the good, the bad and the irrational – understanding the irrational consumer (gerhard fehr,...

28 November 2013

The Good, the Bad and the IrrationalUnderstanding the Irrational Consumer

Gerhard Fehr, Karoline Bauer

How to use the Voting Devices

FehrAdvice & Partners AG, November 2013 2

Press «Channel»-Button

1

Insert thenumber «41»

2

Finally, press «OK»

3

Do not press anything except the number you want to vote for, the answer will be

registered automatically.

In case you see “new channel?” on the screen, follow these steps:

Which table is longer?


Which patch is darker?


Clearly, the upper patch is brown and the lower

patch is orange.

When all the rest is stripped away, we realize: they

are both the same color!

The power of perception (I/II)

1 2 3

0% 0%0%

Which of the three women do you find most attractive?

FehrAdvice & Partners AG, 8. April 2023 5

1

70% of all male respondents choose

option B.

The secret lies in the hips/waist ratio:

0.67 is considered most attractive in a

indo-european culture

Our perceptual system is able to base

decisions on extremely subtle

differences.

These differences can have a crucial

impact on the success of a product!

Devendra Singh and Robert K. Young (2001). Body Weight, Waist-to-Hip Ratio, "Breasts, and Hips: Role in Judgments of Female

Attractiveness and Desirability for Relationships

Philip Barden (2013), Decoded – The Science Behind Why We Buy, p. 69

1. A

2. B

3. C

The power of perception (II/II)

1 2

0%0%

Which of the two bottles holds more?


1. A

2. B

2

Consumers use the height of a product

as the primary signal for larger volume.

This influences their perception of

value-for-money and at the same time

increases consumption.

Win-win situation for marketers:

More purchases

Faster consumption-rate

Philip Barden (2013), Decoded – The Science Behind Why We Buy, p. 70

Please answer the following question

FehrAdvice & Partners AG, June 13 7

Which of the two chocolates would you prefer?

Griotte Praliné € 0.05

Lindt Praliné € 0.20

1. 2.

50%50%

1. Griotte Praliné

2. Lindt Praliné

1

Please answer the following question

FehrAdvice & Partners AG, June 13 8

Which of the two chocolates would you prefer?

Griotte Praliné free


1. 2.

50%50%

1. Griotte Praliné

2. Lindt Praliné

2

9

The power of “0” contributes to the “zero price trap”

FehrAdvice & Partners AG, June 13Ariely, D. (2009). Predictably Irrational. New York: Harper Collins Publishers

In versus

Which chocolate would you prefer?

Griotte Praliné free


Which chocolate would you prefer?

Griotte Praliné € 0.05


30%

70%

1 2

69%

31%

The price of 0 completely changes human decision-making

Offers that are free lead to an affective/emotional reaction

People use this affective/emotional reaction as a decision criteria and choose the free option – even if the other option is of significantly better quality and is better value for money

The power of

FREE!

Please answer the following questions (I/III)

1 2 3 4 5

0% 0% 0%0%0%

A bat and a ball cost €1.10. The bat costs one Euro more than the ball. How much does the ball cost?


1. € 1.05

2. € 1.00

3. € 0.20

4. € 0.10

5. € 0.05

1

Please answer the following questions (II/III)

1 2 3 4 5

0% 0% 0%0%0%

5 machines need 5 minutes to produce 5 units. How long do 100 machines need to produce 100

units?


1. 1 minute

2. 5 minutes

3. 10 minutes

4. 20 minutes

5. 100 minutes

4

Please answer the following questions (III/III)

1 2 3 4 5

0% 0% 0%0%0%

A pond is covered in water lilies. Because the water lilies continue to form new leaves, the area

covered by them doubles each day.

If it takes 48 days until the water lilies cover the entire pond, how many days does it take to cover

half the pond?


1. 6 days

2. 12 days

3. 24 days

4. 36 days

5. 47 days

5

People think in 2 different systems – on the one hand intuitively and impulsively, on the other hand rationally and slowly


People think in two different systems*:

System 1 is...

...intuitive,

...fast and

...impulsive.

System 2 however is...

...rational,

...slow and

...lazy.

System 1 causes people in certain situations to…

… be impatient

… have low self-control and

… display little stamina.

System 2 can easily solve the previous questions, but it often is not even involved in the decision.

*Kahneman, D. (2011). Thinking, Fast and Slow.

The previous questions are from Shane Frederick’s Cognitive Reflection Test.

The right answers are as follows:

The ball costs 5 Cents (intuitively: 10 Rappen)

100 maschines need 5 minutes (intuitively: 100 minutes) to produce 100 products

It takes 47 days (intuitively: 24 days) until the water lilies cover half the pond

Autopilot

Pilot

Even students of Ivy League Universities don’t have control over their system 1

FehrAdvice & Partners AG, November 13 14*Shane, F. (2005). Cognitive Reflection and Decision Making.

Even the great majority of Ivy League

students don’t answer these

questions correctly

This shows that not only cognitive skills

are key to this test, but mostly also

non-cognitive skills.

Thinking can be difficult. Most people try to avoid difficulties if possible and will often make intuitive decisions instead

(system 1).

The implications of explicit and implicit image for market research

FehrAdvice & Partners AG, November 2013 15*Kahneman, D. (2011). Thinking, Fast and Slow

¨Philip Barden (2013), Decoded – The Science Behind Why We Buy, p. 33

Our product experience is

mostly influenced by implicit

processes, for example

expectations, implicit reference

points, etc.

If those are positive and

reference points are not

violated, brands and products

are more likely to be considered

by the consumer

We can draw one clear conclusion from this:

market research, based on cognitive decisions,

has very limited power.

The only thing able to tell us

something reliable about consumer

behavior are close-to-reality

experiments


What is a Brand?And why does it matter?

RAIL TICKET PRICES TO

DOUBLE NEXT YEAR

RAIL TICKET PRICES TO

DOUBLE NEXT YEAR

Evidence shows that media brands greatly

influence the credibility of news items – more

than the actual content.

Brands are a type of overall frame for different products

It’s not a question of ‘brand or product’, ‘sales or image’,

‘functional or emotional’ benefit.

Brands provide a background leading to a product’s higher

perceived value.

Newspaper 1 Newspaper 2

Lessons learned: Consumers behave pretty irrational

FehrAdvice & Partners AG, August 13 17

Cognitive skills

& biasesEmotional

skills & social

preferences

Identity &

social n

orms

Willpower & time

preferences

People

Latest behavioral economic research provides empirical insights about systematic human skills and abilities These human skills and abilities need to be taken into account when analyzing behavior of employees and managers

People can only assess a limited amount of information, systematically overweigh losses compared to equal gains and tend to be overconfident. For instance, they cannot always assess risks and often act according to stereotypes. Thus, they often act in a way that does not seem fully rational.

People’s behavior is influenced by social preferences. Emotional skills like empathy influence how these social preferences are put in action.

Human behavior is influenced by limited willpower and limited self-control, presence-biased time preferences as well as heterogeneous levels of motivation.

People have different social identities (job, leisure, family) with different social norms. The sense of belonging to a social identity can overwrite social preferences.

The good and the bad consumer (I/III)

1 2 3 4 5

0% 0% 0%0%0%

How ethically appropriate / inappropriate do you think the other people

in this room will judge…

… buying clothes at Abercrombie & Fitch?


1. Very inappropriate

2. Inappropriate

3. Neither nor

4. Appropriate

5. Very appropriate

1

The good and the bad consumer (II/III)

1 2 3 4 5

0% 0% 0%0%0%

How ethically appropriate / inappropriate do you think the other people in this room will judge…

… concealing the actual content amount of a product through extensive packaging?



2. Inappropriate

3. Neither nor

4. Appropriate

5. Very appropriate

2

The good and the bad consumer (III/III)

1 2 3 4 5

0% 0% 0%0%0%

How ethically appropriate / inappropriate do you think the other people in this room will judge…

…marketing sugary yoghurts as healthy snacks for kids?



2. Inappropriate

3. Neither nor

4. Appropriate

5. Very appropriate

3


No homogeneous values regarding ethical behavior can be observed

… Abercrombie & Fitch supports sexism and

superficiality by employing tan, half-naked men with six

packs.

Some people might argue that…

1

… concealing the product’s actual amount through

packaging is equal to lying to the customer.

2

… marketing sugary yoghurt as healthy for children is

contributing to the obesity epidemic.

3

But homogeneous values about ethical behavior do rarely exist.

Your ethics compared to others in the audience

1 2 3 4 5

0% 0% 0%0%0%

How ethical do you judge your own behavior compared to that of the other people in this room?


3

1. Very unethical

2. Unethical

3. Neither nor

4. Ethical

5. Very ethical

Overconfidence is a widespread phenomenon


As the questions demands a relative consideration of the present audience, the shares above and below average should be equally big

Assumptions: a roughly normal distribution

A variety of empirical studies shows that people systematically overestimate their skills and performance

Men are more overconfident than women (which can already be observed in childhood)

Wherever overconfidence applies, it is more difficult to change behavior

People are systematically overconfident, which has tremendous impact on the decisions we make.

Ø - --++ +

Overconfidence regarding own skills and capabilities:

Siehe Niederle, M. and Vesterlund, L. (2007). Do Women Shy Away From Competition? Do Men Compete Too

Much?

Lessons learned


The good consumer

The bad consumer

Our self-image

Reality (sometimes)

Irrational consumption behavior

1. People think they are “good consumers”, however, sometimes “makes” bad decisions

2. Marketers can design products in a way that consumers are “nudged” into good decision making

Non-binding Defaults and “green” consumer behavior – Example from the Energy Sector


Conversion Rate = 8.8%

Conversion Rate = 8.0%

FehrAdvice & Partners AG, April 8, 2023 26

The effect of Choice Architecture can be illustrated with the aid of the following example:

Choice Architecture plays a major role in the pricing policy (II/II)

Subscriptions

Pick the type of subscription you want to buy or renew

1. Web subscription

$59.00

2. Print & web subscription

$125.00

Subscriptions

Pick the type of subscription you want to buy or renew

1. Web subscription

$59.00

2. Print subscription

$125.00

3. Print & web subscription

$125.00

68%

32%

16%

84%

0%

*The experiment was conducted by Dan Ariely

Because we find it difficult to assess the absolute value of different options, we rank them relative to the available choices

In a field experiment* participants were able to choose between different subscription offers for “The Economist”

When the choice was between web subscription only and print & web subscription, most participants chose web subscription only

With an additional, clearly inferior, choice that nobody chose, the previous preferences were changed completely

The effects can be explained in the following way: Consumer prefer one-off payments over multiple installment payments, because

one-off payments only „hurt“ once (loss-aversion, prospect theory). The Framing of the increase is very important. The „hidden increase of the annual

fee via a split of the annual fee will, on average, be considered as unfair. Unfairness very often triggers a „negative reciprocate behavior“, i.e. customers are willing to incur own cost by harming the company (negative referral, churn ,etc. ). Additionally, additional flexibility is „very seldom“ a sufficient argument for price increases.

FehrAdvice & Partners AG, Mai 13 27

How to change consumer behavior in an undesirable way: Introduction of a quarterly fee does increase churn-rates considerably and decreases customer satisfaction

The annual fee will be replaced by a quarterly fee and increased by 20% p.a.

...which increased the churn rate and decreased customer satisfaction

Framing to the customer:

The quarterly invoice of the fee increases the flexibility of the customers, because contract durations will be shorter

Jahr 1 Jahr 20%

1%

2%

3%

4%

5%

6%

7%

8%

Kontrollgruppe* Quartalsgebühr

+7 %-Punkte

-7%

0123456789

10

100

120

+20%

Annual Fee

Vorgehensweise Resultate

4 x

Explanation

Loss-Aversion is the main trigger for customers in the case of splitting annual payments into multiple installments.

This approach in order to increase prices will not be accepted by customers.

Conclusion

Kontrollgruppe*

Customer Satisfaction%Churn

A 2.

Control group Quarterly fee Quarterly feeControl group


„Status loving“ Gold costumers have a willingness to pay a premium in order to increase their privileges

A new status is introduced: „Gold Premium“ – three months later the prices is increased

...which will be accepted by predominantly male consumers with high income

In a first step, a «Gold Premium Status» will be introduced, which all Gold Costumers will receive

In a second step (after 3 months) the annual fee will be increased – but only, if the customer will keep the new level of status.

The increase of the annual fee will be introduced by an opt-out structure

Approach Result of the choice architecture

The „Gold-Premium Status“ was given to all customers. The idea was to create an „endowment-effect“. Consumers do not want to lose the status and suffer „loss-aversion“. Due to this effect, overwhelming part of the customers accept the price increase due to the fact, that they do not want to lose the new privileges

This effect is considerably higher by male consumers with high income. The opt-out (old status, old price) option was used in a modest

frequency.

Explanation

Status matters and has its price

Choice Architecture matters and has

low impact on customer

dissatisfaction.

Conclusion

91%

9%

Annahme Opt-out

8%

93%

Männer

16%

84%

Frauen

Time

Contact customer service

Gold

Premium

Status

Annual

Fee

300 CHF

11%

89%

Income below 125‘000 CHF

6.5%

93.5%

Income beyond 125‘000 CHF


Putting the pieces together – lessons learned

• Irrational consumer behavior is systematic and can be observed in different cultures, markets or customer segments

• Traditional market research asks the “pilot” and produces feedbacks that do not reflect real consumer behavior in the real world

• Overwhelming part of consumers believe, that their consumption behavior reflects ethical standards, however, in the moment of truth, they regularly act against their beliefs

• Good and bad consumption behavior does mainly reflect choice architecture and framing of campaigns and products

• Marketing Managers can often design their products & campaigns in a way, that consumers are “nudged” into better behavior, without harming business goals

The management team of FehrAdvice consists of experts from science and practice


Univ. Prof. Ernst FehrChairman of the Board

Bergstrasse 1148032 Zürich

Tel: +41 44 256 79 00

[email protected]

Gerhard FehrCEO and Managing Partner


Tel: +41 44 256 79 00

[email protected]

Harald P. StoehrManaging Partner


Tel: +41 44 256 79 00

[email protected]


[email protected]


FehrAdvice & Partners AG

Contact

http://www.fehradvice.com/

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