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Consumer Decision Making-1

Mishra, S., & Olshavsky, R. (2005). Rationality Unbounded: The Internet and Its Effect on Consumer Decision Making. Chapter 17 of Online

Consumer Psychology.

Ravi VatrapuDirector, Computational Social Science Laboratory (CSSL)

Associate Professor, Center for Applied ICTCopenhagen Business School

Howitzvej 60, 2.10, Frederiksberg, DK-2000, Denmark

+45-2479-4315vatrapu@cbs.dk

http://www.itu.dk/people/rkva/

Monday, 11-April-2011

T14: Human Information Processing: Lecture 21

2A20, ITU, Copenhagen, Denmark

Neoclassical Rational Model of the Consumer

Three main assumptions:

1. Perfect knowledge about possibility sets

2. Transitivity of preferences

3. Existence of a scheme of preferences for all available alternatives

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Simon’s Bounded Rationality

Decision-making is Satisficing rather than Optimizing

Three main assumptions:

1. Limited Knowledge

2. Information is costly to collect and store

3. Economic behavior requires trial-and-error search process

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Consequences of Bounded Rationality

Cognitive Effort vs. Decision Accuracy tradeoffs

Less-accurate heuristics over optimal choice rules

Task Effects Time pressure Number of alternatives and number of attributes Response modes

Context Effects Similarity of alternatives

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Decision Heuristics

Weighted Additive Rule (WADD)

Equal Weight Rule (EQW)

Elimination-By-Aspects (EBA)

Lexicographic (LEX)

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Weighted Additive Rule (WADD): Example

Textbook: Table 17.2 (p. 365)

Alternative A: (6x4) + (4x7) + (2x4) = (24) + (28) + (8) = 60

Alternative B = 44 Alternative C = 54

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Picture Quality Versatility Convenience

Weights 6 4 2

Alternative A 4 7 4

Alternative B 2 7 2

Alternative C 4 6 3

Equal Weight Rule (EQW): Example

Same as Weighted Additive Rule (WADD) but with Equal Weights

Alternative A = 4 + 7 + 4 = 15 Alternative B = 2 + 7 + 2= 11 Alternative C = 4 + 6 + 3 = 13

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Picture Quality Versatility Convenience

Weights 4 4 4

Alternative A 4 7 4

Alternative B 2 7 2

Alternative C 4 6 3

Elimination By Aspects (EBA): Example

Form cutoffs for the most important attribute Eliminate all products with attributes not meeting the cutoff Repeat till only one product remains

Select Picture Quality First Alternative B is eliminated Select Versatility Next Alternative C is eliminated and Alternative A is selected

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Picture Quality Versatility Convenience Cutoff 3 7 4

Alternative A 4 7 4

Alternative B 2 7 2

Alternative C 4 6 3

Lexicographic (LEX): Example

Select most important attribute Select the product with the best value on the attribute Resolve ties by selecting the next important attribute

Select Picture Quality First Alternative A and Alternative C are selected Select Versatility Next Alternative C is eliminated and Alternative A is selected

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Picture Quality Versatility Convenience

Alternative A 4 7 4

Alternative B 2 7 2

Alternative C 4 6 3

WADD & EQW

Compensatory Utility loss in one attribute can be traded off

with utility gain in another attribute of the same product

Alternative-based All alternatives are considered

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EBA & LEX

Non-Compensatory Utility loss in one attribute CAN NOT be

traded off with utility gain in another attribute of the same product

Attribute-based Only specific set of attributes are considered

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Internet’s Effect on Decision Heuristics

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Impact on all Four Components of Consumers’ Choice Space:

1. Evaluation Strategies

2. Evaluative Criteria

3. Consideration Set

4. Image of Alternatives within the Consideration Set

(Un)Bounded Rationality

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Authors’ Claim: The Three main assumptions might not be valid

1. Limited Knowledge

2. Information is costly to collect and store

3. Economic behavior requires trail-and-error search process

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Online Consumer Psychology

Hood, K., & Schumann, D. (2007). The Process and Consequences of Cognitive Filtering of Internet Content: Handling the Glut of Internet Advertising. In D. Schumann & E. Thorson (Eds.), Internet advertising: Theory and Research (pp. 185-202): Lawrence Erlbaum Associates.

Henry, P. (2005). Is the Internet Empowering Consumers to Make Better Decisions, or Strengthening Marketers' Potential to Persuade? . In C. Haugtvedt, K. Machleit & R. Yalch (Eds.), Online consumer psychology: understanding and influencing consumer behavior in the virtual

world (pp. 345-360): Lawrence Erlbaum Associates.

The Internet Revolution

Traditional Media Newspapers Radio Television

SMEs and MNCs Virtual Storefronts Brand Comparisons

Travel and Tourism Government Education Libraries

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Human Information Processing-1Hood, K., & Schumann, D. (2007). The Process and Consequences of Cognitive Filtering of Internet Content: Handling the Glut of Internet Advertising. In D. Schumann & E. Thorson (Eds.), Internet advertising: Theory and Research (pp. 185-202): Lawrence Erlbaum Associates.

Sometimes there can even be too much of a good thing

Limited Cognitive Capacity Information Overload Clutter Effects

Sensation, Perception, Attention, Cognition, Action

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Human Information Processing-2

Contextual Cuing Situations influence perception Task demands influence attention Knowledge, skills and abilities influence cognition

and action

Internet Search Process Circuitous Process Decision Heuristics

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Cognitive Filtering

Learning in and of itself is selective (Broadbent)

Cognitive filtering is a coping mechanism

Internet Search: Two Primary Goal States Information-seeking goal state Desired Experiential State

Moderators of Cognitive Filtering Individual Differences Situational Influences

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Consequences of Cognitive Filtering

Restriction of exposure to diversity Intergroup-bias

First-order effects (confirmation bias) Second-order effects (inaccuracies) Third-order affects (restricted action)

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Implications of Cognitive Filtering

1. Accurate targeting of an online consumer’s “in-group” online spaces

2. Online market segmentation

3. Online communities

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Online Consumer Decision-MakingHenry, P. (2005). Is the Internet Empowering Consumers to Make Better Decisions, or Strengthening Marketers' Potential to Persuade? . In C. Haugtvedt, K. Machleit & R. Yalch (Eds.), Online consumer psychology: understanding and influencing consumer behavior in the virtual world

(pp. 345-360): Lawrence Erlbaum Associates.

Two Themes: Is the Internet

1. Empowering Consumers’ Decision-Making?

2. Strengthening Marketers’ Persuasion Potential?

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Henry’s Central Claim

“Despite the impact of innovation on media alternatives, we must realize that we are faced with human characteristics that remain constant over time.” (p. 346)

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Henry’s Four Skepticisms

1. Enhanced Decision Capability

2. Search Patterns

3. New Decision Strategies

4. Consumer Empowerment

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Human Information Processing

Information Overload “Single-Feature Responding” From “product orientation” to “marketing orientation” Online Heath information example

Constraining Factors Limits to Human Information Processing Limited Time Expanded Information More Cognitive Effort Increased Choice but decreased perception of power

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HUMAN DECISION-MAKING

Information presentation and communication requirements

Financial Decisions Kahneman & Tversky’s Prospect Theory

Decision-Making Heuristics Habitual Repurchase Most well-known brand Price as proxy for quality Third party opinions (experts, friends, trusted others)

“Short-cuts have utility” (p. 354)

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HUMAN COGNITIVE VARIABILITY

Different Cognitive Characteristics Knowledge Skills Abilities

“Access is only empowering if one has these prerequisite skills” (p. 354)

• Visual vs. Textual

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TECHNOLOGY CYCLES

Increased Time Pressure

Expanded Access to Information

Greater Range of Choice

Human Cognitive Limitations

Technology cycles that results in the default shortcut to reliance on expert opinion

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HENRY’S CLAIM

If this approximates reality, then the Internet will not change the basic decision strategies, nor it will lead to substantial knowledge enhancement.” (p. 356, emphasis mine)

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RECOMMENDATIONS

Understanding of Consumers’ Decision-Making Processes

Involvement with the category

Identification of current information-search patterns

Alternative evaluation criteria

Duration of the decision process

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THREE APPROACHES TO DECISION-MAKING INSIGHTS

1. Expert questioning Form a panel of prospective customers Facilitate expert questioning sessions

2. Guided Recall Category need identification Subsequent product purchase processes and outcomes

3. Triadic sorting• Sets of three product alternatives• Select one that is most different than the other two

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