FINAL EXAM Flashcards
Adam Smith, father of modern economics. What were the assumptions of modern economics model of CB?
- Internal knowledge (preferences)
- External knowledge (market and choices)
- Choose rationally to maximize utility
homo economicus
Consumers are rational, selfish, consistent and looking for optimal
Principle of Bounded rationality (H. Simon)
The idea that we make choices with limited rationality:
- limited info
- cognitive limitations
- time
- risk
- emotional involvement
Satisficing
Satisfy + Suffice
Accepting choices that are good enough but could be optimized
Prospect Theory (Amos Tversky & Daniel Kahneman)
95% of non conscious brain activity
- People make economic choices based on subjective value and heuristics
- Reference points matter: changes on wealth
- Risk averse with gains and risk seeking with loses
Instincts
Innate and unalterable patterns of activity given biological species
Habits (45% of everyday behaviors)
automatic and rigid patterns of behavior learned by effort and repetition
transform automatic, decrease mental activity effort and energy expense
they become an itch we need to scratch
Stroop effect
word association influenced by color
phenomenon that occurs when you must say the color of a word but not the name of the word.
Cognitive illusions
Situations where your mind systematically and unconsciously misperceives or misinterprets the info available (like optical illusion)
dunning-kruger
illusion of superiority, incorrectly perceive as to even if they have lower competence
biases
systematic (non-random) and non conscious patterns of deviation from norm logic or rationality
fluency bias
fluent statements are better remembered
- more true
- more likeable
- more famous
- more intelligent
ambiguity bias
avoid ambiguity and uncertainty preferring the known of a favorable outcome
heuristics
cognitive shortcuts to simplify decisions, substitute a difficult question with an easier one (tennis)
The doer
system 1, immediate experience, impulsive, impatioent
The planner
system 2, maximize utility rational patient
Procastination
When we Put off for tomorrow what we can do now
Planning fallacy
overestimate the ability and underestimate the time and resources to complete a project
(i.e. oxford dictionary)
Experiencing self (emotional self)
NOW, present at the moment
Unconscious
Remembering self (rational self)
Conscious
PAST
storyteller not so accurate
Guides decisions
We tend to make rational decisions to satisfy our remembering self and avoid regret
true
Remembering self governed by 2 rules…
- Duration neglect rule: insensitive to duration
2. Peak end rule: judge by the most intense peak and its end rather than the whole experience (i.e. colonoscopy)
Example of Phineas Gage
We need both rational and emotional selves to properly function and be able to make decisions
affect heuristic (intuition)
Automatic mental shortcut to make quick judgments by using emotional response
Conflict of selves: cognitive dissonance
mental discomfort experience when holding 2 or more contradictory ideas, actions don’t match beliefs
hot-cold empathy gap
cognitive bias mispredicting own behavior and preferences across affective states
Why system 1 exists?
- Brain evolution has created ways to avoid energy expense
- maintains energy, doesn’t deplete brain power
- allows for a smaller head
brain fatigue
brain gets depleted and becomes less effective
Brain fatigue examples
angry at colleagues and families, splurge on clothes, buy junk food and can’t resist the seller’s offer to upgrade his phone.
status quo bias
when low on energy or facing difficulties we tend to avoid change and maintain current state
(example israeli parole board, organ donation)
Willpower
depletes and leads to self control impairment (i.e. impulse purchases)
The habit loop
- Trigger
- Routine
- Reward
Triggers
cue to reminder a routine (internal, memory / external)
- location
- time
- emotions
- other people
- immediately action
Reward
something positive or avoid something negative. The closer to the routine the better
Nucleus accumbens
Activated when we crave something
Repeated coactivation
forges direct links in memory between triggers and responses (associative learning)
how do we create habits
- associate the new routine with an existing trigger and a reward (new or not) and repeat until automatic
- Keep trigger and reward but insert new routine.
implementation intentions (P. Gollwitzer)
self regulatory strategy “if-then plan” that helps in habit creation
Specifies when, where and how of a goal oriented behavior
keystone habits
habits that have power to create a chain reaction of change
When consumer tend more to follow habits?
- under time pressure
- when distracted
- when self control resources are depleted
habit research
- in context research
- habits & practices studies
in context research
people are interviewed or observed while performing the task
habits & practices studies
large-scale studies where respondents are asked to keep written records of usage or shopping habits for long periods
choices
act or instance of selecting among options
they involve comparison and a cost
Paradox of Choice
(jam experiment)
too many options make decisions difficult, can lead to no decision, can decrease satisfaction and increase regret
rational choice theory
expected value, the probability weighted average of a mathematical outcome
expected utility theory (D. Bernoulli)
subjective value, the utility each person assigns to an otucome
3 principles of prospect theory
- loss aversion
- reference dependence (framing)
- diminishing sensitivity
Prospect theory: Loss aversion
- losses cause greater emotional impact.
- more motivation to avoid loss than to acquire gain
Prospect theory: Loss aversion implications
- non consistent risk preferences
- possibility and certainty effect
- status quo bias
- endowment effect
Loss aversion implications: non consistent risk preferences
we are risk averse in gains and risk seeking in losses (pay of premium to remove risk)
Loss aversion implications:
possibility and certainty effect
- Possibility effect: unlikely outcomes are weighted disproportionately
- Certainty effect: when sure outcomes are weighted disproportionally
Loss aversion implications: endowment effect (R. Thaler)
People give more value to things because they own them or you think so . Ownership increases utility
Endowment effect: exceptions
- experience traders
- seen as an exchange
- need money
Prospect theory: reference dependence
influenced by context and the way things are presented
Prospect theory: reference dependence key framing effects
- affect heuristic
- anchoring
- contrast principle
- mental accounting
reference dependence: anchoring
2 mental processes
- Priming effect
- Adjustment process
(numbers, images, order questionnaire)
reference dependence: contrast principle
affects the way to perceive difference between 2 things together or one after the other. Second will be perceived more different than it is
reference dependence: mental accounting
We divide our assets into separate and non transferable mental accounts. (concert tickets)
mental accounting: sunk-cost fallacy
Continue a behavior as a result of previously invested resources (time money or effort)
Prospect theory: diminishing sensitivity
we become less sensitive to the impact that variations can produce
predilection for causal thinking
- we are programmed from birth to jump to conclusions of causality
- Pattern identifiers
- jump into conclusions and ignore statistics
narrative fallacy
limited ability to look at sequences of facts without weaving an explanation into them
Explanations bind facts together more easily remembered
Mistakes of causal thinking
- superstition
- clustering illusion
- insensitivity to sample size
- availability heuristic
causal thinking: clustering illusion
tendency to erroneously believe that the inevitable clusters that normal appear on random distributions are non-random and are a pattern
causal thinking: insensitivity to sample size (small numbers law)
- underestimate the variability in small samples
- “forget” extreme results are more likely in small sample sizes (kidney cancer)
how do we avoid insensitivity to sample size?
ask about the results at the opposite
insensitivity to sample size: regression to the mean
statistical phenomenon that establishes that things tend to even out over time
availability heuristic
the process of judging frequency and/or probability by “the ease with which instances come to mind”
Implications of availability heuristic
You will remember more easily:
- Salient events
- Recent events
- Dramatic events
- Personal experiences
- Pictures & vivid examples
- Media, brand awareness
representative heuristic
The process of judging probability by how representative of a category something is, without taking into account real probability
representative heuristic leads to stereotypes
preconceived notion about specific groups or certain ways of behaving intended to represent the entire group of those individuals as a whole (father and son car accident)
conjunction fallacy
faulty reasoning inferring that a conjunction is more probable, than just one of its elements
(Linda case)
disjunction fallacy
When we estimate a disjunctive statement to be less probable than at least one of its component statements
WYSIATI What you see is all there is
We often fail to allow for the possibility that evidence that should be critical to our judgment is missing
(elephant test)
halo effect
tendency to generate a general impression of something or someone based only on our opinion of that thing/person in some areas
hindsight bias - knew-it-all-along effect
is the inclination, after an event has occurred, to see the event as having been predictable, despite there having been little basis for predicting it
- memory distortion due to the imperfect ability of our minds to reconstruct past beliefs that have changed
outcome bias
tendency to judge a past decision by its ultimate outcome instead of based on the quality of the decision at the time it was made, given what was known at that time
confirmation bias
tendency to search for, interpret, favor, and recall information in a way that confirms one’s preexisting beliefs or hypotheses
how can we reduce confirmation bias?
- “consider the opposite” strategy
- find a “devil’s advocate” to argue against the decision
the illusion of validity
We tend to overestimate our ability to accurately interpret and predict an outcome when analyzing a set of data, specially when the data analyzed show a very consistent pattern
classical conditioning (I. Pavlov)
a reflexive or automatic type of learning in which a stimulus acquires the capacity to evoke a response that was originally evoked by another stimulus
operant conditioning (instrumental conditioning)
learning process through which the strength of a voluntary behavior is modified by reward or punishment. (promo give away)
How can we influence others actions
universal habits & automatic responses embedded in our software
6 principles of influence
- reciprocation
- commitment & consistency
- social proof
- liking
- authority
- scarcity
principles of influence: Reciprocation
-we feel obliged to give back to others who has previously given something to us
psychologic
-uncomfortableness when we feel we are in debt with someone
Techniques of reciprocation
- That’s not all: give something for free
2. Door in the face: start with an unreasonable request, and then ask what you really want
Door in the face:
Conditions for success:
1) The first request has to be believable
2) Both requests have to be related
3) The same must deliver both
4) The initial request must be rejected
5) A reason has to be offered
6) Not much time between the two requests
principles of influence: commitment and consistency
once we’ve committed to something or started doing something, we’re then more inclined to go through with it
- if we are not consistent, we feel psychological distress (cognitive dissonance)
- The bigger the effort, the bigger the commitment
Commitment has to be:
Voluntary
Active
Public
Techniques of commitment and consistency
- Foot in the door: begin with a request so minor that it is unlikely it will meet resistance and, after securing it, go with a more costly request, (i.e. pledge or signature)
- Low ball: changing the deal after getting an initial commitment to a very advantageous proposal
- Even a penny helps: reduce the quantity or level of effort so that they cannot say no
WHAT HELPS Foot in the door technique
First request has to be fulfilled
Explicitly and publicly labeling the person as a supporter
Initial request has to be small but not so small that the person doesn´t feel committed
here is not a long time between requests
WHAT HURTS Foot in the door technique
Saying that there are only few people willing to do the first request
Second request is done right after the first
Paying or offering a reward for doing the first request
When is more effective low ball techniques:
- Same person making the offer/request 2.First commitment is done freely and willingly
- Commitment is public 4.There are barriers/difficulties to get to the final decision
principles of influence: Social Proof
we look to the actions and behaviors of others to determine our own
Social proof stronger if:
there is uncertainty
focus groups
people similar to us
Social proof implications:
Claims: #1, most recommended,
half empty displays sell more than perfectly filled ones
pluralistic ignorance
when a majority of group members privately reject a norm, but incorrectly assume that most others accept it, and therefore go along with it
principles of influence: liking
we are more prone to be influenced by people we like (transference of affection)
Liking: Key factors
1) Physical attraction
2) Similarity
3) Cooperation
4) Flattery
5) Repetition (mere exposure effect
mere exposure effect
familiarity breeds likeability
the more we are exposed to something, the more familiar it feels, the more we like it
advertising wear-out
Too much exposure leads to advertising wear-out , need to use variations
principles of influence: Authority
- people follow the lead of credible, knowledgeable experts and people in positions of authority
- job titles, uniforms, and even accessories like cars, gadgets or seals
Milgram’s obedience experiment
The experiment found, unexpectedly, that a very high proportion of subjects would fully obey the instructions, albeit reluctantly.
principles of influence: Scarcity
people want more of those things they can have less of.
-Things are more attractive when their availability is limited
Scarcity Potential loss activates:
a. Loss Aversion
b. Fear of regret
c. Status Quo bias
d. Psychological reactance to maintain our freedom to choose (we pay extra to keep our options open)
Scarcity: psychological reactance
motivational reaction that emerges when people experience a threat to or loss of their free behaviors
Techniques of psychological reactance:
- Almost sold out
- Limited Editions
- Limited time
- Somebody else is interested
- Only available in selected stores
omnichannel
the new way the digital consumer navigates the purchase process, with an integrated and seamless experience across touchpoints
psychological shifts in consuemrs
Brain changes Innovation optimism Consumer empowerment Power of symbols Isolation & individualism Intensified negative emotion
psychological shifts : Brain changes
- neurologically different
- Delegated brain tasks to technology
- Impaired ability to focus
Google effect
internet has become the external hard drive for our memories
Impaired ability to focus is due to:
- information overload
- continuous distractions
- stimulation addiction
-multitasking
when your brain multitasks all the time there are clear changes in the brain that make it virtually impossible for you to focus
64” to recover after an email interruption
stimulation addiction
more intensity required to break through the clutter
consumers get bored more easily
psychological shifts :
Innovation optimism
today there are more early adopters than ever, eager to try new products from introduction to popularity at unprecedented rates
psychological shifts : consumer empowerment
-ratings & reviews
Top 5 factors impacting purchase decisiions
- price
- rating and review
- recommendations
- brand
- Free shipping
psychological shifts : beyond words
sensory marketing
psychological shifts :
Isolation and individualism
- Decline in face to face interactions
- People are more “all about me”
- Increasing importance of appearances
- Emphasis on creating “postable” moments vs. living in the moment
psychological shifts :
Intensified negative emotions
- Need to feel relevant, seen and connected
- Increased stress and anxiety
Narcissism
- Bragging an exaggerating achievements
- Lack of empathy
- Obvious self-focus in interpersonal exchanges
- Pretending to be more important than we actually are
- Need for constant admiration
- Problems maintaining satisfying relationships
- Hypersensitivity to criticism
narcissistic consumers
- need to feel special and appreciated
- want exclusivity
- early access or special offers
- customizable/ personalized products
- secret knowledge
mild levels of stress affect our decision making
more prone to heuristics
more prone to inertia
rely more heavily on trusted experts
prefer smaller pools of options
Pain of paying
spending money can cause the pain center in our brain to light up
The pain is increased by two factors:
- SALIENCY of the payment (more pain when money leaving our hands is more obvious)
- TIMING of the payment (we feel more pain if we pay after we consume)
Pain of paying: how to reduce it
- Token payment systems
- Prepayment
- Fixed-fee or flat rate
- Decoupling
Pain of paying: how to reduce it - Simplify payment
- Splitting the payment
- FREE
Cost of zero cost
When choosing between two products, we often overreact to the free one
- neo-classical economist zero is just another price, but to the average consumer it brings the magical connotations of free and it becomes an emotional hot button
