Decision Making
Michael J. Kalsher
MGMT 4460/6962
Summer 2014
Chapter Objectives
When you finish this chapter, you should understand why:
1. Consumer decision making is a central part of consumer
behavior, but the way we evaluate and choose products
varies widely.
2.
A decision is actually composed of a series of stages that
results in the selection of one product over competing
options.
3.
Decision making is not always rational.
Chapter Objectives (continued)
4.
Our access to online sources is changing the way we
decide what to buy.
5.
We often fall back on well-learned “rules-of-thumb” to
make decisions.
6.
Consumers rely upon different decision rules when
evaluating competing options.
Objective 1 –

Consumer decision making is a central part of consumer
behavior, but the way we evaluate and choose products
varies widely.



No advance planning
Impulse
Different from what we intended
Objective 2 – Stages in Consumer Decision
Making
Problem Recognition
Richard is fed up with his old B&W TV
Information Search
He surfs the Web to learn about TVs
Evaluation of Alternatives
He compares models on reputation & features
Product Choice
He chooses a TV with features appealing to him
Outcomes
Richard brings home the TV & enjoys his purchase
Decision-making Perspectives

Rational perspective


Purchase momentum


Satisficing
Behavioral influence perspective



Initial impulses increase likelihood of buying more
Constructive processing


Carefully weigh pluses/minuses
Environmental influences
Learning principles
Experiential perspective

Gestalt; affective responses
Continuum of Buying Decision Behavior
Selection Stages

A decision is actually composed of a series of stages that
results in the selection of one product over competing
options.
Steps in the Decision-Making Process
Problem recognition
Information search
Evaluation of alternatives
Product choice
Stage 1: Problem Recognition

Occurs when consumer sees difference between current
state and ideal state


Need recognition: actual state declines
Opportunity recognition: ideal state moves upward
Problem Recognition
Example: exposed to a different
or better quality product; changes
person’s standard of comparison.
Example: running out
of a product or buying
a deficient product.
Stage 2: Information Search

The process by which we survey the environment for
appropriate data to make a reasonable decision



Intentional search (pre-purchase) vs. Ongoing search (browsing)
Internal (memory banks) vs. External search
Directed Learning vs. Incidental learning (low-dose advertising)
Learning Objective 3




Decision making is not always rational.
Utility Model suggests that consumers will continue to
search for information as long as the benefits of doing so
exceed the costs.
Overall, the amount of external search for most products
is surprisingly small.
Symbolic items produce more external search (clothing),
because of the high perceived risk.
Rational Search Processes and Brand
Switching
Variety seeking: unpredictability can be
rewarding to consumers
Brand switching tends to occur:
• When people are in a good mood
• As a form of stimulation when bored
• In response to sensory-specific satiation
Brand switching is least likely when a decision
situation is ambiguous or when there is little
information available about competing brands
Biases in Decision-Making Process

Mental accounting:


Sunk-cost fallacy:


Framing problems as gains/losses influences our decisions
We are reluctant to waste something we have paid for
Loss aversion:

We emphasize losses more than gains


Losing is more painful than gaining
Prospect Theory


We value gains that are more certain than larger gains that are
less certain, even when the expected value of each is the same.
The opposite is true for losses: we clutch at straws to avoid a
certain loss even if it means taking even greater risks.
Research on Prospect Theory
Prospect Theory: An Analysis of Decision under Risk
Daniel Kahneman, Amos Tversky, Econometrica, Vol. 47, No. 2 (Mar., 1979), pp. 263-292
Participants told to assume there is a disease affecting 600 people and they have
two choices:
• Program A, where 200 of the 600 people will be saved .
• Program B, where there is 33% chance that all 600 people will be saved, and
66% chance that nobody will be saved.
Most people selected A, showing a preference for certainty.
They then offered them another choice:
• Program C, where 400 people will die.
• Program D, where there is a 33% chance that nobody will die, and 66%
chance that all 600 people will die.
Most people now selected D, seeking to avoid the loss of 400 people.
Framing makes the difference. A and C are the same, and B and D are the same.
So what? How can we use it?
To get people to adopt a
product or idea, focus on
the gain.
To get them to reject
something, focus on what
they might lose.
Defending Self-Interests
In your own choices, beware of words
leading you astray. Think in a balanced
way about potential gains and losses.
Figure 8.6 Five Types of Perceived Risk
Monetary risk
Functional risk
Physical risk
Social risk
Psychological risk
Identifying and Considering Alternatives

Evoked Set


Consideration Set


Alternatives a consumer knows
about (mental models, schemas)
Alternatives actually considered.
Marketers must focus on
getting their brands in
consumers’ evoked set


We often do not give rejected
brands a second chance. Why?
Because it’s effortful!
Levels of Categorization
Product Choice: How Do We Decide?


Once we assemble and evaluate relevant options from a
category, we must choose among them
Decision rules for product choice can be very simple or
very complicated



Prior experience with (similar) product
Present information at time of purchase
Beliefs about brands (from advertising)
Learning Objective 4

Our access to online sources changes the way we decide
what to buy.
Cybermediaries


The Web delivers enormous amounts of product
information in seconds
Cybermediary: helps filter and organize online market
information


Examples: Shopping.com, BizRate.com
Which online sources of information are affecting your
choices as a consumer?



Online reviews and ratings
Comments on social networks
Other?
Learning Objective 5

We often fall back on mental
“rules-of-thumb” that lead to
speedy decisions



General: “higher-priced
products are higher-quality
products”
Specific: buying the same brand
your mother bought
Can lead to bad decisions due
to flawed assumptions
(especially with unusually
named brands)
Heuristics
Product Signals
Market Beliefs
Country of Origin
Shortcut #1: Over-reliance on Product
Signals

Observable product attributes are assumed
to accurately predict underlying qualities


Clean and shiny car = good mechanical condition
Covariation (“halo” again!)



We perceive associations among events even if
they are not really present.
Product type/quality and country of origin
Consumers are poor estimators of covariation,
which leads to “self-fulfilling prophecy”: we see
what we are looking for regardless of the reality.
Shortcut #2: Market Beliefs
Consumer hold assumptions about companies, products,
and stores that become shortcuts for decisions


Price-quality relationship: “We get what we pay for”
Other common marketing beliefs (see Table 9.3 for full list):


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All brands are basically the same
Larger stores offer better prices than smaller stores
Items tied to “giveaways” are not a good value
Shortcut #3: Country-of-Origin



We tend to rate our own
country’s products more
favorably than do people who
live elsewhere
Industrialized countries make
better products than do
developing countries
Attachment to own vs. other
cultures


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Nationalists
Internationalists
Disengaged
Other Notable Shortcuts

Zipf’s Law

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Consumer inertia (laziness)


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Our tendency to prefer a number one brand to the
competition
The tendency to buy a brand out of habit merely because it
requires less effort
Can be offset by noticeably cheaper prices, point-of-purchase
displays, and extensive couponing
Brand loyalty:

repeat purchasing behavior that reflects a conscious decision
to continue buying the same brand
Learning Objective 6


Consumers rely on different decision rules when they
evaluate competing options.
Compensatory vs. Non-Compensatory Decision Rules
Noncompensatory Decision Rules

Lexicographic rule


Elimination-by-aspects rule


Consumers select the brand that is the best on the most
important attribute
The buyer also evaluates brands on the most important
attribute
Conjunctive rule:

Entails processing by brand
Compensatory Decision Rules

Simple additive rule


the consumer merely chooses the alternative that has the
largest number of positive attributes
Weighted additive rule

the consumer also takes into account the relative importance
of positively rated attributes, essentially multiplying brand
ratings by importance weights
Chapter Summary



Decision making is a central part of consumer behavior
and decisions are made in stages
Decision making is not always rational
We use rules of thumb and decision rules to make
decisions more efficiently