mark6012 slides l5 behavioural decision theory (6sp bw)

8/6/2019 MARK6012 Slides L5 Behavioural Decision Theory (6sp Bw)

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7/22/2010

1

MARK6012:Understanding Buyer

Behaviour (UBB)

Week 5: Behavioural Decision Theory

(a bag of tricks)

Heuristics and BiasesHeuristics and Biases

Availability, Representativeness, AnchoringAvailability, Representativeness, Anchoring

Loss Aversion, Framing, Response Mode,Loss Aversion, Framing, Response Mode,Endowment, TradeEndowment, Trade--off Contrastsoff Contrasts

Decision RulesDecision Rules

Heuristic:

Mental processing simplification (a rule of thumb). Itaims at ‘good enough’ solutions.

. ,response

Disadv.: potential for error (bias) in solutions

Bias:

Systematic error in judgment or decision making (a cognitiveillusion). Generally, reduces decision quality.

The main heuristics that affect consumers’probability judgments are:

Availability

Ease of recall affects ud ments of robabilit ..

Representativeness

similarity of X to Y affects judgments of probabilitythat X belongs to category Y.

Anchoring

Point of reference affects judgments of probability

Mental availability is affected by factors otherthan frequency of observed events; e.g.:

Priming

External internal cues automatically activate local network connections

Salience

Cue competition implies that more salient cues are more likely to activatetheir related network connections

Familiarity

Strength of connections facilitates network activation

Recency

Connection strength decays over time if not reinforced, recent activationreinforces current connections

Bias:

Ease of item retrieval, as judgment of probability ofoccurrence

E.g.: more likely rain or shine? judgment on a rainy day.

Number of items retrieved in a mental search, as judgment ofprobability of occurrence

E.g.: more likely to die from a terrorist attack or a caraccident in Middle East?

Ease of imagination, construction of instances, as judgment ofprobability (also wishful thinking, overconfidence)

E.g.: what’s more likely a star or a black hole in space?



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Information display (e.g.: perceptual fluency)and description (e.g.: as gains v. losses) affectsutility of choice options

Violation of the invariance axiom (alternative

have no effect on utility).

Perceptual fluency (easier description of the sameoption receive higher utility)

Loss aversion (description of an option as a gainreceives more utility than when represented as a loss)

Framing is most likely to lead to biased valuation in ambiguous situations.Framing of decisions depends on language of presentation, nature of display,other contextual information.

The method of elicitation or the responsemode (e.g.: judgment v. choice) affects utilityevaluation and can lead to ‘preferencereversals’.

Compatibility hypothesis (the utility weight of aninput component is enhanced by its compatibilitywith the output component).

Relation to the spreading activation network model of long-term memory?

Ownership affects utility

Pre-ownership utility estimate in terms of apotential gain

Ownershi utilit estimate in terms of a loss i.e.:shift in the reference point.

Loss aversion, therefore not willing to sell an object forthe price that one would be willing to pay to obtainthat object.

Changing the choice set affects utility of anoption (violation of the independence of irrelevant

alternatives)

Tradeoff Contrast:

Comparing options relative to what’s available atthe moment (i.e.: local effect), or remembered from

the past (i.e.: background effect).

Local effects (in all strictness, probability of choice effects):

Similarity effect [or uniqueness] (Tversky, 1972, Psychological Review)

Adding alternative S similar in features to X, enhances the utility of theunique features of Y.

Asymmetric dominance effect [aka attraction] (Huber, Payne, & Puto, 1982, Journal of, , , ,

Consumer Research)

Adding alternative D clearly dominated by X, but not by Y, enhances theutility of X.

Reference point effect (Tversky& Kahneman, 1991, Quarterly Journal of Economics)

Starting evaluation from a reference point below Y, enhances the value ofY over X; and vice versa.

Compromise (extremeness aversion) (Simonson, 1989, Journal of Consumer Research)

Middle option M preferred to extreme options X or Y

Similarity:

( | , ) ( | , )P X X Y P Y X Y Y

( | , , ) ( | , , )P X X Y S P Y X Y S

Attribute 1

Theoretical challenge:

Violation ofindependence ofirrelevant alternatives.

Explained by eliminationby aspects.

X

S



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Y

Asymmetric Dominance:

( | , ) ( | , , )P X X Y P X X Y D

Attribute 1

X


Violation of regularity.

Problematic for randomutility models

Explained by lossaversion.

D

Dan Arielyvideo

Reference Point:

Y

Ry

( | , , ) ( | , , ) x xP X X Y R P Y X Y R

( | , , ) ( | , , ) y yP X X Y R P Y X Y R


Violation of IIA.

Explained by lossaversion.

Attribute 1

XRx

Compromise:

Y( | , ) ( | , )P C Y C P Y Y C

( | , , ) ( | , , )P C X Y C P Y X Y C

C Theoretical challenge:

Violation of IIA.

Explained by loss

aversion.

Attribute 1

X

W?

Situation dependent tradeoff between effort and accuracySituation dependent tradeoff between effort and accuracy

W A D D )

W A D D )

WADD

EQW

Situational demands on the consumer determine the rel tive im o rt nce of

Effort (Total EIPs)Effort (Total EIPs)

00 R e l a t i v e A c

c u r a c y (

R e l a t i v e A c

c u r a c y (

EBA

LEX

RC

0Effort constraint

accuracy v. effort goals.

Decision characteristics determine the position of different decision rules in the accuracy/effort space

mark6012 slides l5 behavioural decision theory (6sp bw)

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