Do We Control Our Own Purchasing Habits?

Photo by Alexandre Godreau on Unsplash

Flaws in our decision-making ability are fuel for the market.

Source: Do We Control Our Own Purchasing Habits?

By Liraz Margalit Ph.D.

Persuading rational people to make rational decisions is easy.

Unfortunately, as humans, we’re often stuck with irrational thinking, fueled by cognitive biases and emotions.

While we’d all love to think that our actions are based on reason and logic, the truth is that we’re often driven by cognitive biases that completely ignore reality. In his book, “Descartes’ Error,” Antonio Damasio, professor of neuroscience at the University of Southern California, argues that emotion is a primary ingredient in nearly  every decision.

So, how do you persuade your customers when they are heavily influenced by subjective factors that you have seemingly little control over?

The first step toward answering that question is identifying what those subjective factors are for your audience.

Define Free Choice

Flaws in our decision-making ability are fuel for the market. In certain situations, illustrated below, we are especially susceptible to external influences.

In those situations, our primitive needs and desires plague us. Our basic urges derive from the lower-level areas of the brain, such as the limbic system, which controls emotions and motivation. When it comes to consumers, perhaps the most important characteristic of emotions is that they push us toward action. As humans, we are often compelled to do something as a response to an emotion.

Imagine this scenario: You’re at the supermarket with your three children, who you’ve just picked up from school.

After a tiring succession of aisles, punctuated by the begging, crying and screaming of your children asking for everything that catches their eyes, you’ve arrived undaunted at the checkout line. As you wait, a brave new world greets your little loved ones: a smorgasbord of tempting candies, each colorfully-wrapped treat at exactly the height where your children can reach them.

By wondrous coincidence, soda and popsicles are also within reach. At this moment — while you’re under the stares of the other awaiting shoppers, when you’ve successfully reached the finish line after triumphing over the ceaseless struggles that met you in every aisle of the store — you finally surrender to the pleas of your kids.

Into the cart you toss a Kit Kat bar, a Snickers bar and a packet of M&Ms. At that critical moment, with the barrier of resistance already breached, a chilled bottle of Diet Sprite beckoning from the cooler strikes you as just what you need. Your decision, apparently a choice freely made, is actually as far as it could be from a free choice.

It turns out that when we are worn out, tired, hungry or under pressure (or all of the above), we make decisions that differ completely from those we make when we’re calm, cool and collected.

Overestimating Our Own Powers of Reason

In countless interviews and studies, consumers have revealed that they lack basic understanding of the forces that shape their purchasing behavior.

When they decide to purchase a particular product, they believe that they are behaving rationally, making a choice in an effort to maximize their benefit. Yet this belief is nothing more than a cognitive deception.

Granted, today’s consumers are well aware of being targets of aggressive marketing. Yet in their hearts, they believe they are strong, independent thinkers, impervious to marketers’ manipulations.

When asked how they decide whether to purchase a particular product, consumers speak about an intensive, rational process of thought. They describe how they investigate and consider the characteristics of the product, compare the available prices, and thus attain the best value for their money.

The Illusion of Being in Charge

The problem with their self-conception is that it’s systematically biased. We overrate our resistance to external influences. This bias derives from our need to believe that at any given moment, we are in charge of our own decisions and actions. This delusion enables us to enjoy a feeling of independence and control over our lives. The locus of control bias is a basic, essential defense mechanism, and we couldn’t survive without it.

Our misconception of subjective experience gives us the illusion of control in our decisions. In order to preserve that sense of control that is so crucial in our lives, we create supporting narratives and tell ourselves stories about rational thought processes that underlie our decisions.

In reality, however, emotion and primitive urges play a very significant role part in our purchasing decisions. Much more so than we’d like to admit.

Which Force Decides: Rational or Emotional?

Inside our brains, decision-making is the product of two opposing forces — rational and emotional. The rational conscious force is governed by the brain’s command-and-control areas, located near the forehead. The emotional unconscious force is governed by the more primitive areas, such as the limbic system, which affect feelings and immediate urges, and which we share with our fellow animals.

The human brain has no access to the unconscious processes involved in decision-making. In fact, factors that have nothing to do with the actual decision greatly influence this process, such as environmental cues, context and our emotions.

When test subjects were asked to choose between receiving two Amazon coupons in a month’s time or receiving one coupon when the experiment finished, subjects who had shown high activity in the rational systems involved in long-term planning and in regulation of urges decided to wait a month to receive two Amazon coupons. Subjects who had shown higher activity in the emotional system that deals with immediate satisfaction of needs asked to receive one Amazon coupon on the spot.

The question is why the rational system takes charge in some cases, while in other cases our resistance is weakened and the emotional system takes control.

Draining Our Discipline 

Until recently, the consensus was that self-restraint is an innate ability — that some people are born with abundant self-discipline and others with less. In order to test that conception, subjects were asked to forgo lunch and were presented with two bowls: one full of radishes and the other full of freshly baked chocolate chip cookies.

Half of the subjects were instructed to eat the cookies and ignore the radishes, while the other half was instructed conversely. Immediately after eating, the subjects were asked to perform a cognitive task, a persistence-testing puzzle, which was intentionally impossible to accomplish.

The cookie-eaters, fully armed with self-discipline and motivation, tried repeatedly to complete the task. On average, they spent nineteen minutes more at their attempts than the radish-eaters did. For their part, the radish-eaters made far fewer attempts and devoted less than half the time solving the puzzle compared to the chocolate-eating participants.

Those who had to resist the sweets and force themselves to eat pungent vegetables could no longer find the will to fully engage in another torturous task. They were already too tired and displayed frustration and irritation. They complained that the experiment was a complete waste of time. Some of them put their hands on the table and closed their eyes.

Manipulating People for a Profit

It appears that willpower is not a talent, but a matter of available energy.

When our kids at the supermarket have drained us of our last drop of energy, our ability to stand fast and resist is significantly impaired. When we are under pressure to catch a plane, our resistance to tempting smells from the bakery stalls is particularly low. When we’ve said a painful farewell, our ability to opt for healthy food over junk food becomes dubious.

In online buying as well, it can be observed that impulse buying tends to occur in the evening, after the hard knocks of the day erode our powers of control. Impulse buying is the purchase, for emotional reasons, of products that we don’t actually need. We purchase these things because they provide us, at the time, with a moment of emotional relief.

In contrast, an examination of purchasing in the daytime — when our cognitive resources are still at their fullest — shows consumers more involved in price comparisons and in careful examination of product characteristics.

We don’t stop to think how much effort and expertise is invested in understanding our moments of weakness and in developing strategies for exploiting them. With sufficient knowledge and understanding of people, someone will always find a way to sell an unnecessary product.

George Akerlof, a co-winner of the Nobel Prize in Economic Sciences, once said, “Taking advantage of weaknesses is an integral part of the free market. Manipulating people for profit is a natural aspect of the economic equilibrium. The free-market system exploits our weaknesses automatically.”

Or in other words: if we have a weakness, the market will be sure to manipulate it.

 

Liraz Margalit, Ph.D., analyzes online consumer behavior, incorporating theory and academic research into a conceptual framework.

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The Emotions of Luxury

 


Photo by Danilo Capece on Unsplash

How emotions related to “self” and brand “truth” create perceptions of luxury.

Source: The Emotions of Luxury

ByPeter Noel Murray Ph.D.

When asked about luxury brands, most consumers mention unique design, great quality, high cost, and limited distribution. For many people, these are the characteristics that separate luxury from mainstream products.

A different question is why consumers buy luxury products. Studies show that the appeal of luxury is primarily psychological. These psychological factors, especially emotion, are the focus of my research.

But consumers also are rational beings; they are aware that they can buy products at mass-market retailers which have aesthetics and features similar to luxury brands but are a lot cheaper.

So how does the mind manage these complex behavioral judgments? Is the rational mind more likely to choose the mass market while our emotional mind yearns for luxury? Is it that simple?

Neuroscience tells us that the emotions associated with our judgments guide us in making decisions. Emotions and feelings are components of rationality in that they reveal what is important to us. For example, we can be emotionally drawn to good design, and then rationally decide whether the exceptional qualities of luxury design are worth the additional price versus the “good enough” qualities of a mass-market alternative.

But neuroscience only reveals the process our minds use to make a decision, not why we make one choice versus the alternatives. Evidence suggests that the decisions to purchase a luxury product are overwhelmingly emotional. Purchase behavior is a direct result of how a consumer perceives that a brand delivers the emotional end-benefits of buying and owning.

Emotional End-Benefit: “Who I Am”

Emotional end-benefits impact the consumer’s concept of self and play an important role in motivation. A consumer purchase of luxury brands frequently is driven by perceptions about self-identity, ideal self, social comparison, and other “self” motivations.

Our concept of self is in a constant state of regeneration. Because luxury products have the power to change the consumer’s perception of who they are by altering the self, they deliver desired emotional end-benefits, including self-esteem and hedonic feelings, such as satisfaction and power.

Emotional End-Benefit: “How I Feel”

A different psychological motivation is found in consumers who have a deeper connection to luxury brands. This primarily exists in consumers who have greater financial means and involves high-end luxury brands.

For these consumers, luxury is an integral part of their lifestyle. They experience emotions of trust, security, contentment, and confidence. These emotions are evoked by perceptions that their luxury brands are authentic and timeless. For these consumers, it is not enough that a product is well designed and crafted with the best materials and workmanship. The luxury brands they treasure have the rare and intangible quality of truth.

Luxury brand truth is a visceral connection between the consumer and the brand. While this truth arises from a product’s design and features, it is primarily brought about by a deeper understanding of a brand’s essence. Truth is expressed in narrative and other communication which breathes life into the brand, evoking perceptions of authenticity and timelessness.

In this context of truth, authenticity means that a brand was created to satisfy a vision that expresses excellence in the product category; and that the brand remains faithful to that vision irrespective of shifts in market trends. Timelessness means that the brand will impart feelings of trust, security, contentment, and confidence over the life span of ownership.

It is interesting that consumer perceptions of luxury brand truth are not found exclusively in heritage brands with a long and distinguished past. Indeed, consumers identify some classic brands that have lost their veracity, having surrendered their authenticity and timelessness by embracing a style aesthetic or other factor that contradicts their perceived truth. On the other hand, a new brand can achieve truth when its underlying concept embodies the principles of authenticity and timelessness.

From the perspective of this consumer research on luxury, there are multiple dimensions of emotion which affect the luxury consumer. The broader market is motivated by emotions evoked by enhancing perceptions of the self through luxury products. Wealthier luxury market consumers are motivated by emotions associated with a brand’s core reason for being, perceived in terms of authenticity and timelessness. All of these dimensions create perceptions of luxury in the mind of the consumer.

 

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Online Personality Disorders

As a web psychologist, I’m exposed to many different types of user behavior

Source: Online Personality Disorders

By Liraz Margalit Ph.D.

There are many types of user behavior online, and decision-makingprocesses. While each of us has an individual style, as a web psychologist, I’ve identified six primary recurring patterns of behavior I call online personality types. In this piece, I discuss the 6 pattern types, explain the psychological drivers of their behavior, and provide site optimization tips that online businesses can use to leverage each type’s unique desires:

1. The Wish Lister:

First up is the “There are so many things I want but know I can’t have” disorder. I’ve seen this pattern mostly in women and one-commerce websites. The visitor devotes extensive time and effort into carefully curating items she wants and putting them in her shopping cart. She is never buys them, however.

What causes this behavior?

Unlike a “real-life” shopping cart, an online cart promotes feelings of ownership because the user can add and remove items at any time. Those items remain in the cart even if the visitor leaves the site. She can open the cart when she wishes and view her virtual property. By having all these desired items in her own personal cart, waiting for her each time she enters the website, she almost feels like she owns them. This serves as consolation because she can’t afford to purchase them.

How can you influence the purchasing decision?

One way to encourage the Wish Lister to complete a purchase is to discount one or two of the items in her cart between visits, and then greet her return with a pop-up window announcing, “It’s your lucky day! Your selected item is on sale.” This kind of unexpected personal discount helps to enforce the wishful thinking bias—the notion that what we want to be true affects what we believe to be true. It gives the customer the sense that “the Universe is giving me a sign that I should buy this product.”

2. The Brand-Oriented Visitor:

This visitor prioritizes staying up to date with the latest trends that everyone is talking about. His purchasing decision is based solely on whether a product is reputed as a top brand, and he focuses on the emotional characteristics of the product, such as colors, accessories, and attractive images. His online interaction centers on playing with the product, switching its colors, and examining different accessories that can be added to it.

What causes this behavior?

The Brand-Oriented Visitor is what we call an impulse buyer. The trigger for his purchase is emotional arousal, which is why he tries out different colors and accessories to imagine how it would feel to own the product. Rational parameters like price, practicality, and ease of use are given less weight in his purchasing decision. He replaces the logical sequence of consumer activity with an irrational moment of self-gratification, purchasing items that are neither functional nor necessary.

How can you influence the purchasing decision?

Successful product pages are those that know how to communicate with the customer’s emotional system and keep it in a state of arousal. In order to promote the impulse buy, product information should be hidden behind tabs (and thus available only “on demand,” rather than proactively imposed on visitors.) The website should exploit the emotional system’s propensity to respond to subtle cues, utilizing stimuli – like colorful and captivating images – to trigger emotional arousal. This allows the Brand-Oriented Visitor to simply buy your product because of how it makes him feel, rather than reading through overly detailed information that may cause him to second-guess the purchase.

3. The Rational Visitor: 

The Rational Visitor has a two-step purchasing decision process, which involves (a) rejecting the options that do not meet her most important criterion—usually price—and (b) using cost/benefit analysis to select from the remaining alternatives.

What causes this behavior?

Rational Visitors rely on objective observation and factual analysis in their decision-making process. They consider logical argument as the basis for action. For example, they wouldn’t replace their well-functioning car just because “it’s about time that we replace our car, we’ve had it for 5 years already.” They require a solid argument in order to pursue a course of action. Subjective thought and emotion have no place in their decision-making process.

How can you influence the purchasing decision?

To captivate the Rational Visitor’s decision-making process, the website should provide all the information she needs to make a calculated decision. For example, a telecom site could provide detailed information about the comparative features of different cell phones (screen size, resolution, weight, etc.) so the customer feels that she is making the most informed decision possible.

4. The Maximizer: 

This customer is obsessed with making the absolute best choice out of all available options. He reads through every single product listing from the top of the page to the bottom, and only then feels comfortable enough to make his selection. Regardless of whether it’s a $50,000 car or a $5 used CD, the maximizer can’t make up his mind until he has viewed every option.

What causes this behavior?

The Maximizer worries excessively about making a bad purchasing decision. The decision doesn’t have to be based on utility maximization; it can be based on appearance, safety features, or any other criterion. Often, he becomes so paralyzed with anxiety that he doesn’t buy anything; even when he does, he generally feels somewhat frustrated with his decision.

How can you influence the purchasing decision?

Observation of visitor behavior on multiple ecommerce websites indicates that, when faced with a large number of options, Maximizers inevitably become frustrated and leave the website without making a purchase. Thus, businesses must intelligently limit the number of options that are presented to Maximizers, using such methods as filtering, limiting each row to five items, and providing a default or “suggested” purchase.

5. The Satisfier:

This is a customer who chooses the first product that satisfies her minimum or immediate need. These visitors start at the top of the page, begin scrolling down; they immediately stop and purchase when they find their match, regardless of how many other options are available.

What causes this behavior?

To the Satisfier, time is money. She doesn’t want to waste hours looking for the optimal option if she could be doing something else with that time. She takes action when her criteria are met. She may not settle for mediocrity; her criteria may in fact be very high. As soon as she finds an option that meets them, she is satisfied.

How can you influence the purchasing decision?

One efficient method for helping a Satisfier is filtering, which allows her to drill down to the options most relevant to her needs. This is the digital equivalent of an in-store customer service representative telling her, “Let me know what color and size you need, and I will bring it to you.” Retail sites might also arrange their listings by brand, purpose or mood (romantic, sexy or fun).

6. The Hesitator:

The Hesitator fills out an online registration form or places desired items in a shopping cart, only to have second thoughts upon reaching the call-to-action (CTA) button. He may spend a significant amount of time clicking on different tabs and hovering over the CTA, as though waiting for the site to persuade him to click.

What causes this behavior?

The personality trait most likely to cause hesitation in online shopping behavior is risk avoidance. The Hesitator tries to avoid regrets over making the wrong decision, tends to be confused by an abundance of choices, and is indecisive about every aspect in his life.

How can you influence the purchasing decision?

The Hesitator needs all the reward he can get to proceed with the purchasing process. He must be completely convinced that he is making the right decision. This requires constant feedback and approval in response to every little step he takes. One way to do this is to use positive-oriented wording. For example, the subscription page might welcome him with “You made a great decision choosing Forbes” or “You are one step from joining our high-level community,” rather than the neutral language used on most sites. Positive wording has a carryover effect, so the feeling the Hesitator gets from encouraging feedback puts the entire experience in an optimistic light, making him feel good about the purchasing process. Also, the website design should limit the opportunities for him to rethink his decision. Reduce the number of checkout pages, or remove the ability to return to the previous page, once the process has begun.

Conclusion

The game has changed. Your next customer will research and evaluate your products through web sites and online networks long before your salespeople get involved. In fact, a call to your salesperson may be the last step in the buyer’s journey, significantly limiting the influence and expertise that previously influenced the buying discussion. As the buying process moves online, salespeople are getting less face time with clients, and thus lack insight into which of their prospects are showing the strongest buying signals.

To succeed in this new digital climate, smart businesses are adapting and realizing the necessity of reading and responding to the “digital body language” of their prospects. This new body language is revealed through online activities such as browsing behavior, click-through rates, hesitation, scrolling and more. Tracking this behavior enables companies to quickly identify their buyers’ psychological needs and better assist them through the decision making process.

 

Liraz Margalit, Ph.D., analyzes online consumer behavior, incorporating theory and academic research into a conceptual framework.

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Why some breakthrough ideas don’t break through

Before Amazon, Netflix, and iPhone became part of our everyday lives, there were predecessors with comparable ideas that broke new ground, but didn’t take root. Why do some businesses not reap the rewards of having a world-changing idea, or even being first-to-market? In some cases, the missing ingredient is more fundamental than funding or finding the idea first.

Source: Why some breakthrough ideas don’t break through

By

What did Amazon gain by gobbling up Webvan’s leftovers?

The ones who learn from failure and iterate often go on to greater success.

Infrastructure is a key factor in the speed of adoption.

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Becoming a Mindful Consumer

What moral responsibility do consumers have regarding their purchase decisions?

Source: Becoming a Mindful Consumer

By Azadeh Aalai Ph.D.

How much responsibility do consumers have regarding where and how they are spending their money?

Take, for instance, the burgeoning discussion within the larger culture in the wake of the #MeToo movement regarding whether we can—or should—separate the artist from his or her art. I don’t think I am the only person who gets a queasy feeling now when she watches old movies that have the mark of Miramax studios and feature Harvey Weinstein’s name prominently in the opening or ending credits. Or, to consider another issue, as a consumer am I complicit in the workers’ rights violations of a corporation if I knowingly continue to pay for their products even if they are produced using essentially slave labor? What responsibility do we harbor as consumers?

As a researcher who has been exploring the way that bystanders enable atrocities such as the Holocaust to happen, I am particularly sensitive to the notion that as individuals we have agency, and that our choices matter. Given the power attached to consumption within capitalist systems, one could argue that in a culture like ours the choices we make regarding how to spend our money is particularly influential from the perspective of incentivizing morally reprehensible versus pro-social behaviors.

There is this notion that millennials are more sensitive regarding their purchasing power, and that younger generations are more attuned to the values that corporations stand for, in addition to the quality of the products that they are mass marketing and selling. For instance, Curtin (2018) shares that 73% of millennials surveyed reported a willingness to spend more money on sustainable products. The writer goes on to share the values associated with this sentiment when she notes, “I’m willing to pay significantly more to support quality products and human rights, and put my money where my mouth is when it comes to creating a world in which I want to live” (Curtin, 2018, para. 18).

But what does the empirical research in the field of consumer behavior actually demonstrate? If I try to separate the art from the artist, and continue to consume Woody Allen films even as I suspect that he is guilty of the allegations of sexual molestation he was accused of by his daughter, will I feel guilty nonetheless? It is hard to find psychological research that has actually investigated these questions. I did uncover, however, a recent study published in the Journal of Personality & Social Psychology—one of the most reputable scientific journals within psychology—that reports a seeming moral malleability when it comes to conspicuous consumption among consumers. While they focus specifically on the notion of conspicuous consumption—defined as the excessive and indulgent exhibition of luxury goods and expensive items for purpose of presenting status and social impression—some of their findings regarding consumer behavior may be applied to other aspects of consumer choice.

Goenka & Thomas (2019) essentially propose that the perception of morality regarding conspicuous consumption is dependent upon what moral lens is used in regards to characteristics embedded in the behavior. In other words, consumers have fluidity regarding how consumption is interpreted when it comes to the purchase of luxury items or other products purchased essentially to signal status or impression management. Whether an individual or social identity lens is used alters the extent to which conspicuous consumption is judged negatively, or even potentially celebrated and seen as morally permissible. I wonder if such findings can also be generalized to other consumer decision-making—for instance, is it possible to find a moral argument in favor of consumption of entertainment or goods from corporations even after the creators or leaders within those companies have been found to engage in morally questionable, reprehensible or even criminal acts?

There is, of course, those who bemoan the “politicization” of entertainment and seemingly everything that a person does. Can’t I just watch a film or a sports game without reflecting on the values of the Hollywood studio that created the film or the larger institution running the game, this thread of thought goes. I suppose a consumer could spend their money without a second thought as to who is profiting or benefiting from their purchase, but is that the world we really want to live in? Do we really want to undermine our own purchasing power by being mindless consumers and not following the trail of what our money is supporting, other than the particular product or film that we may be watching? So much of our culture has already become curated and customized with the ubiquity of technology, do we want to further insulate our responsibility as citizens by spending our money without a second thought to who is profiting from our purchases?

It would behoove the field of psychology to take a closer look at the role that consumer values play in consumer choices, and the extent to which consumption has or can become more deliberate and aligned with consumer values. In sparking such a dialogue, it is my aspiration that we can become more mindful in the decisions we make with our money, particularly in cases when we have a choice to support a large corporation or franchise versus a local small business or start up.

References

Goenka, S., & Thomas, M. (2019). The malleable morality of conspicuous consumption. Journal of Personality and Social Psychology. https://doi-org.qbcc.ezproxy.cuny.edu/10.1037/pspp0000237.supp (Supplemental)

Curtin, M. (2018, March 30). 73 Percent of Millennials are Willing to Spend More Money on This 1 Type of Product. Inc. Retrieved on November 10, 2019 from: https://www.inc.com/melanie-curtin/73-percent-of-millennials-are-willing-to-spend-more-money-on-this-1-type-of-product.html

 

Azadeh Aalai, Ph.D., is a tenure-track, assistant professor of Psychology at Queensborough Community College in New York.

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The Psychology of Why We Play Lotto

Ways to explain ‘irrational’ behaviour

Source: The Psychology of Why We Play Lotto

By Ryan Anderson

In the 18th Century a Swiss polymath by the name of Daniel Bernoulli changed the world forever. His work relating to what we now recognize as ‘(expected) utility theory’ essentially taught us how to behave in any given situation where the outcome is uncertain.

It’s hard to conclude that human behavior is rational. Of course this isn’t always the case; from time to time we ‘get it right’, but consistently behaving in the most rational, logical, utility-maximizing way possible is vanishingly rare. All of us invariably fall victim to an array of cognitive biases that hijack (temporarily) our ability to critically evaluate a scenario and offer a considered, logically optimal response.

Let’s imagine you’re at a carnival and someone offers you a gamble that could win you $1,000. The game is simple; you just have to pick a green ball out of a barrel containing a bunch of red balls and only a few green ones. Sounds pretty easy right, and you win $1,000 if you pick a green ball. The problem is that it will cost you $50 to play the game. Should you do it? Well, to answer that question, you really need to know the likelihood of winning; in other words, how many red balls are there and how many green balls are there?

Let’s firstly consider the case (we’ll call it ‘Game 1’) where there are 90 red balls and only 10 green balls. In other words, among every 10 balls there are 9 red and only 1 green. In this example you have a 1 in 10 shot of picking a green ball, or rather, a 10% chance of winning. So on average, you can expect to win 10% of the time. Since each time you win you get $1,000, your expected return on a single game is 10% of $1,000, or $100 (‘chance of winning’ x ‘prize’). You also need to remember here that it will cost you $50 to play. Clearly your expected return of $100 exceeds your cost of $50, so you should absolutely take the gamble.

Now imagine a similar game (still costing $50 to play) but this time there are 99 red balls and only 1 green ball (we’ll call it ‘Game 2). Using the same logic as in Game 1, you now have a 1 in 100 (or 1%) chance of winning. Again your prize is $1,000 if you win. So your expected return on a single game is now 1% of $1,000, or $10. The equation is similar but becomes: $50 (cost) versus an expected return of $10. As your cost ($50) is more than your expected return ($10) you wouldn’t gamble. Doing so would be irrational.

So play Game 1 but stay away from Game 2.

In a more general sense, the cost of doing something (in this case $50) should be weighed against what outcome you can expect by doing it (in this case, the payout of $1,000 multiplied by the chance of it occurring, here either 10% or 1%). When the cost is more than the expected return, don’t do it. When the cost is less, do it.

The math is relatively straightforward when the cost, reward, and probability are known exactly, but life decisions are very rarely this precise.

Playing the lottery is a great example here. Most people that play have at least some kind of intuitive understanding that they are probably not going to hit the jackpot.

Knowing the exact probability of a given outcome would seem to be fairly important. After all, life really is all about probabilities.

Let’s take the Oz Lotto in Australia. I’m going to try and be generous and over/under estimate everything in favour of the punter. The cost to play is a bit over $1. The odds of winning first division are a bit less than 1 in 45,000,000. On November 22, 2016, the division 1 prize was just over 2,100,000 (but we’ll say it was 2.2 million). So our cost is $1, and our expected return is (2,200,000 * 1/45,000,000). In other words $1 versus a bit under 5 cents. So for every $1 you are putting in, you can expect to get about 5 cents back.

However, to be fair there are 7 divisions in Oz Lotto. Instead of scoring 2.2 million, you may get a lesser prize of ~$45,000, ~$6,000, ~$400, ~$60, ~$30, or ~$17. So now we have to weight each of these by their chance of occurring, and sum the values. I’ll spare you the math but essentially now we have a proposition of ~$1 (cost) versus an expected return of ~50 cents. Clearly this is far more respectable, but still a long way from equitable.

But this doesn’t even really matter. After a point, even maths loses its utility. I could tell you that the odds of winning Oz Lotto are far better than the odds of winning either the EuroJackpot (1 in 95 million), the EuroMillions (1 in 140 million), the US MegaMillions (1 in 260 million), or the US Powerball (1 in 292 million), but it won’t really matter.

You’ve probably heard that you are far more likely to die on the way to buying your lottery ticket than you are to actually win the lotto (some estimates of the chances of dying in a car accident are as alarmingly high as 1 in 6,700), but even if you aren’t driving, there’s always the chance that you’ll:

  • Be crushed by a falling vending machine (1 in 112 million)
  • Get attacked by a shark (1 in 12 million)
  • Be stung to death by a bee, hornet, or wasp (1 in 6.1 million)
  • Plummet to your death in a plane (1 in 1 million)
  • Be killed by flesh-eating bacteria (1 in 1 million)
  • Drown in a bathtub (1 in 840,000)
  • Have to visit the ER for a pogo-stick related injury (1 in 115,000)

But it’s not all doom and gloom, you are also more likely to:

  • Become the president of the United States (1 in 10 million)
  • Win an Olympic gold medal (1 in 662,000)
  • Win an Oscar (1 in 11,500)
  • Find out your child is a genius (1 in 250)
  • Live to 100 (1 in 3)

The bottom line here is that winning lotto is very unlikely. So the question has to be asked: “Why is it so popular?” If people know that something is very unlikely to occur, and it costs them to see if it will, why would they do it? Well, there are several reasons – many of them rooted in psychology. In no particular order here are 6 of the more common.

1. Near misses

Across, just about any domain, there is a strange allure of almost winning. The near-miss effect describes a very special kind of failure to reach a goal. The player making the attempt comes close to, but falls just short of hitting their goal. In skill-based games like soccer or basketball a near miss gives players useful feedback and a type of implicit encouragement (“you were so close, try again”) that has the effect of giving the player hope for success in future trials.

Lottery players who come close (maybe they get 3 or 4 numbers out of 6 right – the odds of this are generally less than 1 in 1,000) take this as a ‘sign’ that they should keep playing, and they often do. A 2009 paper found that near misses activate the exact same reward systems in the brain as actual successes!

2. The numbers are too big

Our brains haven’t evolved to understand big numbers. Robert Williams, Professor of gambling studies at the University of Lethbridge, Alberta, suggests that although humans have evolved some appreciation for numbers (we can easily comprehend the difference between being chased by 1 lion versus 100 lions for instance), we don’t really ‘understand’ big numbers.

We deal with amounts like 6, 24, 120 etc. all the time, but throughout history it’s never really been important to measure out 18 million of something, or count 50 million of something else. Odds of 1 in 200 million don’t seem that different to odds of say 1 in 3 million. In both cases success is really unlikely. Give someone a choice between odds of 1 in 3 and 1 in 200, however, and the difference is really obvious. It’s certainly not that people can’t grasp really big numbers, but they don’t have that much meaning until we stop and think about them.

3. Availability heuristics

Put simply, the availability bias/heuristic relates to the idea that people judge the likelihood of something based roughly on how readily examples of that thing come to mind. Take shark attacks. You can probably think of news stories about when a shark has bitten a swimmer. One reason for this is that this kind of a story is sensational, and will likely be highly reported. How often have you seen the headline “No sharks at the beach today”? The point is, because you can easily bring to mind examples of shark attacks, you might be tempted to conclude that shark attacks are far more common than they actually are. In fact, the chances of being attacked by a shark are somewhere in the neighbourhood of 1 in 12 million.

The groundbreaking work of Kahneman & Tversky in the field of human judgment demonstrated that humans are NOT rational actors.

You hear and read stories about lottery winners all the time. Jackpot winners always make the news but the battlers who have been playing for 20 years without winning are relegated to the annals of obscurity. Based on this, it’s at least reasonable to think that ‘jackpotting’ can’t be that rare. The net effect is that winning seems possible.

4. The gambler’s fallacy & the illusion of control

If you are playing roulette in a casino and ‘red’ has come up on all of the last 20 rolls, is the next number more likely to be red or black? The gambler’s fallacy (also known as the Monte Carlo fallacy) is the mistaken belief that because an outcome hasn’t occurred for a while it is (somehow) ‘due’ to occur. In the above example, committing the gambler’s fallacy would involve betting on black because it has to ‘come up’ in order to balance out the average (since we know that red is as likely to occur as black).

People frequently select lotto numbers based on how often they ‘come up’ (or rather, how long it’s been since they ‘came up’). A lot of people reason that this (somehow) gives them some control (over an entirely random process). This illusion of control is powerful enough to influence how someone thinks and sustain their irrational behavior.

5. The sunk-cost fallacy

This is an extremely pervasive cognitive bias. In the field of economics a sunk-cost is any previous expense which can’t be recovered, e.g. a previous business expenditure on software, education, advertising etc. Because this cost has already occurred and can’t be recovered, it should no longer be factored in to future decisions. This is seldom the case.

The sunk-cost fallacy occurs when you make a decision based on the time and resources that you have already committed. In lotto, people will often persevere with what they sometimes know is economically irrational (buying more lotto tickets) simply because they have already invested so much. It’s not just lotto though, sunk-costs result in irrational decision making all the time.

Imagine you’ve bought tickets to a band that you really want to see, but on the day of the concert you come down with an illness. Even though you’re sick you decide to go anyway because ‘you’ve already paid for the tickets, so it would be a waste if you didn’t go’. Never mind that you’ve lost the money whether you go or not, and going may actually be an unenjoyable experience if you’re sick.

Or how about deciding to stay in a bad relationship because you’ve already put so much into it? Or going to a class that you don’t enjoy week after week simply because you’ve already paid for it? Or continuing to read a bad book or watch a bad movie just because you’re already half-way through?

6. Entertainment

Importantly, there are some people that intuitively realize that although playing lotto holds little or no economic value, it does have entertainment value. While you are unlikely to make a net monetary gain, you can get something else out of it. It would be absolutely ridiculous to assume that everyone is equally motivated by financial rewards and nothing else. People go to the movies, concerts, sports events etc. all the time with absolutely no expectation of financial gain. From a purely economic perspective this behavior may seem difficult to account for. Fortunately, we know that humans are motivated by more than just money, and all kinds of seemingly ‘irrational’ behavior can be explained away fairly easily.

So some lottery punters are seeking the thrill of the possibility of winning. Others are using it as a justification to temporarily fantasize about excessive wealth. For less than the cost of a cup of coffee, one can realistically spend several happy hours imagining ‘what if’. The excitement that one may experience from even having a chance of winning may be enough to justify the cost of a ticket or two.

 

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10 Factors That Influence Your Purchase Decisions

 

 

Behavioral economics teaches us lessons on how consumers make decisions.

Source: 10 Factors That Influence Your Purchase Decisions

By Shahram Heshmat Ph.D.

The basic message of behavioral economics is that consumers often act against their own economic best interests when making decisions, due to a variety of biases. Consumers are powerfully influenced by their emotions and environmental cues, as well as by how options are presented to them. By becoming aware of these biases, we could develop a better pattern of thinking and deciding.

1. Of two minds

An important idea in behavioral economics is that our behavior seems to be controlled by a narrow-minded “doer” who cares about immediate gratification, and a farsighted “planner” who is concerned with the long-term satisfaction. The interests of these two selves do not always coincide (e.g., we buy things that we don’t need). For example, a browser is in a planner (deliberative) mindset, weighing costs versus benefits. In contrast, a buyer is a doer, ready to purchase. The challenge for a salesperson, then, is to shift the customer’s mindset from browser to buyer.

2. Situational cues 

Our mind is very susceptible to subtle or subconscious cues. It is estimated that up to 40 percent of consumers change their minds at the point of purchase because of something they see, learn, or do (Dhar, 2012). For example, if a person is vulnerable (e.g., has a sweet tooth) and close to a box of chocolates or a bottle of whisky, she will value these options differently than when she is far away from them. A study (North, et al., 1999) exposed customers in a supermarket drinks section to either French music or German music. The results showed that French wine outsold German wine when French music was played, whereas German wine outsold French wine when German music was played. However, the majority of customers denied that the type of music playing influenced their choice of wine.

3. Social norm

We tend to look at our friends and those around us (such as on Facebook, Yelp, or Amazon) to reassure ourselves that we are making the right decisions. This principle has been used by ad agencies for decades — “nine out of 10 dentists prefer Miracle mouthwash.” In most neighborhoods, dog owners carry plastic bags when they walk their dogs. This has happened in the absence of any law against not doing so. The negative emotional experience of embarrassment, shame, and guilt arises from social misdeeds (Tangney and Dearing, 2003).

4. Mental fatigue

Making a series of decisions that involve conflict leads to ego depletion. Ego depletion leads to loss of motivation, leading to a greater willingness to succumb to temptation and indulgence. Thus, at the end of a long day, people have fewer resources to overcome the urge to consume a tempting snack than at the beginning of the day.

5. Choice overload

When consumers are presented with too many options, they can become overwhelmed, leading to unrealistic expectations, decision-making paralysis, and unhappiness. For example, Trader Joe’s stores are smaller than typical grocery stores, and the choices are fewer, but consumers are happier.

6. Loss aversion

Our aversion to loss is a strong emotion. Roughly speaking, losses hurt about twice as much as gains make you feel good (losing $10 feels twice as bad as winning $10 feels good). Loss aversion is the reason we see phrases like “last chance” or “hurry” or “Stop losing $100 every year in car insurance premium by buying our plan” in marketing campaigns so often.

7. Anchoring

People unknowingly anchor or focus on the number they first see and let that bias them. Consider the price tags in a car dealership. The sticker price is merely an anchor that allows the car salesperson to make the real price of the car seem like a better deal. Supermarkets and convenience stores use promotions like “2 for $2” vs. “1 for $1” that lead us to buy more than we normally would.

8. Buy now, pay much later

We put more weight on here-and-now in buying decisions than in the long term. Retailers know that allowing consumers to delay payment can dramatically increase their readiness to buy. One reason delayed payments work is perfectly logical: the time value of money makes future payments less costly than immediate ones. This explains why people have an easier time spending money on credit cards as opposed to spending real money. This also explains why individuals are willing to buy a cheaper car with less fuel efficiency instead of a more expensive one that has lower fuel costs over their lifetime.

9. Sunk-cost fallacy

Sunk costs are those costs that are beyond recovery at the moment a decision is made. Consider this. You paid $14 for a movie ticket. You realize after a half an hour of watching that the movie is uninteresting and tedious. Should you stay at the theater or leave? The sunk-cost principle says, “Don’t cry over spilt milk.” However, people tend to do the opposite; we stay. We have all experienced the influence of sunk costs or commitment in some form or another, such as an investment of time or money in projects or doomed relationships. It is hard to let go. In part, the act is a way to save face.

10. Self-justification

Decision makers are concerned with justifying their choices to themselves and to others. Making sense is a deep human motivation, but making sense is not the same as being correct (Wilson, 2011). For example, the person who has bought a luxury item but feels guilty about it may try to alleviate his guilt by coming up with additional reasons to justify his behavior, such as, “It was on sale, I had to buy it.”

References

Dhar, R(2012). The Irrational Consumer: Four Secrets to Engaging Shoppers Huffpost Apr 17, 2012.

North, A., Hargreaves, D., McKendrick, J., 1999. The influence of in-store music on wine selections. Journal of Applied Psychology 84, 271–276.

Tangney JP, Dearing RL. (2003). Shame and Guilt. NY: The Guilford Press;

Wilson, TD (2011) Redirect: The Surprising New Science of Psychological Change. Little, Brown and Company.

 

Shahram Heshmat, Ph.D., is an associate professor emeritus of health economics of addiction at the University of Illinois at Springfield.

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