Decision Making in Marketing Summary
Session 1: Heuristics and Biases
Important question regarding consumer decision making: “Are we in Full Control”
“You are not an organ donor on the left, you
have to tell them if you want to donate.
Countries on the right are on default organ
donors, you have to do it and if you don’t want
to, you have to say so.”
The Default Effect
Among the set of options that agents choose from, the default option is the option the
chooser will obtain if he or she does nothing.
Countries with low percentage: Opt-In
• Check the box if you want to participate in the organ donor program → people
don’t check and don’t join
Countries with high percentage: Opt-Out
• Check the box if you do not want to participate in the organ donor program →
people don’t check and join
Other examples: newsletters, travel insurance
MORE LIKELY TO STAY THAN TO OPT OUT, as that’s less work.
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 motivation
Use of Heuristics
Heuristics: shortcuts
Heuristics = cognitive shortcuts to make decisions quickly and efficiently
• Example: Default effect (i.e., people are more likely to accept default options)
• Problem: use of heuristics can lead to systematic errors and biases (e.g., deviations
from the true or objective value, violation of probability laws)
,Decoy Effect
The decoy effect is the phenomenon whereby consumers will tend to have a specific
change in preference between two options when also presented with a 3rd option that is
asymmetrically dominated. Also, when combining two products, consumers will tend to
go for that one.
Example: Cinema popcorn prices. Imagine they add a medium popcorn, for €5.50.
Having this medium option, the large option looks much better worth your money, so
consumers go for that one. As for 50 cents more, you get a “bigger” one. This is the decoy
effect. Marketers do this as they want you to buy that big one.
WE MAKE CHOICES BASED ON WHAT WE SEE
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 to decide → upselling
• Examples: pricing of consumer electronic products (e.g., Apple), buying popcorn
in the cinema
Choices are made relative to other alternatives rather than begin based on absolute
preference
Anchoring and Adjustment
Is the height of the tallest redwood tree more or less than 365 meters? What is your best
guess about the height of the tallest redwood tree?
The salient number → the tallest redwood tree is 115 meters. However, the number in the
question (= anchor) influences the estimate. Many guessed 257 m.
,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:
• General: Negotiations (wages, prices etc.), price expectations
• Specifically: Sales techniques (prices, product portfolio): furniture, cars, home
appliances etc.
Anchoring and Adjustment: Getting Away with High Prices!
Why can Starbucks charge more than other brands? Because of their brand
identity, you feel “rich going there”. It gives you a good feeling going to
Starbucks. You feel very nice.
“We are not in the coffee business serving people, we are in the people
business serving coffee.” – Howard Schultz, CEO Starbucks
Anchoring and Adjustment: The Discount
You buy this bed as you feel you are getting a 500€ discount, which sounds amazing to
you. So, the company made an anchor (full price) on this product.
Mental Accounting
Imagine the following Scenario 1: You are about to buy an ice cream cone for 5€. As you
stand in line at the Manhattan Beach Creamery to buy your ice cream, you discover that
you have dropped a 5€ bill on the Metro. You are disappointed, of course. Will you still
buy the ice cream for 5€?
Yes, most likely you will still buy the ice cream. As you losing 5€ does not relate to the
ice cream. You still want the ice cream. You did not spent money on your “budget for ice
cream”. You lost 5 in the metro, not based on ice cream.
Imagine the following Scenario 2: You are about to enjoy your ice cream cone which you
bought for 5€ in the Manhattan Beach Creamery. However, to your dismay you accidently
spill the entire ice cream on the floor. Will you spend another 5€ for the ice cream?
, Most people will NOT spend 5€ again as they feel like that is a waste, as they lose money
they already spent on ice cream. They already spent their ice cream budget money, so
they don’t want to spend more money on ice cream.
AND ACTUALLY, IN BOTH SCENARIOS YOU LOSE SAME. In our minds, we have
accounts for money, we check and think about what we spent. Losing money from
different ‘mental accounts’ influences purchase decisions
Mental Accounting:
• Mental Accounting = People keep track of their expenses in different mental
accounts (i.e., categories); these mental accounts influence the decision-making
process
• ‘A dollar is not always a dollar’
Managerial & Policy Relevance:
• Individuals / consumers spend money differently depending on the ‘account’ they
pay from
• Examples: Tax refunds, birthday money, investments, bonuses at work, lottery
winnings
Availability Heuristic: What I can Recall is Important!
If you keep reading about the coronavirus on every newspaper, then you believe you will
get it as newspapers are saying it’s happening and serious etc. You easily get influenced
by it.
Same with winning the lottery. You keep seeing people win millions, so you think you
can win millions if you participate. You believe you have a high chance.
Availability Heuristic = Events are judged more likely to the extent that they are vivid or
easily recalled
• Tversky & Kahneman (1974): “If you can think of it, it must be important”
Managerial & Policy Relevance:
• Ignoring relevant facts due to the vividness of recent examples → Overestimation
of the likelihood that something good or bad will happen
• Examples: seeing news (plane accident, job layoffs), lottery winners, sweepstakes
(e.g., Facebook)
Representativeness Heuristic
Consider the following: Linda is 31-year-old, single, outspoken and very bright. She
majored in philosophy. As a student, she was deeply concerned with issues of
discrimination and social justice, and also participated in anti-nuclear demonstration.
What is more likely?
1. Linda is a bank teller
2. Linda is a bank teller and active in the feminist movement
