavior that a. is grounded on solid empirical facts;b. is generally true;c. is not intuitively obvious; andd. has direct implications for major constituents.

1. People are cognitive misers.2. People’s preferences are often

“constructed” and context-dependent.3. People often think in systematic but

different ways than those predicted by rational choice theories.

Three Principles in Behavioral Economics

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Why Do People Like Choices?

• Better preference matching• Expected changes in taste• Choice confidence• Perceived control and freedom

to choose (“positive liberty”)• And many more…

When Choice is Demotivating…• Grocery shopping in CA• 6 vs. 24 flavors of jams• 754 shoppers observed• Shoppers received a $1-

off coupon for jam purchase

Assortment Condition % tasted jams % purchased jams

Limited (6 jams)Extensive (24 jams)

Source: Iyengar, S., & Lepper, M.(2000). When Choice is Demotivating: Can One Desire Too Much of a Good Thing. Journal of Personality and Social Psychology, 79, 995-1006.

30%3%

40%60%

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Buridan’s Ass

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Principle #1People are cognitive misers.

How do people choose and decide?

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How Do People Decide

• A continuum of views:

Rational Approaches

Standard Economic

Theory

MotivationalApproaches

Freudian/Evolutionary/ Anthropological

Approaches

Bounded Rationality

Behavioral Economics &Behavioral Decision Theory

Standard Economic Theory

• People assess options relative to their net worth

• Pick the best option to maximize utility subject to budget constraint

Wealth

Utility

q1

q2

q*1

q*2

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Behavioral Approach to Decision Making

• People weigh the perceived costs and perceived benefits of alternative options/decisions or decision processes.

• Bounded Rationality (Herbert Simon)§ People, because of limited processing

capacity, use simplified ways to make decisions.

§ Optimizing vs. Satisficing• People use heuristics and simple decision

rules that can lead to systematic biases.

To what extent are people’s preferences inherent and stable?

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Classical Economists’ View of Preferences

• Expected utility theory (von Neumann & Morgenstein)

à People have stable preferences• Pick the best option to maximize utility subject

to budget constraint – “exquisite intelligence”● Utility is revealed in choices

§ Weak axiom of revealed preferences: “If x is ever chosen when y is available, then there can be no budget set containing both alternatives for which y is chosen and x is not.” (Paul Samuelson)

Behavioral Economists’ View of Preferences

• Preferences can be constructed!§ People do not always have stable valuations for the

same products or options§ x and y can be chosen in different contexts

• Malleability of people’s preferences is an opportunity for managers and policy makers!Ø choice architecture and nudges

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At the Movies…

Compromise EffectThe share of a product is enhanced when it is the

intermediate option in the choice set and is diminished when it is an extreme option. (Simonson 1989)

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Compromise Effect

Battery Life

A

B

C

D

Screen Size

Asymmetric Dominance Effect

Attribute 1A

B

C

Attribute 2

competitor

target

decoy

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Asymmetric Dominance Effect

Adding a dominated alternative can increase the probability of choosing the dominating alternative (Huber, Payne and Puto 1982)

Principle #2People’s preferences

are often “constructed” and context-dependent.

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Nobel Laureates…

BUSINESS/FINANCIAL DESK | October 10, 2002, Thursday A Nobel That Bridges Economics and Psychology

By DANIEL ALTMAN (New York Times)

ABSTRACT - Daniel Kahneman of Princeton University and Vernon L Smith of George Mason University are awarded Nobel Memorial Prize in Economic Science; tried to explain idiosyncrasies in people's ways of making decisions, research that has helped incorporate insights from psychology into discipline of economics; photos (M)

Prospect Theory

GainsLosses

Value• Kahneman & Tversky(1979)

• Value is judged relative to a reference point

• Diminishing sensitivity• Losses loom larger than

gains (estimates range 2.0 – 2.5) à loss aversion

g

l

l > g

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Principle #3People often think in different but

systematic ways than those predicted by rational choice theories.

Concepts from Prospect Theory

• Loss aversion• Framing• Status quo bias

GainsLosses

g

l

l > g

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Loss Aversion and Life During the COVID-19 Pandemic

BehavioralChange

Losses Gains

Online shopping Unable to touch/examine/choose physical items

24x7 convenience

Telecommuting (working from

home)

Work-family conflict / interactions less

personal

20-sec commute/ meetings in shirt and shorts/sweatpants (!)

Use of TraceTogether

app

Perceived loss of privacy /

hassle to install app

Facilitate contact tracing / flatten curve in

Singapore

• If you want to discourage energy usage/waste, which language would you use in your messaging? Ø Option 1: “If you use energy conservation

methods, you will save $350/year”

Ø Option 2: “If you do not use energy conservation methods, you will lose $350/year.”

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Framing• Imagine that the US is

preparing for the outbreak of an unusual Asian disease, which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed:

Gain Frame:● Program A: 200 people will be

saved.● Program B: There is a 1/3

probability that 600 people will be saved, and a 2/3 probability that no one will be saved.

Loss Frame:● Program C: 400 people will

die.● Program D: There is a 1/3

probability that nobody will die, and a 2/3 probability that 600 people will die.

Respondents’ AnswersGain Frame – A: 72% B: 28%Loss Frame – C: 22% D: 78%Source: Tversky, A., & Kahneman, D. (1981). The framing of decisions and the psychology of choice. Science, 211, 453-458.

Defaults and Status Quo Bias

Source: Johnson, E. J. & Goldstein, D. G. (2003). Do defaults save lives? Science, 302, 1338-1339.

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Other factors that influence decisions?

A Typology of Basic Needs

Physiological

Hunger

Thirst

Sleep

Energy

Thermal equilibrium

Freedom from pain & disease

Sensory & Sexual pleasure

Safety & Structure

Security

Protection

Shelter

Order / Structure

Stability & Predictability

Belonging & Connection

Affiliation & Connection

Giving affection

Nurturing

Receiving affection

Trusting

Being trusted

Self-Identity & Self-Esteem

Uniqueness & Identity

Autonomy & Independence

Achievement

Mastery & Competence

Respect & Recognition

Status & Fame

Dominance

Understanding & Exploration

Knowing

Understanding

Consistency & Balance

Intellectual stimulation

Exploring

Playing

Transcendence & Personal

Growth

Aesthetic pleasure

Collecting experiences

Personal Growth

Spirituality

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Feeling vs. ThinkingThe Two-System Model

Emotional processing Cognitive processing

Automatic ControlledEffortless Effortful

Rapid, parallel Slow, serialHolistic AnalyticPassive Active

Associative connections Logical connections

System I System II

Epstein, S., & Pacini, R. (1999). Some Basic Issues Regarding Dual-Process Theories from the Perspective of Cognitive-Experiential Self-Theory.” In S. Chaiken & Y. Trope (eds), Dual-Process Theories in Social Psychology, 462-482.

Source: Kahneman, D., & Frederick, S. (2002). Representativeness Revisited: Attribute Substitution in Intuitive Judgment. In T. Gilovich, D. Griffin, & D. Kahneman (eds), Heuristics and Biases: The Psychology of Intuitive Judgment, 49-81.

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Availability Bias

• People judge the the prevalence of an event through immediate examples that come to their mind, rather than scientific evidence or statistics.

• Implication: Memories that are well-remembered may elicit intense feelings and have strong influence on attitudes and behavior.

Diabetes medication causes kidney failure for

my mom.

My uncle smokes a pack of cigarette a day. He lives until 90.

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Source: Goldstein, N. J., Cialdini, R. B., & Griskevicius, V. (2008). A Room with a Viewpoint: Using Social Norms to Motivate Environmental Conservation in Hotels. Journal of Consumer Research, 35, 472-482.

39%

38%

48%

Six Principles of Persuasion (Cialdini)● Reciprocity

§ People repay in kind

● Scarcity§ People want more of what they can have less of

● Authority§ People defer to experts

● Consistency§ People align with their clear commitments

● Liking§ People like those who like them

● Social Proof (Consensus)§ People follow the lead of similar others

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1. People are cognitive misers.§ People like to have choices and seek variety, but too many

options can demotivate choice.§ They often “satisfice” rather than optimize.

2. People’s preferences are often “constructed” and context-dependent (i.e., importance of choice architecture)§ compromise effect, asymmetric dominance effect

3. People often think in different but systematic ways than those predicted by rational choice theories.§ Prospect theory, loss aversion, framing, status-quo bias§ When making decisions, people are also influenced by their

needs, feelings and impulses, memory, and social environment.

Three Principles in Behavioral Economics

Be Safe and Stay Healthy!