1 Consumer Decision Making-1 Mishra, S., & Olshavsky, R. (2005). Rationality Unbounded: The Internet and Its Effect on Consumer Decision Making. Chapter 17 of Online Consumer Psychology. Ravi Vatrapu Director, Computational Social Science Laboratory (CSSL) Associate Professor, Center for Applied ICT Copenhagen Business School Howitzvej 60, 2.10, Frederiksberg, DK-2000, Denmark Monday, 11-April-2011 T14: Human Information Processing: Lecture 21 2A20, ITU, Copenhagen, Denmark

Neoclassical Rational Model of the Consumer Three main assumptions: 1.Perfect knowledge about possibility sets 2.Transitivity of preferences 3.Existence of a scheme of preferences for all available alternatives 2

Simon’s Bounded Rationality Decision-making is Satisficing rather than Optimizing Three main assumptions: 1.Limited Knowledge 2.Information is costly to collect and store 3.Economic behavior requires trial-and-error search process 3

Consequences of Bounded Rationality  Cognitive Effort vs. Decision Accuracy tradeoffs  Less-accurate heuristics over optimal choice rules  Task Effects  Time pressure  Number of alternatives and number of attributes  Response modes  Context Effects  Similarity of alternatives 4

Decision Heuristics  Weighted Additive Rule (WADD)  Equal Weight Rule (EQW)  Elimination-By-Aspects (EBA)  Lexicographic (LEX) 5

Weighted Additive Rule (WADD): Example  Textbook: Table 17.2 (p. 365)  Alternative A: (6x4) + (4x7) + (2x4) = (24) + (28) + (8) = 60  Alternative B = 44  Alternative C = 54 6 Picture QualityVersatilityConvenience Weights642 Alternative A474 Alternative B272 Alternative C463

Equal Weight Rule (EQW): Example  Same as Weighted Additive Rule (WADD) but with Equal Weights  Alternative A = = 15  Alternative B = = 11  Alternative C = = 13 7 Picture QualityVersatilityConvenience Weights444 Alternative A474 Alternative B272 Alternative C463

Elimination By Aspects (EBA): Example  Form cutoffs for the most important attribute  Eliminate all products with attributes not meeting the cutoff  Repeat till only one product remains  Select Picture Quality First  Alternative B is eliminated  Select Versatility Next  Alternative C is eliminated and Alternative A is selected 8 Picture QualityVersatilityConvenience Cutoff374 Alternative A474 Alternative B272 Alternative C463

Lexicographic (LEX): Example  Select most important attribute  Select the product with the best value on the attribute  Resolve ties by selecting the next important attribute  Select Picture Quality First  Alternative A and Alternative C are selected  Select Versatility Next  Alternative C is eliminated and Alternative A is selected 9 Picture QualityVersatilityConvenience Alternative A474 Alternative B272 Alternative C463

WADD & EQW  Compensatory  Utility loss in one attribute can be traded off with utility gain in another attribute of the same product  Alternative-based  All alternatives are considered 10

EBA & LEX  Non-Compensatory  Utility loss in one attribute CAN NOT be traded off with utility gain in another attribute of the same product  Attribute-based  Only specific set of attributes are considered 11

Internet’s Effect on Decision Heuristics 12 Impact on all Four Components of Consumers’ Choice Space: 1.Evaluation Strategies 2.Evaluative Criteria 3.Consideration Set 4.Image of Alternatives within the Consideration Set

(Un)Bounded Rationality 13 Authors’ Claim: The Three main assumptions might not be valid 1.Limited Knowledge 2.Information is costly to collect and store 3.Economic behavior requires trail-and-error search process

14 Online Consumer Psychology Hood, K., & Schumann, D. (2007). The Process and Consequences of Cognitive Filtering of Internet Content: Handling the Glut of Internet Advertising. In D. Schumann & E. Thorson (Eds.), Internet advertising: Theory and Research (pp ): Lawrence Erlbaum Associates. Henry, P. (2005). Is the Internet Empowering Consumers to Make Better Decisions, or Strengthening Marketers' Potential to Persuade?. In C. Haugtvedt, K. Machleit & R. Yalch (Eds.), Online consumer psychology: understanding and influencing consumer behavior in the virtual world (pp ): Lawrence Erlbaum Associates.

The Internet Revolution  Traditional Media  Newspapers  Radio  Television  SMEs and MNCs  Virtual Storefronts  Brand Comparisons  Travel and Tourism  Government  Education  Libraries 15

Human Information Processing-1 Hood, K., & Schumann, D. (2007). The Process and Consequences of Cognitive Filtering of Internet Content: Handling the Glut of Internet Advertising. In D. Schumann & E. Thorson (Eds.), Internet advertising: Theory and Research (pp ): Lawrence Erlbaum Associates.  Sometimes there can even be too much of a good thing  Limited Cognitive Capacity  Information Overload  Clutter Effects Sensation, Perception, Attention, Cognition, Action 16

Human Information Processing-2  Contextual Cuing  Situations influence perception  Task demands influence attention  Knowledge, skills and abilities influence cognition and action  Internet Search Process  Circuitous Process  Decision Heuristics 17

Cognitive Filtering  Learning in and of itself is selective (Broadbent)  Cognitive filtering is a coping mechanism  Internet Search: Two Primary Goal States  Information-seeking goal state  Desired Experiential State  Moderators of Cognitive Filtering  Individual Differences  Situational Influences 18

Consequences of Cognitive Filtering  Restriction of exposure to diversity  Intergroup-bias  First-order effects (confirmation bias)  Second-order effects (inaccuracies)  Third-order affects (restricted action) 19

Implications of Cognitive Filtering 1.Accurate targeting of an online consumer’s “in- group” online spaces 2.Online market segmentation 3.Online communities 20

Online Consumer Decision-Making Henry, P. (2005). Is the Internet Empowering Consumers to Make Better Decisions, or Strengthening Marketers' Potential to Persuade?. In C. Haugtvedt, K. Machleit & R. Yalch (Eds.), Online consumer psychology: understanding and influencing consumer behavior in the virtual world (pp ): Lawrence Erlbaum Associates.  Two Themes: Is the Internet 1.Empowering Consumers’ Decision-Making? 2.Strengthening Marketers’ Persuasion Potential? 21

Henry’s Central Claim “Despite the impact of innovation on media alternatives, we must realize that we are faced with human characteristics that remain constant over time.” (p. 346) 22

Henry’s Four Skepticisms 1.Enhanced Decision Capability 2.Search Patterns 3.New Decision Strategies 4.Consumer Empowerment 23

Human Information Processing  Information Overload  “Single-Feature Responding”  From “product orientation” to “marketing orientation”  Online Heath information example  Constraining Factors  Limits to Human Information Processing  Limited Time  Expanded Information  More Cognitive Effort  Increased Choice but decreased perception of power 24

H UMAN D ECISION -M AKING  Information presentation and communication requirements  Financial Decisions  Kahneman & Tversky’s Prospect Theory  Decision-Making Heuristics  Habitual Repurchase  Most well-known brand  Price as proxy for quality  Third party opinions (experts, friends, trusted others) “Short-cuts have utility” (p. 354) 25

H UMAN C OGNITIVE V ARIABILITY  Different Cognitive Characteristics  Knowledge  Skills  Abilities “Access is only empowering if one has these prerequisite skills” (p. 354) Visual vs. Textual 26

T ECHNOLOGY C YCLES  Increased Time Pressure  Expanded Access to Information  Greater Range of Choice  Human Cognitive Limitations  Technology cycles that results in the default shortcut to reliance on expert opinion 27

H ENRY ’ S C LAIM If this approximates reality, then the Internet will not change the basic decision strategies, nor it will lead to substantial knowledge enhancement.” (p. 356, emphasis mine) 28

R ECOMMENDATIONS Understanding of Consumers’ Decision-Making Processes  Involvement with the category  Identification of current information-search patterns  Alternative evaluation criteria  Duration of the decision process 29

T HREE A PPROACHES TO D ECISION -M AKING I NSIGHTS 1.Expert questioning  Form a panel of prospective customers  Facilitate expert questioning sessions 2.Guided Recall  Category need identification  Subsequent product purchase processes and outcomes 3. Triadic sorting Sets of three product alternatives Select one that is most different than the other two 30