MGMD02H3 Final: Final Exam Notes (Session 6-9)

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University of Toronto Scarborough
Management (MGM)
Sam J Maglio

Session 6: Choosing Among Options False memory: - E.g. Brian Williams faced online criticism for calling images of U.S. missile launch “beautiful” during an attack on a Syrian air base - Conflating an experience: internalizing someone’s story as if it were your own Choosing Among Options:  Classical theories of choice: Discernible preferences – you know what you prefer and why  Behavioural research: preferences are constructed on the fly and are strongly influenced by: 1. Choice set 2. Method of comparison Implication  manipulating the context in which people make choices can influence what they actually pick and how much they like it Choice Set Effects: 1. Compromise effect (extremeness aversion): When you add extreme values (cheap vs. very expensive), you choose the middle option  E.g. 3 camera options: cheap, priced in the middle, very exp. 2. Decoy effect: adding clearly inferior option (decoy), increases market share of superior option  will shift people to choose superior/more expensive option  2 bread makers: a high end and a regular option. When high end is added to choice set, increasing choice set, it makes other option seem cheaper and more desirable – even if customer never intended on buying bread maker in first place  add print subscription (no one would pick) for same price as print & web option. Makes other options seem more appealing 3. Dominance effect: desirable attributes are over-weighted  Gift packages: when you add $8 to gift package A to make it equivalent to B, most people choose B b/c they’re more attracted to cash  cash has higher perceived worth than coupons 4. People avoid difficult decisions, even if it means inferior outcomes  Choosing CD players: majority of ppl prefer to wait to learn more about other offers to avoid making a difficult decision, but they will miss low price opportunity (1-day sale – inferior outcome) Implication  Marketers can make purchasing choices easier by only offering 1 option E.g. A trip to Hawaii: people pay $5 fee to buy same special priced vacation package the next day to avoid making an immediate decision  Reduces stress on making purchase right away 5. Attributes that not easily comparable are underweighted  Health club memberships: people don’t want to do mental work to compare gyms so they look at attribute they can easily compare (price). When missing info, you use price to compare  When attributes are not easily comparable, you ignore them and go with perceived quality: If A>B, and A>B>C then A>C Method of Comparison Effects: 1. Choosing vs. Rejecting E.g. Spring Break: Vacation A (all avg. attributes) or B (bipolar, some are great, some bad) - Choose – people choose B and inherently reject A b/c B seems to have better attributes (i.e. lots of sunshine in B vs. average weather in A) - Cancel – people cancel B, it’s easy to justify choice b/c can’t find anything wrong with A while there are reasons to reject B (i.e. cold water, no night life) E.g. Child Custody: Parent A (all avg.) vs. Parent B (extreme – income, minor health probs, strong relationship with child, very active social life) - Choose – award sole custody to Parent B – strong relationship w/ child overcomes fact that they’re never around due to active social life - Reject – deny sole custody to Parent B (lots of extreme reasons to deny), but there’s no reason to not go with Parent A (more stable, reliable choice) 2. Forced vs. Rejectable Choice sets Choosing among activities: - Word search task: 3 choice sets with 1. Forced-choice condition: Capital cities, famous actors 2. Rejectable-choice condition: Capital cities, famous actors, do nothing 3. Another forced-choice condition: Capital cities, famous actors, ballet dancers o Rejectable-choice condition has “do nothing” – you are voluntarily given the choice not to choose, no one will pick Option 2 o With Rejectable Choice of doing nothing  option to quit (“do nothing”) will make you more determined to do word search/do something/try harder The Paradox of Choice a. The Power of Choice: E.g. Puzzles a.i. Free choice condition – you pick puzzle you want to do  personal choice a.ii. Experimenter’s choice condition – experimenter tells you which puzzle to do a.iii. Mom’s choice condition – mother selects puzzle Implication  Having increased controllability and personal choice improves outcomes (i.e. increases time spent on puzzle) E.g. Mortality Langer’s study of nursing home residents who took care of a plant lived longer than if plant tended by staff  increased feelings of choice and daily personal responsibility leads to sustained beneficial effects 18 months later: Enhanced Control condition (plant) – 15% Comparison Condition (compared to other decisions) – 30% Implication  workers given leeway in carrying out tasks and making decisions show improved morale Controllable Aversive Stimuli (measured averse control) - 1972 experiment: research participants charged with doing problem solving tasks % of errors in problem solving: o No noise – 27% wrong o Noise, perceived control – 32%  performed a lot better when they had a sense of control o Noise, no perceived control – 48% b. The Tyranny of Choice: - Too many choices is overwhelming/exhausting (e.g. Bell TV channel options) E.g. Jam study (over choice): - 24 vs. 6 varieties of jam - People are motivated to try jam when there were 24 varieties, but didn’t end up buying b/c overwhelmed with too many choices - When there are less varieties, less people stopped at booth to try them, but more people actually purchased jam E.g. Godiva chocolate – 30 vs. 6 varieties: - Even tho customers were less satisfied with less # of choices/varieties, they’re more satisfied with their purchasing choice Implications  Less choice leads to better outcomes at higher quality Marketing Implications:  Give customers / clients some choice, but not too much  How much is too much? Depends on industry and product type  Anticipated satisfaction (higher for bigger choice sets) vs. actual satisfaction (lower with big choice sets) – E.g. Bell TV channels, if not given enough variety, may switch to Rogers  Big choices: life choices such as marriage, buying a car/house, jobs  too many is not good o People that looked for more job options made more money than those who considered less jons o People w/ lower salaries are more satisfied when they chose from smaller set of jobs/choices b/c they focus less on unrealized options (other jobs)  Irreversible choices: people are more satisfied w/ irreversible choices  less cognitive dissonance E.g. Marriage o Our grandparents may have gotten divorced more likely if they had the option o Since divorce is readily available – you choose to stay married b/c you want to and you’re satisfied w/ marriage not b/c you have to (an irreversible choice)  Individual differences: o Maximizers vs. satisficers: looking to maximize their options vs. settling for what’s good enough and learning to love it  E.g. Looking for lots of jobs (maximizers) vs. those who look for fewer jobs (minimizers) o Culture & choices:  Coca Cola freestyle pop machines (too many drink choices)  Pizza Hut customizable touchscreen pizza to add toppings  user-friendly and effective, not an overwhelming # of choices Session 7: Satisfaction with Choice Determinants of Choice Satisfaction 1. Ease of decision (e.g. Godiva chocolate) 2. Desirability of the chosen option Choosing btwn 2 great options vs. 2 terrible options:  E.g. Custody study for Parent A or B: I.e. both score high on attributes such as income, own a Mean > 0 (both really good options) Mean = 0 (indifferent) home, educated, available, no drug use I.e. had an affair, drug abuse, unavailable Mean < 0 (both really terrible options) When both parents are terrible, the judge (decision maker) is evaluated negatively. People focus more on -ve When both parents are great, the judge is evaluated positively, but ratings are not as extreme as -ve 3. Personality (satisficers – good enough vs. maximizers – want to max utility always)  Outcome satisfaction of jobs is higher for satisficers since they do not focus on unrealized options as much as maximizers who have higher anticipated applications and salaries 4. Cognitive Dissonance  Two conflicting facts are mentally painful (dissonant)  The mind works nonconsciously to resolve a conflict  Results in the spreading of alternatives  choices are similar in value/likeness at beginning, but after you make the choice, you resolve dissonance by increasing likeness for your ultimate choice E.g. Laptops: You like the Mac (9/10), the Dell laptop (8/10), but after you buy the Mac you give it a higher rating of (11/10) and lower rating for Dell (7/10) to further justify your choice for the Mac E.g. Voting Paradox – voters are more satisfied w/ candidate after voting b/c they justify choices 5. Counterfactual Thinking E.g. Winning silver instead of gold (upward comparison) vs. winning bronze (downward comparison)  bronze winner is happier than silver E.g. Dave & Jim Dave stayed at home for university but didn’t like it and wish he transferred (inaction) Jim transferred schools and didn’t like it, wishes he stayed home (action) Implications  in ST, Jim feels regret for moving (action). In LT, Dave didn’t move (inaction) and feels regret since he could’ve had a good experience if he moved When asked about life regrets: majority of people regretted the things that they didn’t do but wish they had done the most. Explanation:  Status quo default  Regrets in the ST concern action  Regrets in the LT concern inaction: o More silver linings w/ regrettable actions o Inaction seems perplexing w/time b/c hard to understand why you didn’t act Consequences of action are finite; Consequences of inaction are infinite Marketing implications  Scarcity promotions (i.e. limited, one-day only sales) leads to action (purchasing) vs. coupon discounts with no end date How to minimize regret after person misses out on sale? -> send consolation email w/ staggering discounts later on (lower than original discount but still better than nothing) Intertemporal Choice (time) Now vs. Later  E.g. 1980s, military attempted to reduce its size by “buying” solders into retirement. They were offered two choices:  Immediate lump sum ($20k)  more than 90% chose lump sum b/c did not want to wait  Annuity: paid out in instalments over time ($40k)  Implied interest rate 17-20% Savings to the U.S. Gov’t and loss to solders: $1.7 billion Explanations:  Traditional: ignorant, illiquidity (poor, need money)  Modern Behavioural Economics: instant gratification, people value (bias) present more than the future (present bias) Intertemporal Choice: 1. Rational/normative models assume time is discounted at a constant rate (i.e. diff btwn now and 1 year is same diff btwn 10 and 11 years) 2. Discount rates: determines PV of future CF; takes into account TMV – the more uncertain the future CF, the higher the discount rate Instead, discount rates are: A. Myopic, “present bias” – want to receive things now even if you’ll regret it later; future is unknown o E.g. $10k now or $12k later Choice of $10k now vs $12k in a year  when it’s now, you prefer present choice Choice of $10k in 10 years or $12k in 11 years  when it’s later you don’t mind waiting B. Unstable o The more you discount (devalue) the future, the more $ you need to be indifferent in waiting for payout later o The smaller the amt, the greater the discount rate needs to be: E.g. New iPhone delivery framing: a) Default shipping is 10 days  willing to pay $13.10 to have it delivered today (speedup) b) Default shipping is today  you need to be paid $25.55 to have it delivered in 10 days (delay)  Larger for vices than virtues: o Vice (i.e. cake - harmful) - you’re willing to pay more in the future  Hyperopia (opposite of myopia): ppl exert too much self-control and delay favourable experiences E.g. Saving expensive wine/dress for a special occasion -> never end up drinking it or wearing the dress, may be too late in future  Remedy a vice by making it seem like a virtue o Virtue (i.e. fruit - helpful) - you’ll pay the same in the future  Ppl use equivalent of sunk costs to commit themselves to an activity (i.e. paying large annual gym membership fee, healthy meal subscription boxes) Self-control: we intentionally make vices harder (i.e. by buying smaller quantities, downloading self- control apps) Implications  Giving us loans higher than the interest rate:  Instant cash back/loans – you are likely to accept refund anticipation fund ($ today) due to present bias, even though you’ll lose $  Buying out lottery/legal settlement winners – you’re better off taking annuity than lump-sum payments  Higher profit margin on “in stock” items (e.g. cars: $25k perfect car later vs. $26k car now w/ needless features)  Inefficient appliances (e.g. lightbulbs – cheaper now, but not sustainable in LT) SMarT (Save more tomorrow) Plan:  Ppl automatically enrolled (they must opt out (action)) in a savings plan in which their future raises are set aside in a savings account  effective at saving $ w/o any work On the other hand: Job A Job B $70K in Year 1 $60K in Year 1 $65K in Year 2 $65K in Year 2 $60K in Year 3 $70K in Year 3  80% preferred Job B even tho Job A is better – you can take $ in Year 1 and invest in the future to earn more  All else equal, people prefer improving sequences  Note: This conflicts not only with the “present bias”, but also rational economic models. 3. Beyond Intertemporal distance - psychological distance: Def’n: any means by or avenue along which an individual goes beyond their direct, immediate, and egocentric experience. Patterns of Intertemporal choice similar to those across other psychological distances  Time: now vs. later - time shrinks time (present bias)  Physical space: here or there – spatial distance Space shrinks time: o Spatially near (NYC) - $50 vs. 3 months time – $65 o Spatially far (LA) - $50 vs. 3 months time – 65$  Social: self or other  Probability: certain or possibility Session 8: Social Decision Making Group Decision Making  When size of group is smaller, accuracy correlation is lower (e.g. online Baseball predictions) Aggregation works b/c: - Estimates about unknown quantities are often unreliable, susceptible to errors - Averaging can help cancel out errors (biases), provided: a) errors are random (not systematic) and b) there is diversity and independence of opinion E.g. Brainstorming Groups of 4 asked to generate as many ideas as possible to solve a problem. Half of the groups worked together to generate ideas, half of the “groups” worked separately. Implications: Nominal groups had high # of distinct ideas compared to real groups, but less good distinct ideas relative to real groups  more distinct, good ideas are generated
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