9--heuristics%2c biases%2c and the context of %28student%290
TRANSCRIPT
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Heuristics, Biases, and the
Context of Judgments
Dr. Kelly Haws
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Key Questions
What are some known ways in which ourdecision making is biased?
How can an understanding of these biases aids
marketers/consumers? What is good decision making?
How does prospect theory affect our judgments?
How can simple aspects of a retail or decisionenvironment have a dramatic impact on ourconsumption decisions?
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Readings
Nudge, Chapter 1, Biases and Blunders, pp. 15-39. (Course pack pp. 110-121) TEAM
Why Smart People Make Big Money Mistakes,
Chapters 2 & 5, When Six of One Isnt Half aDozen of the Other, and Anchors Aweigh, pp.51-59 and 129-135. (Course pack pp. 122-130)
Paradox of Choice, Chapter 4, When Only the
Best Will Do, pp. 77-96. (Book) Why We Buy, Chapters 3 and 4, The Twilight
Zone and You Need Hands, pp. 45-59. (Book)
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BehavioralEconomics &
Consumer Decision-Making
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Our decision-making processes mightnot be as perfect as we think
Lets take acloser look.
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Do we experience decision illusions in
the same way we experience optical
illusions?
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If we make persistent errors in thingswe are very good at like numbers,letters, colors, and shapes
how likely is it that we are alsosubject to persistent, predictable
errors in areas of consumerdecision-making?
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Heuristics and Biases
Heuristics are decision making shortcuts that
help us make quick and easy decisions
Biases occurs when these quick and easy
decisions are not optimal.
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Context of Judgments:
Prospect Theory
(Kahneman & Tversky 1979)
People dont follow a traditionally rational theory
of choice
It applications include: Framing
Loss Aversion
The Endowment Effect
Reference points
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Prospect Theory(Kahneman & Tversky 1979)
We will begin looking at this theory today, and then
continue over the next couple of weeks.
XX
But first, the basics
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Loss aversion and framing
If the same choice is
framed as a loss,
rather than as a
gain, differentdecisions will
be made.
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When an investor
sells a losing stock,
she is committing tothe loss.
Does loss aversion
cause investors tohold losing stocks
longer than winning
stocks?
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THE CONTEXT OF JUDGMENTS
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Although students were reminded thatthe social security number is a randomquantity conveying no information,those who happened to have high
social security numbers were willingto pay much more for the products.
Ariely, D. (MIT), Lowenstein, G. (Carnegie Mellon), & Prelec, D. (MIT), 2006, Tom Sawyer and the construction
of value. Journal of Economic Behavior & Organization, 1-10.
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Experiment:
Business students were told theirprofessor would be doing a 15-minute poetry reading. Half were
asked if they would be willing topay$2 to attend and half wereasked if they would be willing toattend if they were paid $2. Afteranswering, students were then told
that the poetry reading would befree and were asked if they wantedto attend.
Question:
Would the initial anchoring of theexperiences value affect whowould attend for free?
Ariely, D. (MIT), Lowenstein, G. (Carnegie Mellon), & Prelec, D. (MIT), 2006, Tom Sawyer and the construction
of value. Journal of Economic Behavior & Organization, 1-10.
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Perhaps
students
were just
using price
as an
estimate ofunknown
quality?
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Williams-Sonoma, a mail-order andretail business located in SanFrancisco, used to offer one homebread maker priced at $275. Later, a
second home bread maker wasadded, which had similar featuresexcept for its larger size.The newitem was priced more than 50%higher than the original bread maker.
Williams-Sonoma did not sell manyunits of the new (relativelyoverpriced) item, but the sales of theless expensive bread maker almostdoubled.
Simonson, I. (Stanford), 1999, The effect of
product assortment on buyer preferences,
Journal of Retailing, 75(3), 347-370.
When bread makers were new
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Producers want to
anchor to a higher
priced alternative
Even if it means creating
an artificial alternative
Producers avoid
anchoring to a lower
priced alternative
Differentiation is key
If we anchored Starbucks coffee
by Dunkin Donuts coffee, would
we buy Starbucks?
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