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Decision Making in Marketing –Lecture Slides
Lecture 1. Heuristics & Biases
Bounded rationality: we are constraint in our decision making
Decisions are often complex and difficult
Individuals / consumers are bounded rational, they have to make decisions under several
constraints
o Limited knowledge/information
o Limited cognitive resources (time/attention/memory)
o Limited
Use of heuristics: cognitive shortcuts to make decisions quickly and efficiently
o E.g. the default effect (People are more likely to accept default options) opt in
versus opt out
Decoy effect: putting things in context
Choices are made in a context: relative to other alternatives rather than based on absolute
preferences
Decoy effect = the choice of one option over the other changes when a third (asymmetrically
dominated) option is introduced
Asymmetrically dominated = inferior in all properties to one option, but only inferior in some
properties to the other option (i.e. an irrelevant alternative)
Managerial relevance: adding an irrelevant alternative helps consumers decide upselling
“choices are made relative to other alternatives rather than being based on absolute
preference”
Anchoring and adjustment
Anchoring and adjustment = making an estimation based on a process of anchoring on a
salient number and adjusting up or down
Problem: adjustments are typically insufficient, estimation is biased towards the anchor
Managerial relevance:
o General: negotiations, price expectations
o Specifically: sales techniques (990 950)
Mental accounting: different pockets matter
Mental accounting = people keep track of their expenses in different mental accounts (i.e.
categories); these mental accounts influence the decision making process
Managerial & policy relevance: individuals / consumer spend money differently depending
on the ‘account’ they pay from (e.g. birthday money, bonuses)
The IKEA effect: effort increases love
Ikea effect = consumers place more value on products they have (at least) partially created
o Important: only if they actually finish the product
Managerial relevance: integrating consumers in the production process increases valuation
(however, too much effort can have adverse effects)
,Framing effect: preferences about framed problems
Framing effect = the frame of a message influences the decision; i.e. people react differently
depending on how a message is presented
Two effects:
o People prefer positive outcomes over negative outcomes
o People are risk averse over gains, but risk seeking over losses
Managerial & policy relevance: firing vs saving employees / health treatments
Expected utility vs prospect theory
Expected utility theory = utility as a function of absolute wealth marginal utility decreases
as wealth increases
Prospect theory = reference dependence (value is measured in gains and losses relative to a
point)
o Diminishing sensitivity: marginal value of
gains and losses decreases with their size
o Loss aversion: losses loom larger than gains
Managerial & policy relevance: loss aversion
(potential losses motivate more than potential
gains), losses make people risk seeking
Consumer decision making matters for
Netflix
Matching preferences – targeting (top picks)
Variety seeking – trending now
Social proof – if others like it (popular)
Foot in the door – commitment (continue watching
, Lecture 2. Social influences in decision making
Social influence: we influence others and are influenced by others
Weapons of influence: techniques to persuade people / consumers
o Reciprocity & Door-in-the-face
o Commitment & Foot-in-the-door
o Social proof
o Scarcity
Reciprocity: give to receive
Based on the social norm to repay what another person has given us
Across cultures people are taught to live up to this social norm, resulting in distaste for
people who violate the norm
Problem: exploitation of the rule as it enforces uninvited debt and can trigger unequal
exchange
Managerial relevance: sales techniques
Indirect reciprocity: slamming the door in the face (DITF)
DITF = getting compliance to a request by starting with a large (or unreasonable) request
o If rejected, a concession will be offered (a smaller / reasonable request)
Managerial & policy relevance: social settings, sales prices
o Works best when request is made by the same person & immediately > 1 st request
Commitment and consistency: stuck with a choice
After making a commitment, people are more likely to agree with requests in-line with this
commitment people feel pressure to behave consistently with their choice/commitment,
as personal consistency is highly valued by society and facilitates decision making
FITD: getting compliance to a large request by first getting agreement to a small request
o The 1st agreement creates commitment and increases the need to be consistent
when faced with the large request
o 2 requests need to be similar in nature (consistent)
Managerial relevance: grow their own legs (add justifications to support a prior commitment)
Social proof: I do what everybody else does
People who determine what to do by finding out what other people do in the same situation
Most effective (1) under uncertainty and (2) with people similar to the decision maker
Managerial & policy relevance: peer recommendations and peer observations
o Problem: the ‘safety in numbers’ might fail
Scarcity
People assign more value to opportunities when they are less available loss aversion
Explanation: (1) things that are difficult to obtain appear more valuable / of higher quality
and (2) restrictions reduce freedom, perceived loss of freedom creates the need for more
freedom
2 levers: amount and time
Managerial relevance: limited editions, limited stock, expiration of coupons
o Contagious competitiveness: people are most attracted to scarce resources when
they compete with others for them
o No constant effectiveness, the drop from abundance to scarcity > constant scarcity
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