BUAD100 Lecture Notes - Lecture 4: Prospect Theory, Status Quo, Organ Donation

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Consumer Behavior Part 2 video lecture
Step 3: evaluating Alternatives (and step 4: purchase decision)
- How is judgment different from decision making?
o Judgments are evaluations or estimates regarding the likelihood that something
will happen. Judgment does not require the consumer to make a decision
(choice).
E.g. I think car A will be reliable (judgment) I think car B will be
somewhat reliable (judgment). I chose car A over car B (decision making)
- Heuristics are used to simplify judgments (and decisions)
o Heuristics are “rules of thumb”
o Usually helpful
o Can be over-applied and mislead us.
Perspectives in Consumer Decision Making:
- Normative: focus is on finding rules that lead to the “best” decision in a given situation/
How should consumers choose? Primarily used by economists
o What is the best alternative?
- Descriptive: focus is on describing how people make decisions. How do consumers
choose? Primarily used by psychologists.
- Normative and descriptive approaches are often at odds.
But Consumers Are Often Irrational...
- Dan Ariely’s “ted talk”
o Asymmetric dominance (rome with or without coffee vs. paris; economist
subscription)
o Status quo (organ donation)
o Contrast effects (tom & jerry)
If consumers were rational: expected value
- Anticipated value
- Multiply each of the possible outcomes by the likelihood each will occur; add them up
- Basic example of a die:
Expected value: an example
Prospect Theory
- We value outcomes as “gains” and “losses” relative to a reference point
- Losses “loom larger” than equivalent gains
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