LECTURE 8 DECISIO

N MAKING
By Dr. Dongmei Li
THE WHEEL OF CONSUMER BEHAVIOR

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OPENING QUESTIONS

Where are you going to have lunch today?

How did you get to school? How to decide?

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TYPES OF CONSUMER DECISIONS
Habitual Limited Extensive
decision problem problem
making solving solving
- Collect little or - Collect some - Collect a lot of
no information information information
- Requires - Consider a few - Consider a lot of
minimal effort alternatives different
- Known as - Evaluate the alternatives
routine response alternatives using - Evaluate the each
behavior simple decision alternative
rules carefully using
complex decision
rules
 TYPES OF CONSUMER DECISIONS
Habitual Limited Extensive
decision problem problem
making solving solving

Situational Factors:
Cheap Expensive
Frequent Infrequent
purchasing purchasing
Low involvement High involvement
Familiar products Unfamiliar products

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CONSUMER DECISION PROCESS

Problem recognition

Post-purchase evaluation
Information search

Evaluation of alternatives

Product choice

Outcomes
EXAMPLE OF DECISION PROCESS
Problem Recognition Tom realizes hes fed up with a black-and-
white TV that has bad sound reproduction

Information search Tom surfs the Web to learn about TVs.

Tom compares several models in the store

Evaluation of alternatives in terms of reputation and available
features.

Product Choice Tom chooses one model because it has a

feature that really appeals to him.

Tom brings home the TV and enjoys his

Outcomes purchase
2-7
 STAGE 1:
PROBLEM RECOGNITION

PROBLEM RECOGNITION
Problem recognition occurs when consumer sees
a significant difference between his current
state of affairs (actual state) and some desired
state of affairs (ideal state)

Two types of recognition

Need recognition
Opportunity recognition
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Problem Recognition
An increase in the ideal state

An drop in the actual state

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PROBLEM RECOGNITION
Primary demand:
Consumers are encouraged
to use a product or service
regardless of the brand they
choose.

Secondary demand: Consumers are encouraged

to use a specific brand can only occur if
primary demand exists
 STAGE 2:
INFORMATION SEARCH
TYPES OF INFORMATION SEARCH

1. Internal vs. External

_______________ search is a memory scan to assemble information
about different product alternatives
_______________ search obtains information from advertisements,
friends, or just plain people-watching

2. Deliberate vs. Accidental

_______________ search is an active search resulting in
directed learning
_______________ search is a passive search resulting in
incidental learning, the exposure is usually over time

3. Prepurchase vs. Ongoing

_______________ search is an explicit search for information for a
single purchase
_______________ search keeps track of changes in the product
categories of interest to them 11
A FRAMEWORK FOR
CONSUMER INFORMATION SEARCH

Prepurchase versus Ongoing Search

Prepurchase Search Ongoing Search

Determinants Involvement with Involvement with product

purchase

Motives Making better purchase Building a bank of

decisions information for future use

Outcomes Better purchase Increased impulse buying

decisions
 HOW MUCH INFORMATION TO S
EARCH?
In fact, on average, consumers visit 2 stores before
making a decision to purchase.
Economics: Search cost
Economics-of-information
Consumers will gather as much data as is needed to
make an informed decision.
How much, really? It depends
Search = f (importance, expertise, perceived risk, n
eed for cognition, accessibility of information)

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 HOW MUCH INFORMATION TO SEARCH?
Expertise is a belief of ones
knowledge in an subject area.
Importance is a belief that the
product/decision is of superior worth or
may resulting in great consequence.
Search
of Search

Perceived risk is a belief that the

product or decision may lead to
negative consequences
Amount of
Amount

Need for cognition is the degree to

which one likes to think about things
(i.e., to process information).
Accessibility of information is a
Expertise belief of ones ease of access to
useful information.

Search = f (importance, expertise, perceived risk, need for cognition,

accessibility of information)

14 Cobb & Hoyer (1985), Moore and Lehmann (1980)

Source:
UNDERSTANDS PERCEIVED RISK
Monetary risk

Functional risk

Physical risk

Social risk

Psychological risk
 STAGE 3:
EVALUATION OF ALTERNATIVES

EVALUATION OF ALTERNATIVES
Identifying the alternatives, evaluation in terms of
evaluating whether an option should be considered
at all.
Beer Example:
Chineseand American considers 3 brands of beers.
Canadian considers 7 brands of beers.
Norwegian considers only 2 brands.
 EVALUATION OF ALTERNATIVES
Consideration set is a set of alternative actively con
sidered during a consumers choice process.

+
Brands recalled from your Brands prominent in
memory the retail environments
(Evoked Set)
LEVELS OF ABSTRACTION
 STAGE 4:
PRODUCT CHOICE
Once we assemble and evaluate the relevant options, we have to
choose one based on some rules and criteria.

Evaluation Criteria
Evaluation Criteria are the
dimensions we use to judge the
merits of competing
products/brands. These
dimensions are usually the
attributes of a product/brand.
The attributes actually used to
differentiate among choices are
determinant attributes.

How do you evaluate a mobile

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PRODUCT CHOICE: HOW DO WE
DECIDE?
Once we assemble and evaluate relevant opti
ons from a category, we must choose among
them
Decision rules for product choice can be very
simple or very complicated
Priorexperience with (similar) product
Present information at time of purchase
Beliefs about brands (from advertising)
INFORMATION NECESSARY DECISION
It should point out that there are significant differe
nces among brands on the attribute
It should supply the consumer with a decision-maki
ng rule, such as if, then
It should convey a rule that is consistent with how t
he person made the decision on prior occasions
NEUROMARKETING
Uses functional magnetic resonance imaging,
a brain-scanning device that tracks blood flo
w as we perform mental tasks
Marketers measure consumers reactions to
movie trailers, choices about automobiles, th
e appeal of a pretty face, and loyalty to spec
ific brands
 Noncompensatory
PRODUCT CHOICE
Decision Rules Compensatory
The Decision Rules
lexicographic Simple addictive
rule: The brand rule: Consumer
with the best merely chooses the
attribute is alternative having
selected the largest number
The conjunctive of positive
rule: Consumer attributes
processes products Weighted
by brand. Cutoffs additive rule:
are established for Consumer consider
each brand. Failure the relative
to meet one cutoff importance of
means the brand positive attributes
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 EXERCISE: PRODUCT CHOICE
Beliefs
Evaluation Criteria
Importance Bus Taxi Walk

Price 10 7 2 9

Convenience 8 7 9 5

Comfortable 5 4 8 4

Speed 2 4 7 6

Overall Score
Exercise: Apply each of the four rules in this decision to see
which mode of transportation is selected.
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 HEURISTICS
In general, consumers use mental shortcuts (or heuristics) to mak
e decisions, for many reasons.
Lets face it, we are a lazy species, we leave the optimization mo
dels to the robots. Put it in another way, we optimize our thinkin
g effort by not thinking too much, sometime (actually most of th
e time).
Recalling habitual decision making, limited problem solving, and
extensive problem solving
We infer hidden dimensions of products from observable attribute
s. The observable element is a product signal that communicates s
ome underlying dimensions of the product (i.e., quality). These ob
servable attributes act as mental shortcuts to speed up the deci
sion process
 SPECIFIC HEURISTICS (QUALITY)
Example 1: Market Beliefs
Some generalizations about companies, products, and st
ores.
Example 2: Country of Origin
Someproducts are associated with (and are perceived to
be better if they are produced in) some countries.
Example 3: Ethnocentrism
Tendency to prefer products or people of ones own cult
ure
 HEURISTICS & BRANDING
Branding is a marketing strategy that often functio
ns as a heuristic.
A brand is success if consumers use the brand name as th
e determining attributes and choose the marketers bran
d.
 MENTAL ACCOUNTING
Coined by Richard Thaler,mental accountingdescribes
the process whereby people code, categorize and
evaluateeconomic outcomes.
It explains biases in decision-making (based on
psychology, but not in economics)
In theory, extraneous (i.e., unrelated) variable should
NOT influence decision; however, Thaler found that
people are willing to pay a premium to buy beer from
hotel than when buying from a grocery store to drink on
the beach!
Related to loss aversion
 PROSPECT THEORY
Proposed by Daniel Kahneman
and Amos Tversky,prospect
theoryexplains how people
make choices where utility is a
function of gains and losses.
The central concept of prospect
is losses loom larger than gains.
Implication: separate gains,
combines losses
Note that Daniel Kahneman won
a Nobel Memorial Prize in
Economics for his work
developing prospect theory

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IMAGINE 2 SCENARIOS
Situation A:
You gain $50 from a poker ga
me
Situation B:
You gain $100 from a poker g
ame, and loss $50 when play
ing roulette later

Which situation do
you think you will
feel better?
Or no different?
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