When Kahneman and Tversky went shopping!

Here is a look at how shoppers rely on  heuristics while shopping and how sellers can make use of this knowledge to their advantage.

heu·ris·tic [hyoo-ris-tik]. noun

“Computing proceeding to a solution by trial and error or by rules that are only loosely defined.”

Source: Oxford Dictionary

 

Daniel Kahneman and Amos Tvsersky were the pioneers in the research on heuristics (although the concept was originally introduced by Herbert Simon). In an article by Kahneman, Slovic and Tvsersky (1974), heuristics are described as certain principles or rules that people follow “…which help in reducing the complex tasks of assessing probabilities and predicting values to simpler judgmental operations.” (p.3). Although they help us in arriving at decisions faster, they can sometimes lead to severe and systematic errors in decision making.

We will look at some of the heuristics below and how consumers often use them to make purchase decisions.

i. Availability Heuristic

When people try to estimate the frequency or probability of occurrence of an event or by the ease with which they can remember instances of the event occurring, they are using availability heuristic to make a decision. Vivid, weird, unusual or emotionally charged instances of events will be better remembered thus leading to a bias in estimation of probability (Kahneman and Tversky, 1972).

Consumers often ignore the base-rate information (how often the event really occurs) and place more importance to information that is more easily accessible. For example, if you once owned a Sony Walkman that gave you a lot of trouble and needed repair, you are likely to remember your dissatisfaction with the Walkman and will influence your decisions about buying Sony products even years later.

A related concept to availability heuristic is the ‘law of small numbers’, where people generalize information gathered from a small number of people to the population. For example, if your friends say the new café on High Street, which opened recently, is terrible, you may believe that this belief is held by the majority of people, and never try out the new café.

Marketing Implications

Marketers can use the availability heuristic to their advantage or use it to overcome bias. Advertisements that contain vivid imagery, humorous themes, are better recalled. Such advertisements can help in increasing product recall among consumers thereby leading to increased purchase frequency. Marketers can also similarly exploit (?) the ‘law of small numbers’ (Hoyer and Macinnis, 2009). If you look at the product description of an item on Amazon, you can usually see recommendations and reviews from around 3-4 people.  Consumers may use the law of small numbers to generalize and believe that a majority of the population likes the product.

 

ii. Representativeness Heuristic

This is a fallacy where people estimate the frequency or probability of an event/product by considering how much the event or product resembles the prototype. Kahneman and Tversky (1972) describe a person who uses this heuristic as someone who evaluates the probability of an event, by the degree to which it is similar in essential properties to it’s parent population.

If a new product launched in the market looks similar to a well-established brand, consumers often associate the new product with the attributes of the established one.  If you associate McDonald’s with unhealthy, junk food, you may already base a similar opinion of a newly opened fast food restaurant. Interestingly, McDonalds is trying to shed its ‘unhealthy’ image by offering a healthier variety of Happy Meals.

Marketing Implications

Marketers can take advantage of this heuristic by launching new products with attributes similar to the prototype considered by consumers. Packaging a new product to (some extent) resemble a well-known brand can lead to more consumers willing to try out the new product.

 

iii. Anchoring or Focalism

People often start with a reference point, which can be implicitly suggested to them. They then try and adjust the anchor to reach an estimate. This may lead to a cognitive bias, as the anchor or the reference point decided by the estimator often affects the final estimate.

In a consumer setting, consumers often unintentionally use this heuristic to judge whether an item is expensive or affordable. Research by Ariely, Loewenstein, and Prelec (2003) shows that participants are willing to pay a higher price for a product when the anchor considered is high, than participants whose anchor was low.

To illustrate, imagine you walk in to this restaurant called Norma’s in New York. You flip through the menu and your eyes bulge out when you notice that they make The Zillion Dollar Lobster Frittata with a Supersize serving of Servuga Caviar for $1000 (~ £630). The restaurant uses this absurdly priced item on the menu as an anchor point on their menu. This helps patrons look at the other (slightly less) ridiculously priced items on the menu, seem reasonable in comparison! (Meghan, 2011)

Here is a link to their menu card – Link

Marketing Implications

Looking at this from a seller’s point of view, the placement of products in the aisle at a showroom or a supermarket can influence the purchase behavior of consumers. If a £1000 TV set is placed at the beginning of the Electronics aisle, and a similar TV set which costs £800 is placed at the end of the aisle, consumers would often perceive the £800 TV set to be a better deal!

 

Further Reading

There are many more heuristics that have been developed further to the research by Kahneman and Tversky, which we use in everyday life.

  • Consumer Behavior by Hoyer & Macinnis – Link
  • Heuristic Decision Making by Gigerenzer and Gaissmaier (2011): This paper looks at some of the heuristics developed by Daniel and Kahneman as well as some new principles developed as an off-shoot from the original ones, in detail. – Link

 

Food for thought

  • Given the complexity involved in decision-making, there is no doubt that heuristics can help us arrive at decisions and conclusions, easier and faster. However, using each heuristic can result in a cognitive bias that can color our decision. Do you think consumers should consciously stop relying on heuristics to make purchase decisions?
  • If you were a marketing manager of a brand, will there be some kind of a moral/ethical dilemma in your mind, before you make use of heuristics and capitalize on the phenomena?

 

Reference:

Ariely, D., Loewenstein, G. & Prelec, D. (2006). Tom Sawyer and the construction of value. Journal of Economic Behavior & Organization, 60, 1–10.

Hoyer, W. & Macinnis, D. (2009) Consumer Behavior. USA: South Western.

Kahneman, D., Slovic, P. & Tversky, A. (1974). Judgment under uncertainty: Heuristics and biases. Science, 185, 1124-1131.

Meghan, V.H. (2011). Anchoring & Adjustment on “Hell’s Kitchen”. Retrieved 17thNovember 2011 from here