Please see below a summary of the course to help you study:

In the first class, we made an overview of the many biases that influence our judgments and
decisions. We also discussed the definition and consequences of prospect theory: people
are risk averse towards gains and risk seeking towards losses. This theory explains why
people make bad decisions in the stock market: they sell good stocks because of being risk
averse towards gains and not the bad stocks because of being risk seeking towards losses
(the disposition effect). It also explains why people overvalue the things they own (the
endownment effect). If you are curious about the original experiments we performed in class
(about loss aversion and framing of choices), this is the paper that developed them:
http://web.missouri.edu/~segerti/capstone/choicesvalues.pdf

One student asked me about biases in terms of discrimination in the marketplace. There is
indeed a lot of research about it. Please see this video summarizing the results of
correspondence studies:
https://www.youtube.com/watch?v=6RKgfWvnuAo
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The second class centered on the implications of the fact that consumers have limited
attention resources. Please see below the 10 most important points of the class:
1) consumers become overloaded with too many options to choose from and end up not
choosing (choice overload theory);
2) they select information in the environment that is more relevant for a current goal;
3) they make choices based on the information that is more accessible at the moment;
4) the context in which a choice is made has a strong effect on the choices consumers
make;
5) our memory of products depends on the type of product and of purchase. We remember
better familiar products when using memory-based shopping and unfamiliar products when
using stimulus-based shopping. You may also read the summary of the paper below:
https://discovery.rsm.nl/articles/394-when-and-why-we-forget-to-buy/;
6) the price of products has a strong impact on the evaluation of products and on the
performance of products (subjective and objective quality);
7) many unconscious influence end up guiding their choices;
8) product endorsers exert a strong effect for choices low-involvement;
9) if product endorsers and positive images are shown to consumers together with a
product people like the product more;
10) consumers often make better choices when deciding unconsciously and basing their
decisions on their immediate emotional reaction.

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The key learning points of sessions 3, 4 and 5 were (some of those points we didn’t have
time to discuss this week and we will discuss next week):

1) The 6 key routes to persuasion according to Robert Cialdini:

1. Liking = we comply with those who like us. The sources of liking include:
a) Physical attractiveness: we like pretty people because we believe they have other
qualities as well (the halo effect);
b) Similarity: we like similar others and those who mimic us;
c) Familiarity: we like familiar things (the mere exposure effect);
d) Liking: we like those who signal they like us though smiles and touch. In a restaurant
context both men and women give more tips and evaluate the service as better when they
receive small touches in hands, arms and shoulders. Touching is neutral among those who
don’t like to be touched.

2. Reciprocity = people repay in kind. In order to use this strategy optimally one has to be
the first to give, make the gift personalized and unexpected (the example of the mint study
in which tips increased 23% when the mint brought by the waiter was personalized and
unexpected). This is also the mechanism through which free samples and free home
inspection work. By providing something first, the company is likely to receive something in
return from customers.

3. Consistency = people fulfill public and voluntary commitments. Asking people to commit
to something enhances their likelihood of doing it. For example, restaurants reduced no-
shows of customers who had made a reservations by instead of asking them to please call
if they are not coming, to answer whether they would call if they are not coming. Customers
often said they would call. As a result, those who couldn’t go to the restaurant, were more
likely to call to cancel the reservation. And those who were not sure if they would go, were
more likely to come to the restaurant given that they hadn’t cancelled the reservation.

4. Reference groups = people follow others by a normative influence (people like to follow
others) or by informational influence (what others are doing should be the correct thing to
do). The Ash experiment is a demonstration of this principle.

5. Authority = people defer to experts and even alleged experts by others. For instance, real
estate agents increased sales by 15% by arranging reception staffs who answer customer
inquiries to first mention their expertise: “speak to Pieter our head of sales, he has 20 years
of experience selling properties”.

6. Scarcity = people want more of what they can have less of. This is true especially when
the items were available before and they became scarce because of others’ demand.

2) Online ratings and reviews influence consumers especially when 1) the situation is
ambiguous/risky (and therefore for intangible services more than for tangible products) , 2)
the reviewer is similar (from the same country, similar age, same gender…), and 3) the
review is negative (unless the consumer really wants to buy something, then she or he will
skip the negative comments).

3) The five dimensions of culture influence how people behave and react to advertising:
a) Power distance: in power distant cultures (hierarchical cultures), consumers seek more
status through consumption, and women tend to use more make up. In those cultures, there
is more inequality. And consumers search less for information as they delegate the
responsibility to power holders.
b) Individualism/collectivism: in individualistic societies there is more use of low-context
advertising. The endowment is stronger in individualistic cultures.
c) Masculinity/femininity: in more feminine cultures, the focus is on consensus and
agreeableness. Therefore, the use of hard sell doesn’t work in these cultures.
d) Uncertainty avoidance: in uncertainty avoidant cultures, people are more risk averse.
Consumers try to minimize risk and are reluctant to buy new products in the market.
e) Long-term/Short-term orientation: in short-term oriented cultures the focus is on here and
now, and people have more present biased preferences.

4) There are two routes to persuasion. One requires little elaboration and effort. It is often
used by low involvement products. In this route the number of arguments used to buy a
product is the key to persuasion. The second route is more elaborate and effortful. It is used
by high involvement products. In this route the number of arguments and the strength of
arguments are important for persuasion.

5) Eye-contact and gestures: Eye-contact helps when clients agree with the salesperson
and are almost buying the product. Gestures need to fit the receiver regulatory focus
(promotion vs. prevention).

6) Behavior is a function of personal characteristics and the context. Personal

characteristics can personality traits or hormone levels. The context include the social
influence and the culture one is identified.

7) The Beijing study is an example of the effect of reference groups. Highlighting the most
popular items in the menu of a restaurant in Beijing increase orders by 13% to 20% and
increased customers’ satisfaction significantly. This is because by highlighting the most
popular items we signal that these options are good, they are approved by others. In
addition, we make choice easier. Thus, someone who was in doubt about asking for desert,
now has a good reason to ask.

8) Consumers are often in a hedonic treadmill by erroneously thinking that they will become
happier if something good happens and less happy if something bad happens. However,
people adapt very fast to their situation, and don’t report being more or less happy a few
months after the experience. This is because people focus too much on the specific event
when predicting their happiness (focalism). In addition, they fail to realize that they are quite
good at coping with adversities (immune neglect).

9) PWYW strategy (asking consumers to pay what they want): the PWYW strategy works
because of self-signaling (people want to be fair to themselves) and social signaling (people
want to be fair in the eyes of others).

10) There are two ways or systems of thinking. One requires little elaboration and effort
(system 1). In this route, heuristics and short-cuts are used to make judgments and
decisions. The second route is more elaborate and effortful (system 2). In this route the
analytical thinking is more used to make judgments and decisions.

11) Political ideology has a strong effect on consumer behavior. Please watch this video I

made about my research: https://www.youtube.com/watch?v=F5a609jpET4&t=5s