Decision Making in Marketing

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Lecture 1

Question 1 = Assume you would like to subscribe to ‘Time’ magazine * internet only subscription
* print only subscription
* print and internet subscription

= context question
* Choices are made in a context
* Everything is relative , without context choices (in absolute terms) mean nothing * We compare jobs with jobs, wines with wines, lovers with lovers

Question 2 = Anchoring and adjustment
When was Atilla defeated by estimation.
Question 3 = Mental Accounting (Thaler)
Losing your movie ticket while having no receipt, will you buy one again? Losing money = different mental account

Question 4 = Availability Heuristic
Which disease causes more deaths? (breath cancer vs respiratory infection)(car accidents vs diabetes)

Question 5a: Firm Statistics
Which group of companies has the largest total revenues?

Question 5b= conjunction fallacy
Is linda more likely to be a bank teller or a bank teller and in a feminist group(Linda is 31 year old, single, outspoken and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice, and also participated in anti-nuclear demonstration.)

Question 5 = Representative Heuristics
* People answer a question about an object by considering how much the object is a prototype (representative) of the category

People judge the probability of a hypothesis by considering how much the hypothesis resembles (is representative for) available data

Prospect theory (k&T, 1979)
The theory describes the decision processes in two stages: editing and evaluation. During editing, outcomes of the decision are ordered following certain heuristic. In particular, people decide which outcomes they see as identical, set a reference point and then consider lesser outcomes as losses and greater ones as gains. In the following evaluation phase, people behave as if they would compute a value (utility), based on the potential outcomes and their respective probabilities, and then choose the alternative having a higher utility

Heuristics & Biases: Definition
* Bounded rationality: individuals have to make decisions under constraints - Limited knowledge/information
– Time pressure
* Limited cognitive resources (attention, computatio n, memory) * Limited motivation

* People use cognitive shortcuts, intuitive rules to come up with likelihood judgments, with little mental effort and awareness

* May be efficient in some situations but lead to systematic errors and biases in others

* Biases:

– deviations from the true or objective value

* Violations of the basic laws of probability (Linda example)

Heuristics & Biases in Judgment

* Availability: Events are judged more likely to the extent that they are vivid or easily recalled "if you can think of it, it must be important * Anchoring: the common human tendency to rely too heavily on the first piece of information offered (the "anchor") when making decisions Estimation is often a process of anchoring on a salient number and adjusting up or down ; but Adjustments are typically insufficient and the estimation is biased toward the anchor. * Representativeness: The probability that object A belongs to class B depends on the degree to which A resembles B * Mental Accounting: People keep track of their expenses in different mental accounts and budgets. * Prospect Theory: Losses appear larger than gains

* Context Effect: Choices are made in a context. Everything is relative, without context choices (in absolute terms) mean nothing

Why are people often not rational?
1. Limited cognitive capacities and abilities
2. Emotions and feelings
3. Social influences
4. Cultural influences

This (ir)rationality is
1. Systematic, we repeat it over and over...
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