MAR3503 EXAM 2

Within-participant laundromat example.

-A before-after design - or a within-participant design - could be something like this: -Imagine a large apartment building with a laundromat. -A load of laundry initially costs 4 quarters, but management changes the machines to only accept prepaid cards. (This is a natural experiment because the building management makes the change, not the researcher.) -The researcher observes people doing laundry over a 40-day period; during the first 20 days the machines accept coins. -During the second 20 days, the machines are retooled to accept cards. -Before the change, only 45% of people separate their laundry by colors, whites, etc. After the change to using prepaid cards, 65% of people sort their laundry. -Which means what in economic terms? People are spending more. -So why did people sort their laundry more? -The hypothesis of the researcher - based on previous research - is that card payments are less painful than cash payments. (The payment by card is less salient and remembered less accurately, whereas we hold cash and count it out.) -To determine the true cause, you'd have to either: 1. Switch back to coins after the 20 days to see what happens. This is called A-B-A design. 2. Or find a similar apartment building with similar people who receive similar mail, etc. where the laundry is NOT changed in any way, to serve as a control group. This is A/B Testing.

How does decoupling affect consumption?

-Consequently, price bundling leads to a "decoupling" of transaction costs and benefits, reducing attention paid to sunk costs and decreasing a consumer's likelihood of consuming a paid-for service (e.g., a theater performance). EXAMPLE: -In one lab study, they had 2 conditions (Soman and Gourville, 2001): 1. Bundled Pass: subjects were told they had pre-purchased a single four-day ski pass for $160. 2. Unbundled Tickets: subjects were told they had pre-purchased four one-day ski tickets for $40 each. -Then they told them: It is now the morning of the last day of your vacation. You have had three excellent days of skiing with perfect conditions. Unfortunately, last night a warm rain hit the area. While skiing is still permitted, it may not be much fun. As an alternative, a friend suggests taking it easy, having a nice lunch, and leaving early to beat the traffic. You look at your [ski pass/remaining ski ticket] and are not sure if you want to go skiing or leave early. -Results: Subjects were significantly less likely to go skiing if they held a bundled pass than if they held an unbundled, one-day ski ticket (mean ratings = 3.6 versus 5.2 out of 10). -Reason for this effect? = Transaction decoupling. -In the unbundled, 4 ski ticket scenario: there is an explicit coupling between the $40 you paid and the day of skiing you would forego. -In the bundled pass scenario: you could easily convince yourself that you got $160 worth of good skiing over the past 3 days.

What is an Independent Variable?

-In basic business experiments, this often means taking action with one group of customers and taking a different action (often no action) with a different group = control group. -Examples: the way in which the information is presented, the font size or type, the comfort of the seat the participant sits in, the size or temperature or color of the room or the number of choices on display (e.g. 6 vs 24 jams).

What is mental accounting?

-Mental accounting is the system that households use to evaluate, regulate, and process their home budget. -Formally: a series of cognitive processes that people use to track, organize, evaluate and monitor their financial and economic transactions. -Mental accounting = adopting internal control systems. -Basically: we act like accountants in a corporation, but with our own money. -We treat and spend money differently based on where it comes from. -So why do we do this? To help us control spending. Just like an organization.

What is the sunk cost effect?

-Sunk costs = prior investments of time, money, or effort. -That investment / money paid is gone and can never be recovered. And yet, the fact that we've spent it leads us to make choices we otherwise wouldn't have made! -It often drives us to continue to do things or consume things we have already paid for with time, money or effort is being because not doing so would feel (or look to others) like a waste. -Nonmonetary examples: Should I continue with this terrible job? I spent a year training to get this position and Queuing at Gatwick airport...

What is random assignment? How could you randomly assign people to conditions?

-The researcher "randomly assigns" individuals to different levels or versions of the IV. -Act of allocating participants to different conditions randomly. -In the lab/online, we use Qualtrics surveys to randomly assign each participant in the room to experience only one condition, e.g. see only one video or ad or framing of information. -Draw a piece of paper out of a hat. -A random number generator online / app on your phone may also be used. -You must ensure that you have a method of randomly assigning participants to one of your conditions!

What does the sunk cost effect depend on?

-The sunk cost effect depends on coupling. -For the Sunk Cost Effect to work: the amount paid ($) must be linked with consumption.

How does the use of credit cards affect willingness-to-pay?

-When it comes to credit card payments Gathergood et al. (2019) studied American consumer data and found: 10% of people do what they should, most common = follow a "balance matching heuristic": Pay $400 to AMEX and $200 to Visa and people are insensitive to the interest rate on the card. EXAMPLE: Prelec and Simester (2001): bidding on sporting events tickets. 1. Celtics vs Miami Heat. Last regular-season game. Celtics needed the win to clinch the division title. Sold-out game. 2. Red Sox vs Blue Jays. Regular season tickets. -IV: told pay for tickets with cash vs told payment by credit card. -Market value of the tickets was NOT provided to the MBA students taking part. -Results: people were willing to pay twice as much to bid on basketball tickets when paying with a credit card vs cash.

How does mental accounting affect consumers' decisions and behaviors?

-When the price of gas goes up, people switch from premium to regular. They don't switch from Tropicana to private label orange juice. -The larger takeaway is that consumers use various mental accounts to keep track of different purchases. -When the price in one mental account increases, consumers don't ease the pain of that loss by shifting purchases across a variety of other budgets. Instead they make more dramatic changes in their purchasing choices in the category with the price increase - hence, they switch gas grades.

According to "A Step-By-Step Guide...", what are the 7 rules for running experiments?

1. Focus on individuals and think short term. 2. Keep it simple. 3. Start with a proof-of-concept test. 4. When the results come in, slice the data. 5. Try out-of-the-box thinking. 6. Measure everything that matters. 7. Look for natural experiments.

What are the 6 principles of Choice Architecture? (see also "Nudge")

1. Incentives 2. Understand mappings 3. Defaults 4. Give feedback 5. Expect error 6. Structure complex choices

What are the central features of an experiment?

1. Independent variable 2. Random assignment 3. Dependent variable

What is covariation?

Assumed associations among events that may or may not actually influence one another.

How can marketers use the knowledge that a decision is emotional or cognitive?

COGNITIVE MARKETING: emphasizes favorable price, documents the product's superiority and provides instructions for learning more. EMOTIONAL MARKETING: uses evocative imagery, symbols and situations to bring happiness, fear, patriotism, etc.

What factors drive each type of decision making?

COMPENSATORY FACTORS: -More likely to choose this strategy if the consideration set is smaller. NON-COMPENSATORY FACTORS: -More likely to be used if the consideration set is large (think picking an apartment on Airbnb).

How does the availability bias affect consumers' behavior?

The availability bias affect causes people to impulsively purchase items they think they need but really don't.

According to "A Step-By-Step Guide to Smart Business Experiments", what is the key to success with treatment and control groups?

The key to success with treatment and control groups is to ensure separation between them so that the actions taken with one group do not spill over to the other.

What are internal cues vs external cues with respect to eating? What external cues did we discuss in class (soup, popcorn experiments)?

--If I'm French, I stop eating when... I feel full =internal cue. -If I'm American, I'm more likely to stop eating when... The TV show is over, everyone else is done, my plate is empty, etc. =external cues. -Soup experiment: -2 at the table had a refillable bowl; 2 did not. -Students were randomly assigned to EITHER have the regular OR the refillable bowl. -Stopped participants after 20 minutes and asked lunch-goers to estimate # calories, how many ounces of soup, how full they were (_self-report DVs) & weighed soup (_behavioral DV). -Results: -Normal bowls: 9 oz eaten; estimated had eaten 123 Cal but was 155 Cal. -Bottomless: 15 oz (ate 73% more!) -Ps estimated had eaten 127 Cal but had eaten 268 Cal AND didn't rate selves as being more full than other participants. -Popcorn experiment: -Afternoon movie: "Payback" with Mel Gibson just after lunch given free drinks and 5-day old, stale popcorn. -"It was like eating Styrofoam packing peanuts" -IV = medium container vs large container (bucket) -DVs = survey questions ("I ate too much popcorn") and weighed popcorn after. -Debrief: do you think you ate more because you had the large size? -Results: large size bag = consumed 173 more calories, i.e. 21 more dips into the bag. -Why did these movie-goers eat this stale popcorn (time and time again - even 14-day old popcorn)? -Environmental cues: Hear the crunching of popcorn, distracted by the movie, schema of a movie theater (eating scripts: consuming snacks and popcorn is an ingrained part of the movie experience) and size of the popcorn bucket.

What is a Dependent Variable?

-A measure of participants' behavior or attitudes after they have been exposed to one of the conditions. 1. SELF-REPORT: they answer questions verbally, on a computer or on paper. -Example: recall the 5-day old popcorn study Question 1 on a survey: "I ate too much popcorn" . Likert scale: Disagree <--> Agree. Question 2 on a survey: "Do you think you ate more because you had the large size?" Yes/No. 2. BEHAVIORAL : we measure something they do (purchase something, how fast they walk, do they stop to help someone, how much trash was left, etc.).

What is the definition of a nudge? (see also "Nudge")

-A nudge is any aspect of the choice architecture that alters behavior in a predictable way without forbidding any options or significantly changing their economic incentives. -A nudge must be easy and cheap to avoid. -Nudges are not mandates. Putting food at eye level to attract attention, and hence to increase the likelihood of getting chosen, counts as a nudge. The banning of junk food does not. -The features of a nudge then are: 1. A nudge does not limit the choice set, i.e. the available options to the decision maker. 2. A nudge increases the decision maker's utility/welfare from the perspective of a rational agent. 3. A nudge is useful when: -Behavior is affected by cognitive influences and individuals struggle with turning intentions into action. -Economic incentives or penalties are not appropriate.

What did we learn from Terry O'Reilly's program "Under the Influence" regarding nudging in governments and in grocery stores?

-A supermarket in El Paso, Texas, tried their own nudge experiment to see if they could steer people toward healthier foods. -It placed a mirror on the inside front of grocery carts, allowing people to see themselves as they shopped. So when people reached for junk food and turned back towards their cart, they saw an image of their double chins in the mirror. -The store saw a dramatic increase in the purchase of fruits and vegetables as a result. -The mirror was the nudge. -In a Virginia store, each shopping cart had a line of yellow tape that divided the cart in half. A sign in the cart asked shoppers to put fruit and veggies in the front half of the cart, and everything else in the back half. -When shoppers saw how few fruits and vegetables were in the front half compared to the less healthy items in the back of their carts, they were influenced to change the way they shopped. -Produce sales shot up by 102%. -The visual of the dividing line was the nudge. -In another grocery store, big green arrows were put on the floor that directed shoppers right to the produce aisle. Nine out of every ten shoppers followed the arrows. -In another nudge experiment, a glossy card was attached to carts that told shoppers which produce most other shoppers were buying - and which five fruits or vegetables were the biggest sellers. -Because people are social animals and like to conform, produce sales jumped 10% by the second week. -The store was so amazed by the results that they began duplicating the nudge in the rest of their 146 locations. -But the art of nudging is a delicate one. In stores that used the green arrows on the floor plus an info card in the carts saw produce sales fall. The card was one nudge too many.

What is the affect heuristic?

-Affective feelings: the "goodness" or "badness" of an item / event / issue is often quickly elicited when we are exposed to it. -Affect heuristic: using an overall, readily available affective impression to make: 1. a decision or choice, judgment or an assessment of risk. -Can be far easier - and more efficient - than weighing the pros and cons or retrieving from memory many relevant examples. -Representations of objects and events in people's memories are tagged to varying degrees with affect, i.e. weak to strong and positive or negative associations. -When making a judgment or decision, people consult an "affect pool". -Affect pool = sum of all the positive and negative tags (consciously or unconsciously) associated with the idea / product / brand / person, etc. EXAMPLES: -When we are in a positive mood, we evaluate products more favorably even when the positive mood came about in an unrelated manner, (i.e. was manipulated by the researcher). -Research examples manipulating mood: finding a dollar, receiving a small gift. -Study on the effect of music on product evaluation: Ps asked to evaluate a pair of speakers through which pleasant/unpleasant music was playing. -When asked to rate the speakers without being asked to reflect on the music, participants rated the speakers playing pleasant music higher. -But when first asked about the music and then the speakers, i.e. drawing attention to the potential influence of the music (and likely engaging the cognitive system), participants rated the speakers the same regardless of the type of music. -Another consumer behavior study (Hsee and Menon, 1999): -Students were more willing to buy a warranty on a new car when it was a beautiful convertible rather than a dull, ordinary station wagon even though the repair costs were anticipated to be the same! -Their liking for the car (positive affect) influenced their decision to buy a warranty to protect it. -Slovic & Peters (2006) surveyed people regarding their opinions about: adding fluoride to the water supply, chemical plants, food preservatives, nuclear energy, etc. In other words, topics people likely have little knowledge about, yet potentially very strong feelings towards. -Findings: when people were favorable towards a technology/topic, they perceived them as having: high benefits and very little risk. Not favorable low perceived benefits and high risk. -This link between emotion and assessment of high benefits and low risk was even stronger when they answered questions under time pressure, meaning there is less chance for thought and recall of relevant information so it was their affect towards the technology/issue driving the assessment. -Starr (1969); Slovic & colleagues -People are willing to accept far greater risks for activities that they chose over activities that did not involve personal choice. -Example: people would be willing to accept a higher level of risk for activities such as: driving or skiing or bungee jumping but find a similar level of risk unacceptable when it comes to things like building safety or the use of preservatives in food.

Why would customers with a moderate knowledge of a product seek more information than either someone with no information or someone with extensive knowledge?

-All things equal, younger, better-educated people who enjoy the shopping/fact-finding process tend to conduct more information searches. -Women are more inclined to search than are men, as are those who place greater value on style and the image they present. -Product experts and novices use different strategies when they make decisions. -"Newbies" who know little about a product should be the most motivated to find out more about it. -However, experts are more familiar with the product category, and thus they should be better able to understand the meaning of any new product information they might acquire. -People with limited expertise may not feel they are competent to search extensively. In fact, they may not even know where to start. -Because experts have a better sense of what information is relevant to the decision, they engage in selective search, which means their efforts are more focused and efficient. -In contrast, novices are more likely to rely on the opinions of others and on "nonfunctional" attributes, such as brand name and price, to distinguish among alternatives. -Finally, novice consumers may process information in a "top-down" rather than a "bottom-up" manner; they focus less on details than on the big picture.

How to expect error.

-Anticipate when people are most likely to make errors. -Example of good design: Paris' Le Métro: designed the tickets with the magnetic strip to go into the machine in any direction. -Example of bad design: many pay machines at parking garages (how to insert ticket and/or credit card). -Example: Gmail's / Outlook's "attachment" reminder. -Example: leaving gas cap, restructured to prevent "post-completion errors". -Example: Publix pick up was often set to the wrong store.

How to structure complex choices.

-As choices become more numerous or more complex: -Choice architects have more work to do. -Good choice architecture should provide structure and that structure will affect outcomes. -Many options: Example: if colors were organized alphabetically by name, these two shades of beige: Oklahoma Wheat and Kansas Grain would not be next to each other. Even better: Group colors that go together for exteriors or organize common colors into a more understandable and useful format (Maria Killam, designer). -Example: structure on Netflix: organizes its > 15,000 titles by genre, new releases, etc. BUT also uses "customization" to make recommendations, i.e. "what others like you may like"... -Example: cocktail menu: provide structure by organizing by glass type.

In "Nudge, what do Thaler and Sunstein have to say about choice and choice contexts?

-Choosers are human, so designers should make life as easy as possible. -Send reminders, and then try to minimize the costs imposed on those who, despite your (and their) best efforts, space out. -People are more likely to make good choices in contexts in which they have: lots of experience, good information and prompt feedback. Otherwise, they likely need help. -A choice architect is a person "who has responsibility for organizing the context in which people make decisions". -If you are a choice architect - indirectly influencing the choices people make - you "want your architecture to reflect a good understanding of how humans behave".

What does it mean that people are cognitive misers? How can we help consumers make better choices, e.g. with respect to food and health, by recognizing this?

-Cognitive misers: People tend to think and solve problems in simpler and less effortful ways rather than in more sophisticated and more effortful ways, regardless of intelligence. -So even though we know the 5 food groups make information: 1) useful and easily digestible and 2) available to them at the point of purchase.

What is the compromise effect?

-Compromise effect suggests that a product will have a higher chance to be chosen from a product choice set when its attributes are not the extremes (the best with the highest price or the worst with the lowest price). -Attracting people to a middle option, even if its middleness results from arbitrarily surrounding it with other choices.

How did Slovic et al. manage to reduce the identifiable victim effect? What were the 5 conditions in the experiment? What was the general impact on WTC?

-Conditions: how much would you be willing to contribute (WTC) to: 1. One child 2. Two children 3. Eight children 4. A family of two children 5. A family of eight children -The children were in 2 (or 8) separate photos. -The children in these families appeared in the same photo and were described as "a family" -WTC unrelated kids: one child (31.8), two children (25.9) and eight children (20). -WTC siblings/family unit: two children (32.9) and eight children (32.1). -Children were perceptually and psychologically grouped as a single unit. -Donations were now comparable to those of a single child when grouped as a single unit.

How do anchoring effects affect consumer judgments and purchase decisions/behavior?

-Decisions should not be influenced by irrelevant information, but people are influenced by anchoring effects: -Anchoring = the tendency to rely too heavily on the first piece of information received with subsequent judgments adjusting around the first data point. -People often make estimates or decisions starting from an initial value - the anchor - and then adjust from there BUT adjustment is often insufficient; and anchors are often irrelevant so different starting points yield different estimates and decisions... EXAMPLES: -Spin a wheel. Spinner lands on 65 or 10. -Q: is the % of African countries in the UN: -Higher or lower than 65%? Median Estimate: 45%. -Higher or lower than 10%? Median Estimate: 25%. -Wansink's (1998) field study of 906 shoppers used 3 grocery stores: chosen because they had similar sales volume and similar shopper demographics. -Campbell's Soup on sale for 79 cents (a modest discount of 12 cents). -3 signs, i.e. 3 conditions that were displayed for 1 hour from 8-9 PM: 1.No Limit Per Person 2.Limit of 4 Per Person 3.Limit of 12 Per Person -Conditions were counterbalanced, i.e.: rotating the sign across stores reduced type-of-store effects and rotating the sign each evening (Mon-Wed) reduced day-of-the-week effects. -Results: What patterns do you see across the 3 conditions? -Overall, the "Limit 4 or 12" increased the number of cans bought per person. -In the "Limit 4" condition 4 cans is the most frequently purchased number. -In the "Limit 12" condition not as many purchased 12, but it did serve as an anchor, skewing sales to higher # of cans.

What is Sheena Iyengar's recommendation to companies? Why?

-Decrease the number of options provided for a product category and sales will increase. EXAMPLES: -P&G: 26 kinds of Head & Shoulders to 15, sales increased by 10%. -Golden Cat Corporation eliminated 10 worst-selling cat litter products and increased in profits by 87%. -Costco recently reduced its # of choices across the board and saw sales go up.

What is framing? How does framing influence our decisions and perceptions?

-Describing or presenting the same options in different ways leads people to have different preferences or to make different choices -The core information related to a decision does not change; people still have the same decision options and the same potential decision outcomes. But the way we present that information - and what is explicit or implicit in the presentation of the problem or choice - differs. -Labels and product descriptions affect not only consumers' choices, but also how people experience the results of those decisions. -Research studies show that in fact the "75% lean" hamburger actually tastes better than the "25% fat" burger.

What is the endowment effect? What examples did we discuss?

-Encouraging shoppers to touch a product encourages them to imagine they own it, and researchers know that people value things more highly if they own them. -"For most things are differently valued by those who have them and by those who wish to get them: what belongs to us, and what we give away, always seems very precious to us." — Aristotle -When you own something that you plan to use or consume, you think about the pain of losing it if you were to sell. -When you don't own it, you think about the pleasure of getting it. -Loss aversion comes into play and we experience loss much more than gains so we need more to be willing to give it up. -When an object comes into possession, the owner will typically think that it is worth more than it did before they owned the item. EXAMPLES: -The mug experiment: Sellers who owned the mug wanted to sell the mug for $7.12 on average. Buyers who didn't own the mug said they would pay $2.87 on average. -In another study, ½ students were given mugs and the other ½ were given a chocolate bar. -Then they were asked if they wanted to switch. -Results: Whichever object they were endowed with, they formed a greater preference for. Even though there was no great attachment to the object - they'd only possessed it for a few minutes! -The current baseline (or or status quo) is taken as a reference point, and any change from that point is perceived as a loss. -Imagine you have a ticket to a sold-out concert or football bowl game or Super Bowl Tickets -- which you bought at regular price for $100. You are an avid fan and would have paid up to $500 for a ticket. Now after looking online, you see tickets are auctioning for $3,000. Do you sell your ticket? -If you're like most of the audience, you do not sell. -Your minimum selling price is above $3,000, yet -Your maximum buying price is $500. -This is an example of an endowment effect and is not explained by standard economic theory.

What products have been developed building on behavioral insights? Which behavioral insights do they capture?

-EvaDrop: gamify your shower. -Example: showers at a fitness facility OR kids / teens in your household OR Airbnb guests. -Person using the water has no visible / obvious incentive to make showers short(er). -Nudge for your kids/teens: gamification. -EvaDrop allows you to set timers. EvaDrop LED lights blink to remind you to get out of the shower. -Clocky: The alarm clock that runs away beeping, to get you out of bed. -Stats show that 40% of people 'abuse' the snooze. -If you snooze, Clocky will jump off of your nightstand, and run around beeping, absolutely determined to get you out of bed on time. -Behavioral insights: 1) commitment devices: Cold-state planning for the hot-state sleeper AND 2) gamification. -Economists consider lotteries lopsided taxes that eat away at poorer people's chances to save. They tend to see it as their only chance for financial planning. -So some states have changed banking laws to allow credit unions to offer this plan: Consumers buy shares in 1-year C.D.s and for every $25, they get a lottery ticket. -Across 4 states, the program has created 50,000 accounts that saved a total of $94 million. -Behavioral insights: 1) Gamification (the power of fun). 2) Lotteries can be more effective than giving small prizes to everyone, people focus on the large prize, even if their chances are winning are small.

What is an evoked set? What is the consideration set?

-Evoked set: the process by which the consumer surveys his or her environment for appropriate data to make a reasonable decision. -Consideration set: the products a consumer actually deliberates about choosing.

What is the jam study?

-Field study: a display table of "exotic jams" with free samples. All "Wilkin & Sons" jams ($5-$6). -Common flavors of strawberry & raspberry eliminated. -Subset of 6 chosen as 2 highly-, moderately-, least-preferred. -IV: table with 6 jams vs 24 jams rotated each hour throughout the day on 2 consecutive Saturdays. -40% of passersby stopped at the 6-jam display (104 of 260). -60% of passersby stopped at the 24-jam display (145 of 242). -Then given a $1 coupon & had to go to usually jam area to buy, so encountered all 28 Wilkin & Sons jams (DV): -More likely to purchase if initially selected from 6 jams than from 24 jams (30% vs only 3%). -They were 10 times more likely to buy at the smaller display! -People showed more interest in the table with more choice, but then consumers experience choice overload, and does not choose.

Why are habits so difficult to change?

-Habits are self-reinforcing: automatic, unconscious and triggered by the environment. -Present bias: immediate rewards are valued much more than future rewards, people value NOW over LATER. -Progress is invisible: especially at the beginning stages. -Social pressure: bad habits are ritualized within social environments (we eat, drink, smoke more in groups) and stopping these behaviors can result in social isolation. -Vague goals: people often fail to set specific goals, but without them, it's difficult to define and experience success. -Over-optimism: people are consistently over-optimistic about their ability to achieve their goals, particularly health goals, many make people think they don't need assistance of any kind. -Resisting temptation: we are constantly tempted: advertisements, other people, heavenly smells of food resisting temptation only lasts so long and we may feel licensed to indulge (more) later.

What is the hot-cold empathy gap? How does this relate to temptation?

-Hot-cold empathy gap = a cognitive bias in which people underestimate the influences of visceral drives on their own attitudes, preferences, and behaviors -In a hot state, we are overly influenced by our current desires/level of arousal, and don't grasp how much our decisions and preferences are being driven by it. -In a cold state, we have difficulty picturing ourselves in a hot state and often then leads to unpreparedness in later situations when we are aroused (hungry, angry, excited). -Human understanding is "state-dependent". -Example: In two upstate New York elementary schools, students use an electronic pre-ordering system to order lunch in the morning. -What did the sales records report? -A significant number of healthier choices were made when students pre-ordered lunch. -When preordering was available (cold state): -29.4% of students ordered the healthier lunch entrée vs -15.3% when no pre-ordering took place -When ordering in the lunch line, hunger (hot state) mixed with the aromas and the sight of food, unhealthy foods won out.

What is the difference between a Human and an Econ?

-Humans are imperfect, emotional, and full of bias while econs are perfect, calculated, and objective. -To qualify as Econs, people are not required to make perfect forecasts, but they are required to make unbiased forecasts. -Unlike Econs, Humans predictably err. Hundreds of studies confirm that human forecasts are flawed and biased. -Human decision making isn't so great either. -In accordance with our definition, a nudge is any factor that significantly alters the behavior of Humans, even though it would be ignored by Econs. -Econs respond primarily to incentives. -Humans respond to incentives too, but they are also influenced by nudges. -By properly deploying both incentives and nudges, we can improve our ability to improve people's lives, and help solve many of society's major problems. And we can still do so while still insisting on everyone's freedom to choose.

Why do extended warranties exist? Do Thaler and Sunstein recommend them?

-In many instances, the cost of the warranty, combined with the small chance that the appliance will break down, suggests that buying the warranty is a poor option. -But what if the purchaser has a strong aversion to paying for repairs when an appliance has broken down? He strongly prefers that payments for breakdowns be handled in advance. -Econs understand the odds of actually getting full use out of extended warranties and thus do not purchase extended warranties. -Humans want extended warranties, perhaps because the salesman offers the "friendly" advice that the extended warranty is a good idea or perhaps because they think, for example, that cell phones break 15% of the time when the odds are really 1%, or perhaps they just think it is "better to be safe than sorry." -Thaler and Sunstein believe that the extended warranty is a product that should not exist. -If humans realized that they were paying twenty dollars for two dollars worth of insurance, they would not buy insurance. But if they do not realize this, markets cannot and will not unravel the situation. -If consumers have a less than fully rational belief, firms often have more incentive to cater to that belief than to eradicate it.

What is the Linda Problem?

-In this experiment, subjects were told the following: "Linda is 31 years old, single, outspoken and very bright. She majored in philosophy. As a student, she was deeply concerned with social justice and discrimination and also participated in antinuclear demonstrations. -People were then asked to rank, in order of the probability of their occurrence, eight possible futures for Linda. -The two crucial answers were "bank teller" and "bank teller and active in the feminist movement". -Most people said that Linda was less likely to be a bank teller and feminist. -This is an obvious logical mistake. -It is of course, not logically possible for any two events to be more likely than one of them alone. -It just has to be the case that Linda is more likely to be a bank teller than a feminist bank teller, all feminist bank tellers are bank tellers. -The error stems from the use of the representative heuristic: Linda's description seems to match "bank teller and active in the feminist movement" far better than "bank teller".

When do heuristics lead us astray?

-Irrelevant information presented, such as anchors, can affect our: evaluations, decisions, shopping behavior and charitable giving. -And our repeated reliance on an existing heuristic can make it difficult to see alternative solutions or come up with new ideas. -The availability heuristic can lead to bad decision-making because memories that are easily recalled are frequently insufficient for figuring out how likely things are to happen again in the future.

How did the representativeness heuristic come into play regarding the perception of WWII bombings in London and shots taken by basketball players?

-London newspapers published maps, displaying the location of the strikes from German V-1 and V-2 missiles that landed in central London. -The pattern doesn't seem to be random at all. Bombs appear to be clustered around the River Thames and also in the northwest sector of the map. -People in London expressed concern at the time because the pattern seemed to suggest that the Germans could aim their bombs with great precision. -Some Londoners even speculated that the blank spaces were probably the neighborhoods where German spies lived. -They were wrong. In fact the Germans could do no better than aim their bombs at Central London and hope for the best. -A detailed statistical analysis of the dispersion of the location of the bomb strikes determined that within London the distribution of bomb strikes was indeed random. -Still,, the location of the bomb strikes doesn't look random. -We often see patterns because we construct our informal tests only after looking at the evidence. -Most basketball fans think that a player is more likely to make his shot if he has made his last shot, or even better, his last few shots. -Players who have hit a few shots in a row, or even most of their recent shots, are said to have a "hot hand" which is taken by all sports announcers to be a good signal about the future. -It turns out that the "hot hand" is just a myth. Players who have make their last few shots are no more likely to make their next shot. Really.

What do consumers expect from higher prices?

-Many people assume that a higher-priced alternative is better quality than a lower-priced option. -This assumption is often correct; you do tend to get what you pay for. -However, let the buyer beware: The price-quality relationship is not always justified."

How could marketers use the asymmetric dominance effect to influence consumer choice?

-Marketers can get consumers to purchase a higher priced item by employing a decoy in between. -Consumers would believe it is of higher value to get the more expensive item because of the decoy. -Example: Williams-Sonoma introduced a brand-new type of product: a home bread maker. -It was a radical invention. It was priced at $275. -Was that a lot to spend on a bread maker? There was no frame of reference. -Later, they introduced a second home bread maker with similar features except larger. The new item was priced at $429. -Results: Williams-Sonoma: -Sales of the less expensive bread maker ALMOST DOUBLED. -People didn't know how to evaluate the bread maker at 275. -Introducing another option helped people make a relative comparison.

What is the availability heuristic? Why does it occur?

-Mechanism by which we judge the frequency or likelihood of something by the ease with which evidence OR examples can be brought to mind. -By how easy it is to imagine it happening or by how easy it is to remember it happening in the past. -In many cases, this is a useful shortcut - imaginability and memorability are often related to frequency...but it can lead us astray in certain, predictable cases. -Why does this occur? 1. Some are inherently: more vivid, more imaginable and more memorable. 2. Movies & pop culture. 3. More attention / press coverage: The media is biased towards novelty & poignancy. The media shapes what we are interested in and we shape the media through our interests. EXAMPLES: -In the United States, are more gun deaths caused by homicides or suicides? -Reality: There are approximately twice as many gun-inflicted suicides than homicides. -"On average, fewer than 350 people under the age of 21 have been abducted by strangers in the USA per year since 2010.... = 0.1% of kids are abducted by a stranger -"It doesn't happen very often, but they're certainly the cases that capture our attention because they strike at our worst fears."

What examples of mental accounting did we discuss?

-Mr. and Mrs. Li and Mr. and Mrs. Hugh went on a fishing trip in the northwest and caught some salmon. They packed the fish and sent it home on an airline, but the fish were lost in transit. They received $400 from the airline. The couples take the money, go out to dinner and spend the $400. They had never spent that much at a restaurant before. -At a casino, gamblers who win money early in the night take some money and put it into one pocket, while keeping the money s/he brought to the casino in another pocket. What are they doing? Research shows people are more willing to gamble with "house money". -Jamie has $12,000 in a savings account for his 8-year-old daughter's college education. It is earning 3% interest. After the pipes in his beach house burst and flood the house (he didn't have insurance), he takes out a loan at 8% to pay for the repairs. He wouldn't dare take his daughter's college fund money - it's too "sacred". -You put $30 on your Starbucks Reward app each Monday, which is what you allow yourself to spend at Starbucks each week.

What are defaults?

-People do whatever requires the least effort •Inertia, status quo bias, "yeah, whatever" heuristic. -Well-designed defaults: Simplify decision making, enhance customer satisfaction and drive profitable purchases, e.g. car rental companies European railroad seat reservations (9% - 47%), improve consumer safety, e.g. Maxi-Cosi therefore benefiting customers AND companies. -Under presumed consent, people may not opt-out because of: inattention, inertia or procrastination rather than because the default captures their true preference. -Defaults should be chosen to reflect choices people would prefer to make. -Example: Publix experiment. -Target behavior: Increase use of Paper bags and reduce use of Plastic bags at Publix. -Bagger: "Is paper okay?" vs. "Is plastic okay?" -Results: increased the # using paper bags by over 400% and decreased the number of those using plastic bags by 50%. -Why are defaults so powerful? 1. Inattention: life is busy & complicated and can't pay attention to everything. 2. Many people infer the default is the normal or recommended option. 3. Loss aversion: Move away from default can be coded as a loss.

What is the MPG illusion? How can we help consumers make better decisions when buying a car?

-People falsely believe that the amount of gas consumed by an automobile decreases as a linear function of a car's MPG. -The actual relationship is curvilinear. Consequently, people underestimate the value of removing the most fuel-inefficient vehicles." -The bottom line is that equal increases in MPG are not equal in gas savings. -Representing fuel efficiency in terms of amount of gas consumed for a given distance—which is the common representation outside of the USA.

What do we learn in the article, "Nudged to the Produce Aisle"? What was the impact of having a yellow line inside the grocery cart? What was the impact of having green arrows? What other behavioral insights do we learn about shopping in grocery stores?

-People who shop with divided carts (yellow line) that suggest they put their fruits and veggies in the front buy 23% more produce. -In stores that used the green arrows on the floor plus an info card in the carts saw produce sales fall. -Behavioral insight: mirror reflecting actual self. -Behavioral insight: vivid obvious feedback of how cart was not filled with produce.

What are the downsides to bans?

-Potential downside 1: People strategically change their behaviors to align with the new law/rule. -Potential downside 2: Psychological reactance: an emotional reaction to pressure or persuasion that results in an increased desire for forbidden objects. -Potential downside 3: The industry fights back.

What are heuristics?

-Quick rules of thumb and shortcuts used to make decisions. -Rules of inference used to simplify decision making, minimize effort & still leave consumers feeling confident in their decision. -Heuristics often "prove useful but can lead to characteristic errors or biases".

What's the importance of the reference point?

-Reference points mark the boundary of indifference between the perception of a gain versus a loss. -In purchase decisions, the reference point = the standard of comparison against which an observed price is compared. -Internally derived: -The "fair" price. -The price often / most often charged. -The last price you paid. -The price of brand usually bought. •Externally derived: -"Regular retail price". -What the item is placed near. -How other items in the line are priced. -Other brands the brand claims to be similar to.

How do marketers assist with problem recognition?

-Remind consumers of existing needs. -Help identify new "problems" . Marketers make consumers aware of a new ideal state.

How can our "Planner self" compensate for our "Doer self"?

-Self-control problems can be an issue we can: -Utilize our far-sighted "Planner" self to promote our long-term welfare to help cope with our myopic "Doer" self, "who is exposed to the temptations that come with arousal"

What is the impact on decision making when they only have 1 choice versus when they have many?

-Single-option aversion: they were reluctant to pick an option—even one they liked—when no other options were being considered. -Consumers seem averse to a choosing lone option. This effect is driven by the uncertainty consumers face when only one option is available AND their increased desire to search for more options.

What did we learn from Terry O'Reilly's podcast?

-Small nudges can generate huge impacts. -Can be used by governments to influence behavior positively. EXAMPLES: -Attic cleaning service-governments providing this will allow consumers to get over this initial obstacle. -People who were behind in paying their road tax in the UK were found to be more likely to respond when presented with a letter that included a picture of their car. The photo was the nudge. -The airport in Amsterdam, Holland, wanted to solve a persistent problem in the men's washrooms. So they etched the image of a housefly into the urinals near the drain. Overspray was reduced by 80%. The housefly was a nudge - because men just love to aim at things.

What do Thaler and Sunstein recommend in "Nudge" for individuals who have an inability to spend?

-Some people have trouble spending. -If their problem is extreme, we call such people misers, but even regular folks can find that they don't give themselves enough treats. -Example: Dennis has adopted a clever mental accounting strategy to deal with this problem. When Dennis turned 65, he started collecting social security payments, although both he and his wife continue to work full time. Since he has been a good saver over the years, Dennis wanted to be sure he could do things he enjoys now while he is healthy, and not be put off by the expense. He opened a special savings account for his social security checks and has designated the money in this account as a "fun account". A fancy new bike or a case of good wine would be acceptable purchases from this account, but a repair to the roof would certainly not. -For each of us, using mental accounts can be extremely valuable. They make life more fun and more secure. -Many of us could benefit from a near-sacrosanct "rainy day" account and from a freely available "entertainment" account. -Understanding mental accounts would also improve public policy. -If we want to encourage savings, it will be important to direct the increased savings into a mental (or real) account where spending it will not be too big of a temptation.

How to understand mappings.

-Some tasks are easy (like choosing an ice cream flavor) as long as the shop doesn't introduce extra info like nutritional content or calories. -Decision is simply based on taste (either familiar options or with a taste test). -Some tasks hard (like choosing a medical treatment: complicated & involves trade-offs). -The relation between choice and welfare = a mapping. -"A good system of choice architecture helps people to improve their ability to map and hence select options that will make them better off" (Nudge, p. 94). -To facilitate optimal decision making make the information about options comprehensible and provide structure. -Example: lightbulbs give you 500 lumens but people don't know what that means. -Example: Zucchini brownies calls for 2 cups of grated zucchini but most people don't know how many zucchinis are in two cups. -Behavioral insight: Make the information about options comprehensible by transforming numerical information into units for actual use. -Example: Goodyear priced their tires on the basis of how many miles the tires could be expected to last rather than their engineering complexity; this highlighted the advantage of those innovations for customers and taught customers a new way to compare tires. -Behavioral insight: Make the information about options comprehensible by doing the calculations for people.

What were the details of the studies conducted by Paul Slovic re: 1, 2 and 8 children? What was the impact on affect and WTC?

-Study 2: investigated our propensity for giving: compared 1, 2 and 8 children. -WTC and positive emotions were higher for one child than two or eight children. -Compassion fade: As the number of needy persons increases, affective feelings and action may begin to diminish. -"When you're made aware of others who you cannot help, this creates negative feelings that come in and mix in with the good feelings and dampen the good feeling you have about what you can do" - Paul Slovic -And as #s grow to 1000s, we experience psychic numbing: feeling indifferent to the suffering of large numbers of people. -"It's not that people are not compassionate. But that compassion has to be aroused" - Paul Slovic.

How does the sunk cost fallacy affect consumption?

-Sunk-cost fallacy: If we've paid for something, we're more reluctant to waste it. -The sunk cost fallacy means that we are making irrational decisions because we are factoring in influences other than the current alternatives. -Example: researchers find that people are more likely to risk their personal safety in the storm if they paid for the football ticket than if it's a freebie. Only the most die-hard fan would fail to recognize that this is an irrational choice because the risk is the same regardless of whether you got a great deal on the ticket.

What is the Halloween study? What are the two conditions called? What does it tell us about separate vs combined choice? What were the results?

-The Halloween study was conducted with young trick-or-treaters visiting two neighboring homes on Halloween. -Some children chose two candy bars at one house (combined choice), whereas others chose one candy bar at each of the two houses (separate choice). -Prediction: less variety seeking in separate choice. -Results: Condition 1 (separate choice): Only 50% of the kids chose 2 separate candy bars; The other 50% chose the same candy bar at each house (two of the 3 Musketeers or two of the Milky Way, whichever was their preferred candy bar). -Results: Condition 2 (combined choice): ALL the kids chose one of each: one Milky Way and one 3 Musketeers.

What is a country of origin heuristic?

-The country-of-origin effect is created in the minds of consumers through an individual's knowledge, experience, exposure and inclination towards a particular country. -It helps in reducing cognitive load in consumer decision-making by becoming a proxy for quality, reliability and acceptability of products originating from a specific country. -Consumers are exposed to many products over time, and we naturally associate certain geographies with quality brands and products. -Example: we associate France with wine and cosmetics, Switzerland with watches, Italy with cars and pizza, and Germany with cars. -And marketers often go out of their way to capitalize on those associations with a specific country-of-origin. Example: Haagen Dazs ice cream founded in Brooklyn, NY. -Brands / products from developing countries are often perceived as being of lower quality. Example: Chocolates El Rey from Venezuela processes some of the best cacao beans in the world and charges a 30% price premium. The beans are bought by the big chocolate houses in Switzerland and Belgium. But El Rey chocolates are hard to find outside of Venezuela. And international consumers won't pay a price premium for Venezuelan chocolate believing that the best chocolate comes only from Europe. -Extensive research has shown that the country of origin of products has substantial impact on consumer product evaluations. -Maheswaran (1994) found: C.O.O. provides consumers with information about the quality and other aspects of a product, e.g. authenticity -or perceived authenticity. -Generally, consumers are willing to spend more money for a branded product from a C.O.O. with a more favorable country image. -Potential C.O.O. strategries: 1) Incorporating the country or region into the name. Ex. Bank of America, Royal Dutch Shell 2) "Made in Germany" or "Made in Italy" 3) Use of COO language. Example: Volkswagen's "Das Auto" - slogan used internationally from 2007- 2016. -Home country bias: a favorable disposition towards products from one's own country found in many studies especially if the consumer belongs to a more developed country

What is the identifiable victim effect? How does it work? What examples did we discuss in class?

-The identifiable victim effect describes the likelihood that we feel greater empathy, and an urge to help, in situations where tragedies are about a specific, identifiable individual, compared to situations where the victims are a larger, vaguer group of people. EXAMPLES: -Aylan Kurdi, a single victim who died Sep 2015 vs. 3,600 refugees who died in 2015 when crossing the Mediterranean Sea. -Until this photo in Sept 2015, people did not seem aware or focused on the humanitarian crisis in Syria" -But Aylan's photo mobilized empathy and concern, soon bringing in record donations to charitable organizations around the world to aid the victims." -Avg daily donations to the Swedish Red Cross campaign for Syrian refugees was 55 times greater in the week after the photo (~$215,000) than the week before (~$4,000). -"... a single photo of a single individual [stirred] the emotions and arouse[d] public concern more powerfully than statistical reports of body counts, which at that point — five years into Syria's civil war — had reached the hundreds of thousands" -According to psychologist Paul Slovic: -It is easy to project the face of someone you know onto the image. -Very young, nicely-dressed and could be one of our own. -Can easily imagine his life. -Slovic et al. (2014) investigated our propensity for giving: asking people to donate money on behalf of children facing starvation: 3 conditions: 1. One child (girl): Rokia 2. One child (boy): Moussa 3. Two children: Rokia and Moussa -Results: Affect and donations were lower in the two children condition. -Billie Bob is a greeter at GHF and often sits by the door handing out mints. -Identifiable Victim Effect: her picture on this life-size placard arouses emotion -- how? -She is familiar to members. -Elderly and frail. -Engenders guilt. -Positive effect, want to help her.

What behavioral insights does StickK.com leverage?

-The referee acts as another source to motivate users. People care what other people think. -The anti-charity option motivates users to complete their goals because they don't want their money going to an organization they do not support.

What is the representativeness heuristic? (See Chapter 1 in "Nudge)

-The representativeness heuristic involves estimating the likelihood of an event by comparing it to an existing prototype that already exists in our minds. -Think of it as a similarity heuristic. -The idea is that when asked to judge how likely it is that A belongs to category B, people answer by asking themselves how similar A is to their image of B (this is how "representative" A is of B). -Example: we think a 6-foot-8-inch African American man is more likely to be a professional basketball player than a 5-foot-6-inch Jewish guy because there are lots of tall black basketball players and not many short Jewish ones.

What is the salience bias? How can it be overcome?

-The salience bias describes our tendency to focus on items or information that are more noteworthy while ignoring those that do not grab our attention. -We show that an effective way to overcome salience bias is by providing feedback on resource use in real time, while individuals can directly adapt. -Salience of ethics: The problem with curbing dishonesty in behaviors such as filing tax returns, submitting insurance claims, claiming business expenses or reporting billable hours is that they primarily rely on self-monitoring in lieu of external policing. -Proof of honest intent is typically provided through signature at the end of, e.g., tax returns or insurance policy forms. -Research: testing an easy-to-implement method to discourage dishonesty: signing at the beginning instead of the usual the end of a self-report. -Part of the discrepancy between: individuals' aspirations and their daily behavior can be attributed to salience bias at the moment of decision making. -Some features of a decision are often vivid and perceptible while other features are obscure and difficult to quantify.

How does the affect heuristic come into play with respect of marketing products like Juul?

-Through the workings of the affect heuristic, we have evidence suggesting that cigarette advertising designed to increase the positive affect associated with smoking will quite likely depress perceptions of risk. -Affect is positive and perceived risk decreases. -Affect is positive and risk taking increases.

What other behavioral insights did we discuss in class that have been effectively utilized by the US government?

-USA: The Bureau of Prisons and SBST developed three checklists featuring action steps that inmates and former inmates can take before and after their release... In many cases, the timing and proper sequencing of actions is important for preventing setbacks. For example, encouraging individuals to obtain a birth certificate prior to release can accelerate their getting a government-issued photo ID and applying for work. -Behavioral insights: 1) simplifying necessary actions and 2) encouraging feelings of progress towards goals (getting the birth certificate even before leaving prison) aids achievement of goals.

Why are defaults so powerful?

-We have emphasized that default rules are inevitable, that private institutions and the legal system cannot avoid choosing them. -The choice architect can force choosers to make their own choice. We call this approach the "required choice" or "mandated choice".

Why does choice overload occur?

-We have limited cognitive resources, so having more options to consider drains our mental energy more quickly, overwhelming us. -We experience less satisfaction and more regret when choosing from a larger set of options.

Incentives and behavioral insights examples.

-What motivates people? -Translate information into personal objectives. -Make benefits salient. -Make it fun. -Make ethics salient. -Feelings of progress. -Research has found an empathy gap: when planning pursuit of long-term goals, people underestimate how much they care for immediate rewards so they don't bring these rewards to mind. EXAMPLES: -Calories burned on a StairClimber. Better: display calories burned in terms of food. -Ship greener: 1) Make benefits to the environment salient and 2) utilize. -In a test in Mexico, a researcher at MIT found that 52% of shoppers were willing to wait longer when they were told at checkout that slower shipping would save trees. -People want to be seen as responsible. -You could also give people points or badges for picking the greener option. -Companies could "create a "virtue signal" to neighbors — put slower-shipped boxes in a different color — without having to raise prices." -Points / badges = social capital online. -Visibility = earn esteem of neighbors in real life. -Behavioral insight: Make the benefits to us & to the environment salient. -Use stairs: Behavioral insight: Make the benefits salient with calories burned on stairs. -Piano stairs: Behavioral insight: Harness the power of fun. -Magnificent, artistic musical creation. -Results: 66% more people took the stairs. -Only a small minority of people most fun way to pursue their goal. -Woolley and Fishbach (2016): pursuing personal goals for delayed rewards (e.g., exercising to improve health) often provides consumers with: immediate rewards (e.g., a fun workout) in addition to the delayed rewards they receive. -Encouraged people to either: 1. choose an exercise you most enjoy doing OR 2. choose an exercise that you find most useful for your health goals. -DV: counted number of reps and sets. -Results: People chose similar exercises in both conditions. -BUT participants who focused on the FUN rather than the most useful exercise increased persistence. -One way to combat laziness / motivate is to make things more fun. -It seems obvious BUT it is NOT our intuition. -Follow-up survey: asked people how they motivate themselves when working out. -A majority (69%) said they focus on the delayed reward (examples: "becoming fit and healthy" or "running a half-marathon soon"). -Only 26% said focus on the fun of the workout. But when highlighted, people said they could see how it would be more motivating. -People need to be directed (implicitly or explicitly) to choose the most fun way. -Tongji University in China encourages students to sort garbage and recycling properly with a Recycling Game.

What are prospect theory's implications for consumer behavior and marketing?

-When encountering a sticker price, consumers will judge it with respect to the reference price they are using. -When actual price is above reference price, people will code it as a loss. -And when the actual price is below the reference price, they will code it as a gain. -This is transactional utility= the evaluation of the "deal", i.e. an assessment of the price paid relative to some reference price. -Example: Evian water costs 3 cents per ounce. Evian Facial spray - the same Evian water - costs $2.50 / ounce costs 83x more. -Evian "reframed the categorical identity of its water for its customers seeking skin hydration", using a neighboring "category reference framing". Example: Hampton Mist Hydrating Aloe for $28 / 5-ounce bottle.

When do we use heuristics?

-When problem is hard. -When mental capacity is limited. -When situation is not highly involved.

What does Barry Schwartz in "When Words Decide?" say about the narrowness vs broadness of the choice context?

-When the options are framed narrowly, people decide within that limited context. -A more narrowly constructed question can raise a lower-priority project to greater prominence in people's minds.

What is a post-completion error? What are some examples discussed in Chapter 5 of "Nudge"?

-When you have finished your main task, you tend to forget things relating to previous steps. EXAMPLES: -Leaving the gas cap behind. -Leaving your card at in the ATM slot after you get your cash. -Leaving the original in the copy machine after you grab your copies.

How do consumers categorize time? How does it affect what they work on or when they make decisions?

-While time passes continuously, most people think about time categorically -For example: -We organize our calendars by the week. -We categorize a project as being due this week or next week. -Student may categorize time by semesters. -Fashion designers/buyers by season. -People also tend to use important "landmarks" to slice up time (birthdays, festivals, holidays, Christmas). -For example: Harry Potter used Christmas as a cue to categorize future time events, and suddenly felt a great sense of urgency in preparing for the TriWizard Cup right after Xmas. It had transferred from the "future" to the "now". February twenty fourth looked a lot closer from this side of Christmas. -"Getting started is often the hardest step in any task. One way to nudge people to start is by making a task's deadline seem part of the present rather than the future," says Prof. Yanping Tu. -Example: a project started in April with a deadline of 2 weeks is more likely to be considered "now" if : its due date is in the same month than if the two-week deadline makes the project due next month. Resulting in people being more likely to start the project. -"Busy people were more likely to start work on a task when its deadline was perceived to be in the 'now' than when it was perceived to be in the 'later." -"The manner in which we think about the future changes the way we work on things and perhaps even whether we get them done."

Reference point example

-Who is happier: silver medalists or bronze medalists? -Olympic bronze medalists are happier! -Being one of the best in the world can mean little if it is coded not as a triumph over many, but as a loss to one. -Different reference points. -Silver medalists compare themselves to the gold medalists. -Bronze medalists are comparing themselves to fourth place below.

Does repeated behavior indicate brand loyalty? What is inertia?

-Yes repeated behavior indicates brand loyalty. -Brand loyalty describes a pattern of repeat purchasing behavior that involves a conscious decision to continue buying the same brand. -Inertia: the process whereby purchase decisions are made out of habit because the consumer lacks the motivation to consider alternatives.

1. What are the: a. behavioral consequences and b. consequences for the consumer's internal state (psychological consequences) of choice overload?

1) Behavioral consequences: 1. Choice deferral. 2. Stick with familiar items. 3. Switching likelihood: chance of reversing a choice already made increases. 2) Consequences for the consumer's internal state: if a choice is made, it leads to the following: 1. Lower satisfaction with choice made. 2. Lower confidence about choice made. 3. Decision regret. 4. Over-reliance on defaults, the status quo & suggestions.

Why do we use heuristics?

1. Effort reduction: it's a type of cognitive laziness -- heuristics reduce the mental effort required to make choices and decisions -We are more likely to use heuristics when the motivation or ability to engage in effortful evaluation is low, e.g. physiologically aroused (excited, stressed) or cognitively depleted (tired, hungry, overworked). 2. Attribute substitution: people substitute simpler but related questions in place of more complex and difficult questions. 3. Fast and frugal: heuristics often provide us with the correct answer, so they are a useful judgment/problem solving tool.

What 4 strategies can we use to change consumers' behavior? What are some examples of each strategy that we discussed in class?

1. Eliminate or Ban the undesired behavior (Government / Lawyer): Get rid of A from the market entirely or make A illegal. 2. Incentivize (carrots or sticks) (Economist): Subsidies for B and/or taxes on A. BOGO offers or loyalty rewards for B. 3. Inform and persuade (Educator, Marketer): Assumption: consumers must not know about B or don't understand its value, advertise. 4. Nudge (Behavioral Scientist): The first three strategies can be effective... but they are often costly and can trigger reactance. EXAMPLE: -Desired behavior change = healthy eating. -Desired by customers, employers, and government. -Eliminate or ban: Mike Bloomberg prohibited the sale of 16 oz+ sugary drinks because her wanted to fight obesity in NYC. After restaurants, theater owners, beverage companies and small stores sued. -Incentives: To help curb consumption, lawmakers and health advocates around the country have proposed soda taxes in recent years. None has succeeded, however, in part because of heavy campaigning and lobbying from the beverage industry. -Inform and persuade: Soda has been under fire for years, with health advocates saying the sugary beverages are unique in their harmfulness because people don't realize how much high-fructose corn syrup they're guzzling. The bad publicity and government advertising has helped lead to a steady decline in US soda sales for nearly a decade. But the popularity of other sugary drinks such as sports drinks and energy drinks have been growing...so then we need more campaigns targeting these other drinks. -Nudge: Behavioral insight #1:Mirror reflecting your actual self (double chins) and causing you to reflect your ideal self (fit/healthy). Behavioral insight #2: Vivid, obvious feedback of how much their cart was NOT filled with fruits and veggies.

Pros of choice overload.

1. Greater likelihood that consumers can find a close match to their purchase goals. 2. Allows consumers to maintain flexibility in light of uncertainty about future tastes. 3. Accommodate consumers' future variety-seeking behavior.

What are some solutions to mindless eating? Name them and give examples.

1. Mini-packs (Wansink 2016): -Wansink gave Philadelphia moviegoers free snacks—Wheat Thins and M&Ms - that contained 440 calories. They repacked them in clear zipper bags to make sure they could see all they ate and all they didn't. -One group: got 4 small bags, ~110 calories each. -Another group: got 1 large bag, holding 440 calories. -Movie-goers watched the movie and munched away. -Afterward, he collected and weighed the bags. -The results: Moviegoers with the four small bags ate about half as much! When they got to the end of their first or second pack, they just stopped eating. -Even crazier, more than half also said they'd pay 20 percent more money for snacks if companies put them in smaller packages... -Partitioning effect: partition the quantity to be consumed into smaller units. -Consumers: 1. have a tendency to complete: so small packaging is beneficial. 2. Avoid effort: so increase the effort needed for continued consumption. 3. Need an interruption: to pause and think before opening and to be reminded of how much has been consumed. 2. Which is more satisfying? -Smaller plates that look more full are more satisfying than larger plates with the same amount of food. -Ebbinghaus Illusion: optical illusion of relative size. -We pour & consume more in a short, wide glass. We focus on the height >> width. -Tall, narrower glasses make us pour less, drink less & be more satisfied with the drink. -Even experienced bartenders asked to pour a standard shot poured 27% more into short, wide glasses than tall, thin ones.

What are the 11 behavioral insights discussed in Lecture 12?

1. Mirror reflecting your Actual self (double chins) and causing you to reflect your ideal self (fit/healthy). 2. Vivid, obvious feedback of how much their cart was NOT filled with Fruits and veggies. 3. Information that conveys social norms - is highly effective. 4. People have "hot" and "cold" states of decision-making. 5. Eating is often mindless. Partitioning effect (smaller packs) & visual illusions (plate size, glass height). 6. Insert small transaction costs to interrupt consumption. 7. It's easier to change your eating environment than to change your mind. 8. We are influenced by how attractive the food looks. 9. "In sight, in stomach" = a convenience principle, i.e. we eat what we see, not what we don't. 10. : People are cognitive misers. Make useful information available at point of purchase. 11. Speaking evokes more emotion than motor movement (button-pressing or writing). Speaking into a mic or to a person results in more indulgent choices.

Give a brief example to illustrate the problem recognition process.

1. PROBLEM RECOGNITION: Richard realizes he's fed up with a black-and-white TV that has bad sound reproduction. 2. INFORMATION SEARCH: Richard surfs the Web to learn about TVs. 3. EVALUATION OF ALTERNATIVES: Richard compares several models in the store in terms of reputation and available features. 4. PRODUCT CHOICE: Richard chooses one model because it has a feature that really appeals to him. 5. OUTCOMES: Richard brings home the TV and enjoys his purchase.

How do problems arise?

1. Perceived current state has or may get worse = need recognition. -May run out of product. -Product may deteriorate. -Product breaks down (your car, for example). -Product may not meet needs after all. 2. Perceived ideal state may improve and move further from current = opportunity recognition. -New circumstances (life changes), for example: Graduate college, new job, married, etc. New social groups (kids at new school, new neighborhood) -New desires, for example: desire higher quality. Spouse or neighbor gets a new car.

What are the stages in consumer decision making?

1. Problem recognition: the process that occurs whenever the consumer sees a significant difference between his or her current state of affairs and some desired or ideal state; this recognition initiates the decision-making process. 2. Information search: the process by which the consumer surveys his or her environment for appropriate data to make a reasonable decision. 3. Evaluation of alternatives 4. Product choice 5. Outcomes/post-purchase evaluations

Why does the compromise effect occur? Explain the 3 reasons it occurs.

1. Reduces conflict associated with giving up one attribute for another. 2. Can be justified by arguing that it combines both attributes. -This is especially true if a person expects (seems the rational thing to do). -Think-aloud protocols with study participants show exactly this - decision makers do use the compromise rationale to explain the selection of a middle alternative. 3. The middle choice just seems like a good compromise to many consumers, especially to consumers who are uncertain about their preferences.

What are prospect theory's implications for risky gambles? (you may wish to review the video again.)

2 scenarios presented: 1. Gains scenario: given only 20 up front and can win another 30, if they wanted to gamble. 2. Loss scenario: given 50 up front but then 30 taken back immediately. Then asked if they way to gamble to potentially win the 30 back. Those who were given 50 originally felt like they were robbed so they were willing to risk gambling to get back what was rightfully theirs.

How do the A-B-A and A/B testing designs differ?

A-B-A TESTING: T-he A-B-A design allows experimenters to observe behavior before treatment, during treatment and after treatment. -It is used when you are interested in examining one particular group of people, and after observing them for awhile, you subject them all to the treatment for a period of time, and then withdraw it. A/B TESTING: -A Before-After Design (within-participants factor) with 2 groups: A Treatment & a Control Group (between-participants factor) -Technically, this is a mixed design: it has one within-participants I.V. (time) and one between-participants I.V. (treatment vs control). -Method: 2 parallel groups going at the same time measured over time or before and after the treatment is applied to one group. -1 group receives the treatment and 1 group serves as the control. -A/B testing is a form of real-world research that allows you to test small variations in marketing materials to determine which is most effective with your audience. -Social media and e-commerce sites often use A/B testing because it's possible in real time and they are able to separate their audience into two random groups and show a different variation to each one. -Then they compare the responses to each variation to determine which is most effective based on chosen metrics. -Outcomes: these companies can track purchases, clicks, time spent on website, etc. before and after, refine content marketing and advertising strategies on the fly and build a deep understanding of what works—and what doesn't.

What is a brand heuristic?

BRAND HEURISTICS: -Brands give buyers confidence in their purchase decision, allowing for cleaner interpretation and easier processing of information. -Consumers tend to adopt a decision rule to purchase familiar and well-known brand. -Lead us to believe that brands with high brand awareness have higher quality especially in low involvement situations or when consumers have low motivation. -Example brand heuristics:"Let me buy the most familiar name" or "Which brand do I like the most?" or "If it's from [Brand], it must be good." -Example: Hoyer and Brown (1990) had participants - most of whom had never bought P.B. before - sample either: 1) one known brand and 2 unknown brands of P.B. OR 2) 3 unknown brands of P.B. (unknown brands = regional brands from other areas of the US). -What was in each jar was randomly distributed so the known brand jar did not always contain that actual P.B. -Results: brand awareness affected: (1) Brand sampling: Ps who were aware of one brand in a choice set tended to sample fewer brands across trials. (2) Choice: a) 94% chose the known, national brand and 60% of them said it was because of brand awareness. b) Familiarity with one brand in the set tend to choose the known brand. EVEN WHEN it contained the lower quality P.B. than other brands they had the opportunity to sample . The brand mattered more than the quality of the product. c) Ps in the "3 unknown brands" condition often chose the higher quality P.B.

How do cognitive versus emotional decision making differ? What factors influence whether a decision is primarily cognitive or emotional?

COGNITIVE DECISION MAKING: 1. Product type: serves a utilitarian purpose = purchased for their practical uses. -Examples: lawnmowers, garbage disposal, insurance, house paint. -Is a search good= lots of researchable info available so consumers can learn what they need to know before buying the product. -Quality and attributes can be inspected and determined before purchase. 2. Context: example: buying a truck for your business. -Consider important attributes: towing capacity, cargo space, length of warranty. 3. Marketing channel = personal selling. -Knowledgeable salespersons encourage a cognitive process. -Promote consideration of differences among products. 4. Individual differences: some people just want to analyze every purchase as a set of objective tradeoffs... EMOTIONAL DECISION MAKING: 1. Product type: serves a hedonic purpose, i.e. purchased for their pleasure seeking factors. -The item says something about who they are or aspire to be AND/OR the item makes a statement to peers and social groups. -Examples: fashion goods: clothing, shoes, jewelry, fine wines, gourmet foods. -Is an experience: can't assess the characteristics until after purchase and use. -Example: You need to see a movie for yourself, or actually go on vacation, to see if truly you like it or not. -Other examples: services, cars, new types of food 2. Context: example: buying a truck buying a truck to: -Convey the sense that the owner is a rugged outdoorsman. -Is it made in the USA? -Convey a certain sense of style/status. 3. Marketing channel = advertising. -Stories pull at heartstrings. -An ad appeals to the ego. -Draw them closer to the brand. 4. Individual differences: some people just make most purchase decisions on a whim based on how they feel in the moment.

What compensatory and non-compensatory decision rules did we discuss?

COMPENSATORY RULES: 1. Simple additive: Choose the one with the largest number of positive attributes. 2. Weighted additive: Assign weights to the attributes and sum across attributes to choose the overall best option. NON-COMPENSATORY RULES: 1. Lexicographic Rule: Determine the most important attribute and select the brand that does best on it. If there's a tie on that attribute go to the next most important attribute. 2. Elimination-by-aspects Rule: rank attributes by importance and impose cut-offs for each attribute. Start with importance #1 and eliminate brands not meeting the cut-off. 3. Conjunctive Rule: Assess whether each product meets the minimum cutoff on all relevant attributes. If not, reject it.

How does the lost ticket problem demonstrate mental accounting?

Lost Ticket Problem (Tversky & Kahneman, 1981): -Imagine you love classical music and are about to attend the symphony. As you enter the Phillip's Center, you realize you have lost your $50 "general admission" ticket. Do you buy another ticket? 54% said yes. Your data: 57%. -You do not yet have a ticket. As you go to enter, you see that you have lost $50. Do you still buy a ticket? 70% said yes. Your data: 73%. -In both cases, people have lost something worth $50. -From an Econ's standpoint, exactly the same story has unfolded. -But people seem to consider the balance in their "entertainment account" not simply whether they have another $50 to spend.

How do we market to maximizers vs satificers?

MARKETING TO MAXIMIZERS: -When your target customers believe there are large differences across a product group and want the best (Maximizers): -Advertise heavily to convey the product's superiority. -Highlight the economic and social costs of a bad choice. -Price at a point to suggest quality. MARKETING TO SATISFICERS: -When your target customers believe all products in a category are pretty much the same (Satisficers): -Make the product really easy to find. -Give it a large amount of shelf space. -Design colorful packaging to make it stand out. -Give it an affordable price.

How do maximizers differ from satisficers?

MAXIMIZERS: -Those who always aim to make the best possible choice. -Generally: people who rate most questions > 4 = Maximizers. -Engage in: both before AND after they make a purchase. -Exert great effort: reading labels, reading consumer magazines and trying new products. -Spend more time comparing their purchase decisions with those of others. -Strive towards checking out every option --> which can be daunting. -Often experience postpurchase regret as they think about items they did not buy. -Often make better objective choices but feel less satisfied with them. SATISFICERS: -Those who aim for "good enough", whether or not better options exist. -This variable is an individual difference, i.e. it varies from person to person, and -It is independent of product category or type of decision

What is brand loyalty?

Repeat purchasing behavior that reflects a conscious decision to continue buying the same brand.

What does research consistently show about choice over time?

Research consistently shows: 1. People are myopic: they are overly-focused on the present. 2. People are inconsistent: choices change as they get closer to one of the options. 3. Future outcomes are discounted, i.e. if I offer you $500 now and then asked you "How many dollars would I need to give you in 3 months from now to make you indifferent to getting $500 now?" The answer would be > $500. 4. People consistently believe they will have more time in the future than they do now. Yes-Damn moments. 5. People plan to act on their good intentions but only in the future.

What is the difference between standard random assignment and random assignment over time?

STANDARD RANDOM ASSIGNMENT: -Occurs in one sitting. Participants are randomly assigned to a group. RANDOM ASSIGNMENT OVERTIME: -If you have a study where you can only implement ONE condition at a time (in a store, restaurant, etc.) so it must be conducted over several days / times. -Where time-of-day or day-of-week may affect the results and you expect (mostly) different people to be shopping/visiting. -You must use counterbalancing. -Example: If you wanted to test the effect of having a good-looking VS an average looking male greeter at the front of your store on shoppers' spending, you would need to do something like this: Saturday morning Thor, Saturday afternoon Starlord, Sunday morning Starlord and Sunday afternoon Thor.

Define problem recognition.

The process that occurs whenever the consumer sees a significant difference between his or her current state of affairs and some desired or ideal state; this recognition initiates the decision-making process.

How do individuals react to losses vs gains?

We experience the pain of a loss much more than we experience the joy of an equivalent gain. Often 2-3x more.

When do we need a nudge?

When: 1. We space out: we forget things we don't pay (enough) attention. 2. We experience benefits now, costs later (self-control issues). 3. Decisions are difficult. 4. We have few opportunities to practice. 5. We receive too little feedback. 6. We have trouble translating information / options, "best outcome for me."

How many choices do consumers like to have?

-Consumers like having some options. -They are much more likely to buy in a 2-option condition. -Importantly, the choice share of both options increases when presented together.

What does diminishing sensitivity mean?

-People become less sensitive to changes in wealth as the value of the amounts considered rise. -This means the subjective difference between $950 and $1,000 is much smaller than the difference between $50 and $100.

What is maximizing versus satisficing? How does it affect decision making? (see also the "Tyranny of Choice" article, which is assigned for Lecture 15)

MAXIMIZING: -the extensive cognitive decision strategies we use when we want to identify the best possible choice. SATISFICING: -a decision strategy that aims to yield an adequate solution to reduce the costs of the decision making process.

How does the identifiable victim effect counteract feelings of psychic numbing and helplessness?

Focusing on helping one child or one animal promotes a warm glow, helping to cancel out the feelings of 1) psychic numbing (to large "statistics") and 2) helplessness of not helping "millions".

What does libertarian paternalism mean? (see also "Nudge")

-Libertarian: i.e. liberty-preserving. People should be free to do what they like. People should be free to choose what they like. -Paternalism: caring about the outcomes for people, making them better off. It is legitimate for choice architects to try to influence people's behavior in order to make their lives longer, better, healthier. -Libertarian paternalism a relatively weak, soft and nonintrusive because choices are not blocked, fenced off or significantly burdened.

What is the asymmetric dominance effect? How does it work?

-Consumers change their preference between two options when presented with a third option - the "decoy" - that is "asymmetrically dominated". -The effect was first published in a paper by Huber, Payne and Puto (1982). -It is well known in marketing that the preference for a target option over a competitor option increases if the choice set entails a third option, known as a decoy. If the decoy is (nearly) dominated by the target according to the attribute levels, the preference increase of the target over its competitor is often termed the "decoy effect," "asymmetric dominance effect," or "attraction effect.". -The Decoy: Must be inferior to another option on (nearly) all the dimensions. In other words, it is asymmetrically dominated by another option.

What is neuromarketing?

A new technique that uses a brain scanning device called functional magnetic resonance imaging (fMRI) that tracks blood flow as people perform mental tasks; scientists know that specific regions of the brain light up in these scans to show increased blood flow when a person recognizes a face, hears a song, makes a decision, senses deception, and so on; therefore, they are now trying to harness this technology to measure consumers' reactions to movie trailers, choices about automobiles, the appeal of a pretty face, and loyalty to specific brands.

Define compensatory vs non-compensatory decision-making.

COMPENSATORY DECISION MAKING: -A set of rules that allows information about attributes of competing products to be averaged in some way; poor standing on one attribute can potentially be offset by good standing on another. -Example: the high price and low battery life of the early Apple iPhones were compensated for by the sleek design and ease of use and novelty. -Marketers should emphasize the "total package" in promotional efforts. NON-COMPENSATORY DECISION MAKING: -Decision shortcuts a consumer makes when a product with a low standing on one attribute cannot make up for this position by being better on another attribute. -Example: choice of a flight - you may consider only a nonstop flight or rule out all redeye flights, even if it saves you money. -Marketers should emphasize the one or two best attributes that matter most to consumers.

What is habitual decision making?

Choices made with little or no conscious effort.

How does feedback work with nudging?

EXAMPLES: -Ceiling paint gives immediate feedback while going on blue and dries white so there are no missed spots. -Driver alert: Behavioral insight: Lane keeping tech - steering wheel vibrates: Vivid and immediate feedback. -Bosch proposes combining haptic feedback technology with electronic controls already in place in many hybrid vehicles to improve fuel economy - the gas pedal will alert drivers to help them stay in electric-only mode longer (not accelerating as much). -Oral B Genius "Smartring" gives feedback when you are brushing too hard. -The Social Swipe -The bottomless trashcan (feedback and gamification). -Eco-friendly water fountain: -Over 60 million plastic bottles are dumped in landfills or burned in incinerators every day. -Not only is refilling your bottle easy, but you also get salient feedback on the number of disposable plastic bottles saved. -Behavioral insight: Vivid and immediate feedback to encourage pro-social / environmental behaviors.

What do we learn about gains and losses, the status quo and framing in Chapter 1 of "Nudge"? What examples do they discuss (credit cards, conservation, mugs, 401Ks)?

GAINS AND LOSSES: -People hate losses (and their Automatic Systems can get pretty emotional). -Losing something makes you twice as miserable as gaining the same thing that makes you happy. -People are loss adverse. -Example: mug sale experiment. -Loss aversion helps produce inertia, meaning a strong desire to stick with your current holdings. -Loss aversion operates as a kind of cognitive nudge, pressing us not to make changes, even when changes are very much in our interests. STATUS QUO BIAS: -For lots of reasons, people have more of a tendency to stick with their current situation. -Example: In retirement savings plans, such as (401ks), most participants pick an asset allocation then forget about it. -In one study conducted in the 1980s, participants in TIAA-CREF, the pension plan of many college professors, the median number of changes in the asset allocation of the lifetime of a professor was zero. -Over the course of their careers, more than half of participants made exactly no changes to the way their contributions were being allocated. -One of the causes of status quo bias is lack of attention. -Many people adopt what we will call the "yeah, whatever" heuristic. -The combination of loss aversion with mindless choosing implies that if an option is designated as the "default", it will attract a large market share. -In many contexts defaults have some extra nudging power because consumers may feel, rightly or wrongly, that default options come with an implicit endorsement from the default setter, be it the employer, government, or TV scheduler. FRAMING: -Choices, depend, in part, on the way in which problems are stated. -Framing works because people tend to be somewhat mindless, passive decision makers. -Example: When credit cards started to become popular forms of payment in the 1970s, some retail merchants wanted to charge different prices to their cash and credit card customers. -To prevent this, credit card companies adopted rules that forbade their retailers from charging different prices to cash and credit customers. -Its preference was that if a company charged different prices to cash and credit customers, the credit price should be considered "normal" (default) price and the cash price as a discount. -Example: energy conservation is now receiving a lot of attention, so consider the following information campaigns: (a) If you use energy conservation methods, you will save $350 per year; (b) If you do not use energy conservation methods, you will lose $350 per year. -If the government wants to encourage energy conservation, option (b), the loss perspective, is a stronger nudge.

Framing example

Imagine that the U.S. is preparing for the outbreak of an unusual disease, which is expected to kill 600 people. Two alternative programs ... FRAME 1: -If Program A is adopted, 200 people will be saved (72% in the original 1981 study and 86% in class) -If Program B is adopted, there is a 1/3 probability that 600 people will be saved, and 2/3 probability that no people will be saved. (28% in the original 1981 study and 14% in class). -This is a gain frame (lives saved) -Program A is preferred. . You think about the saving the 200 lives for sure and don't take the risk. We are risk-averse for gains. FRAME 2: -If Program A is adopted, 400 people will die. (% in the original 1981 study and 27%) -If Program B is adopted, there is a 1/3 probability that nobody will die, and a 2/3 probability that 600 people will die. (% in the original 1981 study and 73% in class) -This is a loss frame (deaths) so people more likely to take the risk.

What are the 4 elements of the EAST Framework?

MAKE IT EASY: -People often take the path of least resistance, so...remove small frictions or hassles, bdefault people into the best choice orbredesign options / choices to make the desirable behavior easier. -Example: Aalto University in Finland made it easier to bike to campus by installing free bike repair stations and creating more bike parking. -The maintenance points contain the equipment necessary for servicing a bicycle - pump station, maintenance stand and toolkit, and a QR code to a mobile guide. MAKE IT ATTRACTIVE: -People's attention is finite and our mental capacity is limited seeing our names (personalization), seeing our belongings (part of our extended self-identity) example: the photo of the car in the road tax letters, appealing to group/tribe membership or using contrasting / standout colors draws attention and make the desired behavior the most attractive option. -Example: draw attention by placing footstep markers leading up to recycling bins. -Example: Draw attention to the revolving door of Library West to increase usage (and save energy) & invokes Gator tribe membership (group identity, pride). -Example: Most effective way to get people to get the flu vaccine: "John, this is a reminder that a flu vaccine has been reserved for your appt with Dr. Smith." MAKE IT SOCIAL: -People are highly influenced by what others are doing, we'll more likely make a switch if: we think the majority of people are doing something or an increasing number of people are shifting towards it (even a growing minority). -Other strategies: Utilize peer pressure, encourage people to make public commitments, encourage people to reach out to their social networks and utilize reciprocity. -Example: Energy use: The benefits of comparative information are often attributed to people's intrinsic competitiveness. Homeowners want to "Keep up with the Joneses". But giving information on neighbors' energy use also provides a reference point and they judge whether their own outcomes are good or bad. MAKE IT TIMELY: -Encourage pre-commitment. -Encourage pre-ordering. -Emphasize present benefits. -Help people plan and follow-through. -Support people at the moment - or possibly before - they need help. -Examples: signing name BEFORE completing forms, pre-ordering lunch, helping paroled prisoners make initial progress on steps to assist with rehabilitation & finding work and Uni of Copenhagen: support the desired behavior at the moment they need it.

In "Nudge", what do Thaler and Sunstein have to say about System 1 vs System 2? What is the purpose of each? How are they different?

THE AUTOMATIC SYSTEM: -Is rapid and is or feels instinctive, and it does not involve what we usually associate with the word thinking. -When you duck because a ball is thrown at you unexpectedly, or you get nervous when your airplane hits turbulence, or smile when you see a cute puppy you are using your Automatic System. -Your gut reaction. -The Automatic System can be trained with lots of time and effort. THE REFLECTIVE SYSTEM: -Is more deliberate and self-conscious. -We use the Reflective System when we are asked, "How much is 411 times 37?". -Most people are also likely to use the Reflective System when deciding which route to take for a trip and whether to go to law school or business school. -Your conscious thought.

What is prospect theory? (refer to our lecture notes and Schwartz, "When Words Decide") What are its 3 key points?

The prospect theory says that investors value gains and losses differently, placing more weight on perceived gains versus perceived losses. 3 KEY POINTS: 1. The shape of the "S-curve" shows a diminishing sensitivity to gains & losses. Example: Winning $100 will make you feel better than winning $50, but not twice as much. 2. The loss side of the reference point is steeper than the gain side. We experience the pain of a loss ($50) much more than we experience the joy of an equivalent gain ($50). Often 2-3x more. 3. The judgment is made relative to a reference point.