self reflection based on class materials

1 Choice Context BUS143: Judgment and Decision Making Ye Li Repeating themes in this class •People’s evaluations tied to the local , rather than global context. For example: –(Topic1) We take choices as given ( concreteness principle), and evaluate outcomes relative to reference points –(Topic 4 ) We form narrow, “topical” accounts rather than comprehensive mental accounts –(Topic 5) We exhibit myopia in intertemporal choice •Why? We can’t pay attention to everything and have difficulty thinking about what’s not present –In many cases, people find relative evaluation easier than absolute evaluation Choice in context •Given a set of alternatives, how do people select a preferred option?

•How about buying a new smartphone?

–What was your process like?

–How would you describe it? •How about what school to attend (or apply to)?

•How about what to drink at lunch? 2 Making choices: What do Econs do? •A value -maximizing decision -maker would… –Take stock of goals (i.e., knows exactly what he or she wants) –Explore ALL alternatives –Evaluate how well each alternative addresses their goals –Choose alternative that has greatest total utility Value Maximization: Prescriptions from Intro Economics •Use a decision matrix (step 1 of 3) – First, identify and set priorities among objectives  Assign attribute weights (i.e., importance) Attribute Importance 3 2 2 1 2 3 1 Attribute Weight 21% 14% 14% 7% 14% 21% 7% Option Price Display Weight Battery Camera Software Hardware Value Maximization: Prescriptions from Intro Economics •Use a decision matrix (step 2 of 3) – Second, determine how alternatives measure up  Assign attribute values  Scale each dimension from 0 (worst) to 100 (best) Option Price Display Weight Battery Camera Software Hardware iPhone 6 $649 4.7” 326ppi IPS 4.55 oz 14hrs 8/1.2MP iOS 8 1.4GHz Dual HTC One M8 $670 5” 441ppi IPS 5.64oz 20 hrs 4UP/5.1MP Android 4.4 2.3Ghz Quad Moto X (2014) $500 4.7” 313ppi AMOLED 5.08 oz 15 hrs 10/2MP Android 4.42.5Ghz Quad Galaxy S5 $650 5.1” 432ppi AMOLED 5.11 oz 21 hrs 16/2MP Android 4.4 2.5Ghz Quad Option Price Display Weight Battery Camera Software Hardware iPhone 6 31 70 100 20 0 100 0 HTC One M8 0 100 0 80 100 30 70 Moto X (2014) 100 0 55 0 30 70 100 Galaxy S5 30 50 50 100 80 0 100 3 Value Maximization: Prescriptions from Intro Economics •Use a decision matrix (step 3 of 3) – Calculate utility for each option  Multiply values by weights, sum across options Why not use this method for every choice you encounter in life?

Attribute Weight 21% 14% 14% 7% 14% 21% 7% Option Total Price Display Weight Battery Camera Software Hardware iPhone 6 53.8 31 70 100 20 0 100 0 HTC One M8 45.7 0 100 0 80 100 30 70 Moto X (2014) 55.7 100 0 55 0 30 70 100 Galaxy S5 46.4 30 50 50 100 80 0 100 Making Choices: What Humans actually do •Humans use shortcuts –People often make “reason -based” choices (more details later) –Screening (removing options ) –Relative rank matters (not absolute goodness) •Implications… –For modeling people’s choice behavior –For product positioning Also, biological, medical, legal, and political implications X4=taste X3=calories Homo economicus : The Value Maximizer X2=sugar X1=caffeine “Conjoint analysis” (a major marketing tool) isbased on assumption that utility of option is sum of component utilities (“purely additive model”)     n i i i X b x u y u x u x u x p , 1 ) ( ) ( ) ( ) ( ) ( 4 Economic Modeling of Choice I: 1950 -1970s Coke60% Pepsi40% Coke48% Pepsi32% TALLP(ex-Pepsi)8% TALLP(ex-Coke)12% Assumption: Proportionality (“constant ratio rule”) New offering will take in proportion to original shares. TALLP Suppose that, when added, TALLP takes 20% share Choice Modeling II:

Similarity Hypothesis Coke60% Pepsi40% TALLP Coke55% Pepsi25% TALLP(ex-Pepsi)17% TALLP(ex-Coke)3% Assumption: Similarity New offering will take more share from those that are similar(i.e., similar goods swap out for each other in the market) Again, suppose thatTALLP takes 20% share Choice Modeling III:

Regularity Assumption x z y A B Pr(x; A) = ? Pr(x; B) = ? Pr(x; A) ≤ Pr(x; B) The entry of an additional alternative will either reduce the share of existing alternatives or leave them unchanged 5 High -Stakes Violation of Regularity Redelmeier & Shafir 1995 •Scenario presented to neurosurgeons:

Who has priority for surgery?

–Two optionsWoman: mid fiftiesMan: early seventies –Three optionWoman: mid fiftiesMan: early seventiesWoman: mid fifties •Why do these surgeons violate regularity? C T Quality Price 70 50 $1.80 $2.60 D C = competitor D = decoy Violating choice principles: The Attraction Effect Huber, Payne, & Puto 1982 T = target B A Similarity Distance (in miles) 80 70 30 50 CDecoy! The Attraction Effect in Dating 60 35 6 Other Contexts: Decoys without dominance? C T Quality Price 70 50 $1.80 $2.60 D Efficient Frontier “Compromise Effect” -Not just similarity effect-Not necessarily a relatively inferior alternative Why? Extremeness Aversion A Probability of Repair 40 16 B C 32 24 8 9% 7% 5% 3% 1% Shift from B to A = lossof reliability Shift from B to A = gain of functionality Shift from B to C = lossof functionality Shift from B to C = gain of reliability Number of functions Reason -Based Choice Shafir, Simonson & Tversky 1993 •Basic idea: Individuals construct reasons to resolve conflict and justify their choice–“Choice is a search for a unique principle that covers the decision at hand and is not dominated by another more powerful principle .” (Prelec & Hernstein 1991) –Reason -based choice seems more compelling than a tradeoff -base dchoice •Why is making tradeoffs difficult?–Conflicting objectives (and loss aversion!)Tradeoffs create losses on some attributes –Optimizing (pick the best) versus Satisficing (pick something that is ‘good enough’) 7 Reason -based Choice II Shafir, Simonson & Tversky 1993 •Reason -based choice occurs more often: –In complicated situations (lots of information; many alternatives)–When value -based approaches are hard to defend E.g., tradeoffs about human lives, safety, etc. Would you expect context effects to be exacerbated or diminished in organizational decisions?

•Reason -based choice increases with accountability •Reason -based choice is not normative because: –“More important” attributes get too much weight in reason - based choice–Reasons are frame -dependent (see next slide) Which to choose? Shafir 1993 Imagine that you serve on the jury (one of 12 jurors) of an only - child sole -custody case following a relatively messy divorce. The facts of the case are complicated by several ambiguous economic, social, and emotional considerations, and you must decide on the basis of the following few observations:

To which parent would you award sole custody of the child?• Parent A– average income, average health, average working hours, reasonable rapport with the child, relatively stable social life • Parent B – above -average income, very close relationship with the child, extremely active social life, lots of work -related travel, minor health problems Give people a reason to choose you… Iyengar & Lepper 2000 •Field experiment •Two tasting booths A. Few options: 6 jams B. Many options: 24 jams • Difficult to make choice  No choice or choice deferral • Your examples?0% 10% 20% 30% 40% 50% 60% 70% Taste Purchase 6 jams 24 jams 8 Disjunction Effect Tversky & Shafir 1992 Imagine that you have just taken a tough qualifying examination. It is the end of the fall quarter, you feel tired and run -down, and you are not sure that you passed the exam. In case you failed you have to take the exam again in a couple of months —after the Christmas holidays. You now have an opportunity to buy a very attractive 5 -day Christmas vacation package in Hawaii at an exceptionally low price. The special offer expires tomorrow, while the exam grade will not be available until the following day. Would you…?A. Buy the vacation package. B. Not buy the vacation package . C. Pay a $5 non -refundable fee in order to retain the rights to buy the vacation package at the same exceptional price the day after tomorrow —after you find out whether or not you passed the exam. Disjunction Effect: Pass Tversky & Shafir 1992 Imagine that you have just taken a tough qualifying examination. It is the end of the fall quarter, you feel tired and run -down, and you run down, and you find out that you passed the exam . You now have an opportunity to buy a very attractive 5 -day Christmas vacation package in Hawaii at an exceptionally low price. The special offer expires tomorrow. Would you…?

A. Buy the vacation package. B. Not buy the vacation package . C. Pay a $5 non -refundable fee in order to retain the rights to buy the vacation package at the same exceptional price the day after tomorrow. Disjunction Effect: Fail Tversky & Shafir 1992 Imagine that you have just taken a tough qualifying examination. It is the end of the fall quarter, you feel tired and run -down, and you run down, and you find out that you failed the exam. You will have to take it again in a couple of months —after the Christmas holidays . You now have an opportunity to buy a very attractive 5 -day Christmas vacation package in Hawaii at an exceptionally low price. The special offer expires tomorrow . Would you…? A. Buy the vacation package. B. Not buy the vacation package . C. Pay a $5 non -refundable fee in order to retain the rights to buy the vacation package at the same exceptional price the day after tomorrow. 9 Context matters for evaluability Hsee et al 1999 •Joint evaluation: Simultaneous consideration of two or more options •Separate evaluation: Consideration of each option in isolation •Example : Which payment scheme do you prefer in a legal settlement?A. You get paid $500 and other person gets paid $500 B. You get paid $600 and other person gets paid $800 •Evaluability of a continuous attribute depends on knowledge of average, best and worst values–Reflects the desirability of an attribute value in a given decision context Evaluability Hypothesis Hsee et al 1999 •When an option is judged in isolation, the judgment is influenced more by the attributes that are easier to evaluate in isolation –E.g., salary, beauty… What else? –Give me examples of dimensions that are or are NOT evaluable. •In joint evaluation, each option serves as the most salient reference for evaluating the other options  Changes evaluability –Can shift what attributes are important! Which evaluation mode is better? •Of course, neither is always better, so qualify your answer with when.

•Most researchers would argue for joint evaluation. Why?

•When and why might separate evaluation be better? 10 Summary •Choice depends on context–Marketers should consider how to control the choice environment, e.g. via product characteristics.–Decisions in separate and joint evaluations may differ! •People hate making tradeoffs (loss aversion) and generate reasons to choose one alternative over the other(s) •This leads to violating basic choice principles–The Attraction Effect–The Compromise Effect Ye’s Keys 27. Everything is relative, especially if it’s hard to evaluate on its own. Context impacts choice and evaluability. 28. Change the context  change the choice: Maximize your position by identifying extremes and beating the heck out of the weak competitor. 29. Easier to make choices we can explain to others (and ourselves). So give people a reason to choose your product!