social sciences

Prospect theory #1 Buy my products!

Most of us are gonna have to make a myriad of financial decisions in our life times. We often presume that people are rational, and that people would make choices using their rationality. But, there seem to be some patterns in our behavior that are quite far from rational. A very interesting theory looks at how we perceive losses and gains, this is called the prospect theory. 

We often take risks when deciding to spend or to not. We can choose to get a loan, buy a lottery ticket, or buy a very expensive TV (instead of paying our monthly bills). But, all in all, people seem to be loss averse. This means we will try anything to avoid losing money. Though, losses hurt us more than gains bring us joy. So losing 100 euros is more painful than getting 100 euros were to make us happy. This finding is part of the prospect theory that was formulated by Kahneman and Tversky (Barberis, 2012).

The part were it gets especially interesting is when we start framing different scenarios. Framing is a psychological effect, people will make a decisions based on how a certain message is presented. This is an example from Kahneman and Tversky’s (2000) book:

  • Decision 1: Choose between
    • A. sure gain of $240
    • B. 25% chance to gain $1,000 and 75% chance to gain nothing
  • Decision 2: Choose between
    • C. sure loss of $750
    • D. 75% chance to lose $1,000 and 25% chance to lose nothing

In the first decision scenario, the majority of people seem to choose option ‘A’. But in the second decision scenario, people are more likely to go for option ‘D’. In the second scenario, there is a chance to avoid a big loss, so people are willing to gamble to possibly lose nothing.

With the existence of the internet, it has become so much easier to buy and sell goods. Even for us, consumers, it’s possible to sell our own things, on websites like Ebay. Loss aversion has implications for buying and selling situations. Often when we try to sell stuff that we’ve owned, we demand a higher prices than buyers would be willing to pay. This is called the endowment effect. And loss aversion can explain why there is a gap between the price people are willing to pay for a product, and the price people are willing to accept for their product (Morewedge & Giblin, 2015).
People who are selling are at risk of losing something, and they might want to compensate for this. They are the ones that go from owning something to possible losing something. Whereas a buyer doesn’t lose anything.
In sum, according to the prospect theory, losing money or products hurts us. So think twice before betting / gambling your money away!

References 

Barberis, N. C. (2012). Thirty years of prospect theory in economics: A review and assessment (No. w18621). National Bureau of Economic Research.

Kahneman, D., & Tversky, A. (2000). Choices, values, and frames. Cambridge University Press.

Morewedge, C. K., & Giblin, C. E. (2015). Explanations of the endowment effect: an integrative review. Trends in cognitive sciences, 19(6), 339-348.

Photo by Avji

social sciences

Consumer choices #2 How we choose?!

Imagine you’re standing at the candy aisle again. You’re still looking for the best possible milk chocolate bar. So far we’ve seen that having too many options might not be very beneficial for your actual choice outcome. But how will you end up choosing?

I’m assuming that in your lifetime you’ll end up being involved in more choices than just trying to find tasty chocolate bars. You are probably aware of the fact that you’re looking at different options… all day. Should I read this entire blog post? What am I going to eat for dinner? What time should I set my alarm clock? Should I take the job?

If we look at ‘making choices’ in a consumer perspective, it’s interesting to look from a brand’s perspective. Say you’re trying to sell a new product, but there’s already fierce competition from other brands in the same market branch. How are you going to advertise your product to make it stand out? You will have to know how people process information. And multiple researchers have come up with different models on how and when we make choices.

A model that looks at information processing is the Heuristic-Systematic processing model (Chen, Duckworth, Chaiken, 1999). According to this model we have two different ways to process information.

  • First, we could take the heuristic route. This means we’ll use heuristics, these are simple rules of thumb to solve problems. When engaging in this type of processing, we might look at the packaging of the chocolate bars. In the Netherlands, we seem to have this unwritten rule that all milk chocolate is wrapped in blue. Relying on heuristics, we might grab the nearest bar with blue wrapping. We’re more likely to rely on cues, like the color of the packaging, when (a) the issue is not very important to us, (b) we’re under time pressure, or (c) not very motivated.
  • But we can also take the systematic route. Using this route, we’re trying to take in all available information, scrutinizing every detail, and analyzing everything. This way of information processing means using a lot of cognitive effort. In our candy aisle scenario, we would study all the bars, and look for information we find important. Are we into fair trade? Are we limiting ourselves to a certain amount of calories? Do we have a budget? We will compare every piece of information we find important. So when will we spend hours browsing the whole aisle? 1. When the matter is personally relevant to us (Chaiken, 1980)! And we’re just so incredibly passionate about the perfect bar of milk chocolate. 2. When we want to be accurate! So our bar can’t surpass 500 calories. 3. And when we have defense motivation! This means that we care a lot for judgments related to our ‘selves’. In our case, we are looking for chocolate brand that uses fair trade. Because we see ourselves as being nice to others on the planet.

A matter of self-control?
Let’s say you were visiting the grocery store to only get milk and cereal. Yet, you happened to pass the candy aisle and stop for a second. You’re telling yourself to continue walking to the check-out. Because for whatever reason (whether it be a specific diet, or budget reasons) chocolate wasn’t on your shopping list. But in a split second you do grab yourself a tasty chocolate bar. Why?!
Baumeister, Vohs, and Tice, (2007) have developed a model that explains how self-control might work. They use the ‘muscle metaphor’. Our self-control is referred to as a muscle, that will be depleted of energy after it has been used for awhile. So if you have been fighting off temptations all day (not getting angry, staying focused on your work, patiently waiting, etc) it will become harder and harder to practice self-control.
Researchers have even suggested that being low on blood glucose can decrease our self-control (Gailliot et al., 2007). So eating chocolate before shopping should help you refrain from impulse purchases.
Vohs, and Faber (2007) found that once participants’ were low on self-control, they were more likely to buy more and spend more money!

The supermarkets are manipulating you!
North, Hargreaves, and McKendrick  (1999) conducted a very interesting field experiment in a supermarket. This is an experimental setting in which people are looked at in their ‘natural habitat’. Supermarkets either played French or German music, and the experimenters checked to see if customers were more likely to buy French or German wine. And guess what? When French music was played in the background, more French wine was sold! This was also the case for the German wines. And after participants were asked if they were aware of the fact that their choices had been influenced by music, they reported not knowing about this at all!

References

Baumeister, R. F., Vohs, K. D., & Tice, D. M. (2007). The strength model of self-control. Current directions in psychological science, 16(6), 351-355.

Chaiken, S. (1980). Heuristic versus systematic information processing and the use of source versus message cues in persuasion. Journal of personality and social psychology, 39(5), 752.

Chen, S., Duckworth, K., & Chaiken, S. (1999). Motivated heuristic and systematic processing. Psychological Inquiry, 10(1), 44-49.

Gailliot, M. T., Baumeister, R. F., DeWall, C. N., Maner, J. K., Plant, E. A., Tice, D. M., … & Schmeichel, B. J. (2007). Self-control relies on glucose as a limited energy source: willpower is more than a metaphor. Journal of personality and social psychology, 92(2), 325.

North, A. C., Hargreaves, D. J., & McKendrick, J. (1999). The influence of in-store music on wine selections. Journal of Applied psychology, 84(2), 271

Vohs, K. D., & Faber, R. J. (2007). Spent resources: Self-regulatory resource availability affects impulse buying. Journal of consumer research,33(4), 537-547.

Photo source: By Simon A. Eugster (Own work) [GFDL (http://www.gnu.org/copyleft/fdl.html) or CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0)%5D, via Wikimedia Commons

social sciences

Consumer Choices #1 Too many choices!

Often people assume that more is better. And intuitively you might think that having a lot of options when buying a new product is more satisfactory or desirable. But the opposite could actually be true, if we look at existing research.

Lots of options are nice!
Imagine you’re at the candy aisle. You’re craving chocolate, just a bar of plain milk chocolate. But in most big supermarkets it seems as if there are a hundred different brands that sell chocolate bars. Now you have to choose one brand, though you could buy all of them, and try all of them to make sure you get the best tasting one. However, that will most likely end up being very time consuming and you will end up feeling pretty sick in the end. Or you could close your eyes and grab a random bar. But wouldn’t that increase the chances of picking a less than desirable option?

Too many choices?
Let’s look at actual research conducted on this topic. Iyengar and Lepper (2000) have written a great article on having too many options. In their article they created different experimental settings in order to test their hypotheses. In each of these experiments participants were assigned to either a high choice condition or a low choice condition (or a control group). In the high choice condition, people received the most possible options.
These researchers found that when given a limited amount of options, participants ended up feeling more satisfied with their choices. They were also more likely to actually buy products.

Where to go for Spring Break?! So many hotels!
A lot of research on the choice overload hypothesis has focused on products like chocolates. But Park and Young (2013) have looked at having too many options in a touristic setting. Students’ choice satisfaction was measured through the amount of hotels they could choose from, for their next spring break. They found that students who had fewer than 22 options reported feeling less regret, as opposed to those who had no choice or more than 22 options to choose from.

But why don’t we like to choose from a wide variety of chocolate bar brands?
Because we end up being less satisfied, we’re less sure of our choices, and we’re more likely to end up with feelings of regret (Chernev, Böckenholt, & Goodman, 2015).
Here, I’m going to speculate that we might be facing cognitive overload when having a lot of options. Since we have so much information to take in, we might not have time to thoroughly consider every separate option. This might explain the felt regret, when faced with loads of choices.

Are too many choices always ‘bad’? Is this effect real?
According to Scheibehenne, Greifeneder, & Todd, (2010) this is doesn’t have to be the case in every situation we encounter. For example we might like lots of different options when we’re choosing an unfamiliar product, or if all options are equally attractive.
Scheibehenne, B., Greifeneder, R., & Todd, P. M. (2010) also conducted a meta-analysis on choice overload. This is a statistical procedure in which results from different research experiments are aggregated in order to look at for specific effect. Through their meta-analysis they found that existing research combined did not create a robust finding. The effect size was almost zero, this means that there is barely any effect present. Although this research could indicate that the choice overload hypothesis might not actually exist, we can’t know for sure. Maybe we need to look at different conditions or set up different kinds of experimental settings. That’s the beauty of research and science.

References

Chernev, A., Böckenholt, U., & Goodman, J. (2015). Choice overload: A conceptual review and meta-analysis. Journal of Consumer Psychology,25(2), 333-358.

Iyengar, S. S., & Lepper, M. R. (2000). When choice is demotivating: Can one desire too much of a good thing?. Journal of personality and social psychology, 79(6), 995.

Park, J. Y., & Jang, S. S. (2013). Confused by too many choices? Choice overload in tourism. Tourism Management, 35, 1-12.

Scheibehenne, B., Greifeneder, R., & Todd, P. M. (2010). Can there ever be too many options? A meta-analytic review of choice overload. Journal of Consumer Research, 37(3), 409-425.

Photo credit: Swiss Chocolate via photopin (license)