Consumer Decision Making-1

1. 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. • Monday, 11-April-2011 • T14: Human Information Processing: Lecture 21 • 2A20, ITU, Copenhagen, Denmark

2. Neoclassical Rational Model of the Consumer Three main assumptions: Perfect knowledge about possibility sets Transitivity of preferences Existence of a scheme of preferences for all available alternatives

3. Simon’s Bounded Rationality Decision-making is Satisficing rather than Optimizing Three main assumptions: Limited Knowledge Information is costly to collect and store Economic behavior requires trial-and-error search process

4. 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

5. Decision Heuristics Weighted Additive Rule (WADD) Equal Weight Rule (EQW) Elimination-By-Aspects (EBA) Lexicographic (LEX)

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. Internet’s Effect on Decision Heuristics Impact on all Four Components of Consumers’ Choice Space: Evaluation Strategies Evaluative Criteria Consideration Set Image of Alternatives within the Consideration Set

13. (Un)Bounded Rationality Authors’ Claim: The Three main assumptions might not be valid Limited Knowledge Information is costly to collect and store Economic behavior requires trail-and-error search process

14. 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.

15. The Internet Revolution Traditional Media Newspapers Radio Television SMEs and MNCs Virtual Storefronts Brand Comparisons Travel and Tourism Government Education Libraries

16. 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

17. 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

18. 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

19. 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)

20. Implications of Cognitive Filtering Accurate targeting of an online consumer’s “in-group” online spaces Online market segmentation Online communities

21. 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 Empowering Consumers’ Decision-Making? Strengthening Marketers’ Persuasion Potential?

22. 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)

23. Henry’s Four Skepticisms Enhanced Decision Capability Search Patterns New Decision Strategies Consumer Empowerment

24. 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

25. 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)

26. Human Cognitive Variability Different Cognitive Characteristics Knowledge Skills Abilities “Access is only empowering if one has these prerequisite skills” (p. 354) Visual vs. Textual

27. 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

28. 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)

29. 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

30. Three Approaches to Decision-Making Insights Expert questioning Form a panel of prospective customers Facilitate expert questioning sessions 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