heuristics, biases, and other things that go bump in the ... · we know that these effects can be...
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Heuristics, biases, and other things that go bump in the night – What should we do?
John Roberts
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Paper presented to the Behavioural Insights in Business and Policy Roundtable,
University of New South Wales CBD Campus, Sydney, November 2016
An historical view of research in consumer response
Qualitative What is Psychologists
happening? Sociologists
Why? How? Anthropologists
Quantitative How much is Statisticians
happening? Economists
When? How much? Econometricians
The starting point
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From Gigi
1. Economics has provided some
insights into the marketplace and
its social environment
2. However, there are many missing
pieces that we don’t quite
understand
3. Behavioural economics may
throw some insight on those
From Andreas
1. In applying behavioural economics
there are a number of potential
pitfalls:
• Mixed findings, spotty
performance, 2nd order effects
2. Therefore, we should be careful in
looking for, understanding, and
harnessing the insights from
behavioural economics
I would like to close with some thoughts about the where, when and how
Existence
We know that there are departures from “rationality”
• Framing risks choices as lives lost versus lives saved
(Tversky and Kanhnemann 1985)
• Price of a beer at the beach(Thaler 1985)
• Effectiveness of defaults
(Johnson & Goldstein 2003)
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We know that these effects can be fleeting
• Iyengar and Lepper (2000)
Choosing between 6 and 24 varieties of jam
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Is the famous
‘paradox of
choice’ a myth?BY BARRY SCHWARTZ January
29, 2014 at 12:43 PM EST
2. The influenced
and their responses
The environment and
its rules
1. The actors and
their actions
Measuring marketing effectiveness
The Marketing Mix
To make our actions effective, we need to understand three elements
Framework for understanding the locus of action
This provides us with three areas of focus:
How customers and other subjects behave (The marketplace place phenomena)
Dimensions of management action (Decisions managers take based on analysis)
The rules and context of the environment (Regulation and market characteristics)
So where does behavioural economics come in?
“Behavioural economics is the study of where our representations of consumer evaluation and decision making departs from the phenomena we observe in the marketplace.”
• Consumer departures from those that our axiomatic representations of choice would predict are not always usefully described as “irrational.”
• Some choices may just be due to omitted variables (e.g., Shugan JCR 1980 “The cost of thinking”) while others may lead to inconsistent choices.
• For public policy purposes we need to be very careful in defining what is in the consumer’s interests.
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Economic models of consumer behaviourThe workhorses of marketing science
• Utility (e.g., Lancaster 1966)
A product’s utility is constituted by the value of its component attributes
• Choice (e.g., McFadden 1974)
The probability of an option being selected is a function of
its utility
• Budget allocation (e.g., Thaler 1985)
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Improving our representations of consumer evaluation and choice processes
Separability Biases, recency and priors
Kayande et al. (Mkt Sc 2007) Chylinski, Roberts and Hardie (Mkt Sc 2013)
Consideration Emotions with cognitions
Roberts and Lattin (JMR 1991) Roberts et al. (Mkt Sc 2015)9http://www.youtube.com/watch?v=yPAfA84A290
http://www.youtube.com/watch?v=sJzRS_LfalU
Classifying departures from “rationality”
• Heuristics and biases (Tversky and Kahneman 1975)– Representativeness, availability and anchoring
• Framing– Defaults (Johnson and Goldstein Science 2003) – Losses and gains (Armstrong et al. 2002)
• Estimation errors and bounded rationality– Intertemporal discount rates (Loewenstein and Prelac QJE 1992)– Inconsistent treatment of uncertainty– Prospect Theory (Kahneman and Tversky 1979)
• Other criteria, aggregation rules– Mental accounting (Thaler Mkt Sc 1993)Fairness: https://www.youtube.com/watch?v=3XXQMDGErL0
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When our simple models break down
• When consumers have little familiarity with the task
– High technology
– House purchase
• When consumers have incomplete information
– New product purchase
– Credence products (e.g., doctors, wine merchants)
• When consumers have non-comparable options
– Lack of attribute alignability (Johnson JCR 1984)
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Implications of a failure of consumer heuristics % % Inert
Inept Not enough No Real % Non
Unacceptable Information Need Consider
Crunchy Nut
Flakes
36.0 10.0 21.0 67.0
Fruit Loops 78.5 1.5 2.5 82.5
Frosties 76.0 1.5 10.0 87.5
Kelloggs
Corn Flakes
6.0 1.5 12.5 20.0
Komplete
Muesli
8.5 26.5 19.0 54.0
Nutrigrain 16.5 2.5 6.0 35.0
Ready
Wheats
22.0 29.0 19.0 70.0
Skippy Corn
Flakes
12.0 4.0 41.5 57.5
Sultana Bran 3.5 2.5 35.0 41.0
Brands in the Australian Ready to Eat Cereal Market
Weetbix takes on Nutrigrain
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Decisions marketing managers make
• What managers do: The marketing mix– Product: Design features (anxiety and regret)
– Price: “9” endings as a signal of bargains
– Promotion: Choosing a battleground
– Place: Healthy food at eye level
• To whom managers do it: Customer management– Acquisition: Moments of truth (Sainsbury and Safeway)
– Retention: Customer recovery strategies
– Account maximization: Avoiding “bad profits”
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Implications for action: Managers
• Understand (and manage) the benchmarks (anchors) against which your products will be judged. (e.g., Prada stores do not have high sales.)
• Provide context so that consumer inferencing will work in your favour (Avis “We try harder.)
• Turn high involvement decisions to low involvement decisions (e.g., automatic payments)
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Decisions regulators make
• What is misleading and deceptive conduct?– Incorrect claims (“Australians prefer Visa”: True?)
– Inappropriate inferences (Malboro Mild, Low tar)
– The reasonable man
– Heterogeneity: The old and the young
• Fair and open markets– Deceptive barriers to entry
– Maximizing and crimping capture of consumer surplus
– Information transparency; availability and distribution
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Implications for action: Regulators• Understand where consumers are likely to be
misled (e.g., Bunnings “Where lowest prices are just the beginning. Find a lower price on a stocked item and we will beat it by 10%.”)
• Understand consumer inference processes (for example, low fat low calorie in consumer’s mind; energy is good but calories are bad.)
• Look for sources of heterogeneity
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Discussion questions
To be able to harness the ideas of behavioural economics we need to be able to answer the following questions:
1. What are the different types of departure from homo economicus that offer threats and opportunities?
2. When would we expect these departures to be present and to be important?
3. How do we establish the limits, boundaries, domains of these phenomena (external validity)?
4. Given the insights from observing heuristics and biases, what are the actions that the consumer, the decision maker, and the regulator can take to further their objectives?
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