Summary book and articles belonging to the course ECH-31306 Consumer Decision Making
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ECH 31306 Consumer decision making (ECH31306)
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Wageningen University (WUR)
Book
Judgment in Managerial Decision Making
Summary of the book Judgment in Managerial Decision Making by Max H. Bazerman and summaries of the articles corresponding to the course Consumer Decision Making (ECH-31306).
ACC10007 Financial Information for Decision Making Final Assessment Questions – Semester 2 2020
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ECH 31306 Consumer decision making (ECH31306)
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ECH-31306: Consumer Decision Making – samenvatting boek & artikelen
Hoorcollege 1: Views on decision making
Hoofdstuk 1: Introduction to managerial decision making
Rational decision making process:
1. Define the problem
2. Identify the criteria most decisions require you to accomplish more than one
objective
3. Weigh the criteria different criteria will vary in importance to a decision maker
4. General alternatives
5. Rate each alternative on each criterion
6. Compute the optimal decision
o Multiplying the ratings in step 5 by the weight of each criterion
o Adding up the weighted ratings across all of the criteria for each alternative
o Choosing the solution with the highest sum of the weighted ratings
System 1 and system 2
System 1: emotional/affective system: fast, automatic, effortless, implicit, emotional
concrete images and narratives linked in associative networks, operates automatically,
needs not to be trained
System 2: rational/analytic system: slower, conscious, effortful, explicit, logical
symbols, words, numbers, rules, algorithms, does not operate automatically, needs to be
trained
System 1 most often used, used when people are busy, more rushed,
System 2 used in our most important decisions
The two systems operate in parallel, they can operate at the same time. However, system I is
way faster, so when the two systems are in conflict, most behaviour is guided by system I.
The bounds of human attention and rationality
The rational model is based on a set of assumptions that prescribe how a decision should be
made, rather than describing how a decision is made.
o Perceptive decision optimal decision
o Descriptive decision actual decision
Why we deviate from the rational model:
o Limitations (lack of information, intelligence limitations, perceptual errors) prevent
us from making the optimal decisions assumed by the rational model.
o We satisfice = rather than examining all possible alternatives, we simply search
until we find a satisfactory solution that will suffice because it is good enough.
o People rely on a number of heuristics = simplifying strategies / rules of thumb
are helpful, but the use can lead to errors.
o Lack of willpower we tend to give greater weight to present concerns than to
future concerns.
o Lack of self-interest we care about the outcomes of others
Introduction to judgmental heuristics
Heuristics create problems, primarily because people are typically unaware that they rely on
them.
,If people become aware of the heuristics, they become capable of deciding when and where
to use them minimizing their reliance on problematic heuristics.
o The availability heuristic = people assess the frequency, probability or likely
causes of an event by the degree to which instances or occurrences of that event
are readily available in memory an event that is vivid, easily imaged and
specific will be more available in mind.
o The representativeness heuristic = when making a judgment about an
individual (or object/event), people tend to look for traits the individual may have
that correspond with previously formed stereotypes.
Can offer a good first-cut approximation, drawing our attentions on the best
options
Can lead to serious offers
o The confirmation heuristic = we search for and interpret evidence in a way that
supports the conclusions we favoured at the outset.
Explains the power of anchoring = irrelevant initial hypothesis or starting point
holds undue sway over our judgments
Hindsight bias = we dismiss too quickly, in retrospect, the possibility that
things could have turned out differently than they did.
o The affect heuristic = our judgments follow an affective/emotional evaluation that
occurs even before any higher-level reasoning takes place. people use them
as the basis of their decisions rather than engaging in a more complete analysis
and reasoning process.
Hoofdstuk 2: Overconfidence
Overconfidence has been studied in three basic ways:
o Overprecision = the tendency to be too sure our judgments and decisions are
accurate, uninterested in testing our assumptions and dismissive of evidence
suggesting we might be wrong. consequence: we draw overly narrow
confidence intervals, be too certain that we know the truth
o Overestimation = the tendency to think we’re better, smarter, faster, more
capable, more attractive or more popular (etc.) than we actually are
consequence: we overestimate how much we will accomplish in a limited amount
of time, we believe we have more control than we actually do
o Overplacement = the tendency to falsely think we rank higher than others on
certain dimensions, particularly in competitive contexts. consequences: people
to be too interested in competing with others in
negotiations/markets/courts/battlefield
Overprecision
Overprecision = people act as if they are sure they know the truth they draw their bull’s-
eye too small, make their confidence intervals too narrow and don’t shift their actions as
much as they should in the face of uncertainty
Causes of overprecision:
, o Overprecision springs from the desire to relieve internal dissonance people in a
stressful state of tension feel motivated to relieve this dissonance (onenigheid),
even if this requires them to change what they believe.
Bijv. when we are getting advice from others, we prefer to hear perspectives
that are similar to our own, despite the fact that hearing different perspectives
is more helpful and informative
o Our outward expressions of confidence helps others feel sure about us those
who express confidence earn trust, credibility and status.
o Confidence may be a byproduct of other cognitive processes
Consequences of overprecision:
o Reluctant to revise our opinions, we tend to ignore feedback from other on the
products we face
We give substantially less weight to others’ advice, including very useful
advice – than to our own opinions
o Naïve realism = the belief that the way we see the world is the only sensible view
our perspective is the only legitimate one is the default.
We will be unwilling to consider other perspectives and find common ground
o Overprecision can make investors too interested in trading
o Managers make overly precise forecasts of candidates’ potention, because they
are reluctant to acknowledge the true uncertainties associated with personal
selection
Overestimation
Overestimation = the tendency to think you’re better across a number of domains than you
actually are
o Self-enhancement = we tend to overestimate our own performance, abilities or
talents.
o The illusion of control = people think they have more control over circumstances
than they actually do
o When people have very little control, they tend to overestimate it
o When people have a great deal of control, they tend to underestimate it
o The planning fallacy = the tendency to overestimate the speed at which we will
complete projects and tasks
Tends to occur most often in the context of large, complex projects that, by
their very nature, are prone to (zijn gevoelig voor) complications
o Optimistic bias = the tendency to overestimate the rosiness of our future
Consequences:
o defensive pessimism = we brace ourselves for disappointment by making
pessimistic assessments about our own abilities, status and future
performance
o We attempt to manage our expectations strategically we start off full of
hope regarding an unknown future outcome. As the moment of receiving
actual performance feedback draws near, we tend to reduce our
performance expectations, becoming more pessimistic than optimistic.
Overplacement
, Overplacement = the tendency to believe we are better than others in specific ways when
we’re actually not. people rate themselves ‘better than average’
Underplacement = the tendency to believe we are worse than others on various dimensions
o We believe we would perform worse than others on hard tasks and better than
others on easy tasks
o We believe we are more likely than others to experience common events, but
less likely than others to experience rare events.
We regularly neglect the reference group and fail to appreciate that we will be among a
select group of others who, like us, thought they were better than others. when comparing
themselves to others, people often fall back on evaluating themselves in some absolute
sense, or relative to the population at large, rather than comparing themselves to the special
group to which they belong.
By focusing on themselves, people exaggerate (overdrijven) their own abilities and
limitations, failing to consider the fact that, quite often, others face similar opportunities and
challenges.
-
Overconfidence and positive illusions in particular, can be good for you, especially if
optimism enhances psychological resilience (veerkracht/elasticiteit) and improves well-being.
However, positive illusions are likely to have a negative impact on learning and on the quality
of decision making, personnel decisions and responses to crises
If we could only accept our personal vulnerability to bias, we could better anticipate our
biases, correct them and avoid the errors they cause. Unfortunately, people tend to be
resistant to the idea that their views are biased.
Hoorcollege 1, artikel 1: Comparing models of consumer behaviour – Antonides
There is no right or wrong theory for consumer behaviour some theories are more
adequate than others in answering questions in particular situations.
Consumer behaviour has become less predictable over time:
o Beginning of the 20th century: goods were scarce and income was low
consumer behaviour was predictable from models
o After the industrial revolution: goods became widely available, growth in product
variety and income was high consumer behaviour became less predictable
from models
System I: intuitive largely unconscious, associative, automatic, heuristic, emotional
System II: controlled, rule-based, systematic, analytic
Most neo-classical economic models can be categorized as system II types of models
System II types of models
Economic models
Theory of demand
o Engel curves: the quantified relationships between budget shares spent on
particular goods and income bijv. increase in income, proportionally less is
spent on food
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