Consumer Behavior - Heuristics and Biases in Judgement and Decision Making

Positive Decision Making

• how people actually make (descriptive)

• based on psychology and consumer behavior

• Assumes that people satisfice

• Assume bounded rationality

Normative Decision Making

• How people should make decisions (prescriptive)

• Based on economics

• Assumes that people optimize/maximize

• assumes full information, rationality, and consistent preferences (across time and context)

Heuristic

any decision “rule of thumb” or shortcut; make our lives easier; nothing inherently “wrong” with them

Bias

Use (or overuse) of a heuristic leads to a poor decision; problems happen if we OVERAPPLY a heuristic to such an extent that it produces a wrong decision or poor judgement

how heuristics lead us astray

system 1 vs system 2 thinking

system 1

our fast, automatic, intuitive and largely unconscious mode; everyday decisions; jumps into an intuitive conclusion based on a heuristic (an easy, imperfect way to answer hard questions)

system 2

our slow, deliberate, complex decisions; analytical and unconsciously effortful mode of reasoning (lazily endorses this heuristic answer without bothering to scrutinize whether it is logical)

availability heuristic

making decisions based on what comes to mind; if something is available to memory, it’s judged to be more likely

representativeness heuristic

based on how similar an example is to a category prototype/exempler

sunk cost effect

costs that have already been incurred and which cannot be recovered

Halo Effect

tendency to assume that if something is good one one attribute then it is good on all others

Confirmation Bias

the tendency to see what you expect to see or want to see

self positivity bias

thinking bad things happen to other people, but not to us

outgroup homogeneity bias

you feel people in an outgroup are more like each other than they themselves feel they are

egocentric bias

you think people are more like you than they actually are

fundamental attribution error

you overattribute others’ actions to their personality and underattribute to the situation