Several popular books have appeared over the last few years on topics related to consumers, behavior, psychology and economics. Perhaps the most popular are the ones by Malcolm Gladwell. While most use academic research liberally to make their points, relatively few have actually been written by an academic. The reasons are twofold. One, you need an academic who has done sufficient research in an area that is worthy and of interest to the general public and two, you need good writers for lay readers. That combination is hard to come by -- which makes The Art of Choosing an unusual and interesting book. It was written by Sheena Iyengar, a professor at Columbia University Business School and deals with a topic we are all familiar with – choice. She has spent a couple of decades studying this topic and is hence eminently suited to write on it. The fact that she is blind makes it almost awe inspiring to read.
How do you make choices in your life? Even simple ones like chocolate cake or fruit salad for a snack? Are you completely rational about the process, calculating the costs and benefits properly before choosing (also known as the cognitive approach)? Or are you more likely to go by feel, allowing your emotions to guide the choice (the affective approach)? Traditionally, researchers have favored the rational model, but more recently the emotional side has been getting more attention. Regular folks may even argue that they use both approaches depending on the situation, even though they may not know which one predominates without their knowledge. But can your decision-making process, and thus the choices you make, be influenced by external conditions to the extent that you will switch from one mode to another? That was the question that drove two researchers in their quest to understand the process of making choices.
See if this sounds familiar. You and three other friends have gone to a nice restaurant for dinner. The waiter passes the menus around and you are eyeing the pork chops in some kind of fancy glazed sauce. The lamb chops sound nice too, but your preference is clearly for the pork chops. The waiter is going around the table taking orders. Your good friend who is ordering just before you goes for the pork chops. You hear that and decide to order the lamb chops because you don’t want to get the same thing your friend got. Sound familiar? Why does this happen? Why didn’t you choose your favorite dish? Do other people act this way? That’s what Dan Ariely and Jonathan Levav asked themselves. As researchers of consumer behavior, they are well qualified to search for the answer.
I know what you are thinking. This sounds like a joke, but it is not. There really is a What-The-Hell Effect and we will get to it in a moment. First let’s talk about the Denomination Effect. Let’s say you are leaving home and want to carry some cash with you. You have the choice of either taking a $20 bill or $20 in smaller denominations. Should this make any real difference to how much you are likely to spend? After all $20 is $20, right? Not quite. Turns out the denomination in which money is carried does have an impact on spending behavior. Two researchers recently published an article detailing the effects and we’ll take a closer look at it here.
How often do we as consumers see “just below” retail prices such as $2.99 or $29.99 or $299.99? All the time, right? It seems like we rarely ever see “round prices” for anything. The obvious reason why retailers and others do it is because of the belief that the left digit dominates and people are likely to see say, $2.99 as being significantly more than a penny less than $3.00. There are two issues here. The first is whether people actually perceive a difference and the second is whether it has an effect on what they purchase. Both of these issues can be studied experimentally and that’s what two sets of researchers did.
Let’s say you are following your dream to kick your day job and start a pizza joint. Many consequential decisions need to be made, but one that will certainly affect your production and display process will be the shape of the pizza: round or square? You might have personal preferences, but how will your customers see it? Given the same size, which shape will be seen as a better deal? Questions on package shapes often arise for consumer goods, but while pizza is ubiquitous, its shape has not been systematically investigated until recently. The broad area of inquiry is called psychophysical biases in area comparisons and three researchers considered the shape problem to figure out what a pizza parlor should do.
A common experience when shopping is to see price discounts expressed in percentage terms. "All items are 25% off". That's easy enough to understand. How about situations where you see signs that say "Take a further 15% off at the register"? This is where complications arise. If an item costs $100 and you see these two signs what do you think is the final discounted price of the item? Multiple percentage changes are often used by stores and for good reason. Recent research shows that consumers are not very good at calculating multiple percentage changes and in fact make predictable mistakes. The researchers show that these mistakes can be rectified in certain ways and that there is a clear economic cost to consumers when such mistakes are made.
Can simple shapes like circles, squares and triangles affect consumer choice? In particular, will exposure to simple shape arrays influence how people buy? Simple shape arrays are of the form OOOOΔOO or the form OOOOOOO. The former is called a uniqueness array as there is one shape that is unique and the latter is called a homogeneity (or uniformity) array as all the shapes are the same. Another type of array called a variety array looks like OΔOOΠΔOΠ. So they are quite innocuous. The question is, are they powerful enough to induce behaviors in consumers that correspond to the shapes, such as variety seeking and uniqueness? This idea was tested by two researchers from Stanford University and produced surprising results.
Much as it is with people, there are two ways firms and customers can begin a relationship: one of the two parties can initiate the relationship. With people, who initiates the relationship may have no bearing on the outcome of the relationship (at least none that I know of). With firms and customers it really does make a difference says Paul Dholakia, a researcher at Rice University. It happens at least from the firm's point of view, because of the different behavior exhibited by customers who engage firms on their own, as opposed to being induced to do so.
It is generally accepted that purchasing luxury products (ones that provide more pleasure or thrill than utility) is associated with at least some feelings of guilt. This makes it more difficult for manufacturers of products such as expensive cars and designer jeans to sell them, as consumers may have negative feelings and find it harder to justify the purchase. But is this still the case if purchase context is taken into account? Many real world purchase decisions are not made in isolation. The consumer's mindset, the store environment, the state of the economy and other factors influence what is purchased. However, a lot of purchase decisions are studied by themselves without taking into account these kinds of contextual factors. One such factor is the previous choice made by the consumer. In studying this issue with relation to the purchase of luxury products and prior altruistic intentions, two researchers found interesting conclusions.
