1 Ravi Vatrapu Online Consumer Decision Making-2 Mishra, S., & Olshavsky, R. (2005). Rationality Unbounded: The Internet and Its Effect on Consumer Decision Making. Chapter 17 of Online Consumer Psychology. Course Portal: Facebook: Etherpad: Thursday, 03-Mar-2011 EB22: Online Marketing: Lecture 13 Auditorium 4, 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 trail-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

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 12

Internet’s Effect on Decision Heuristics 13 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 14 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

Discussion 15 Exercise 11: In-class small group exercise Post on Etherpad: