Is applied consumer behaviour a qualitative art or a quantitative study?
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Mr. White asks the student to discuss the relationship between consumer behavior and fields such as microeconomics, behavioral economics, culture, decision-making, marketing psychology, and marketing strategy. The student is asked to consider whether consumer behavior is a science or an art. The document discusses how consumer behavior has increasingly been applied to microeconomics. Behavioral economists recognize both predictable and unpredictable influences on consumer choice. Theories of bounded rationality and heuristics show people make satisfactory rather than perfect decisions based on past experiences. Consumer behavior incorporates psychological insights showing emotions and experiences influence decisions more than rationality. While consumer behavior provides scientific findings, observers' conclusions are also shaped by intuition, making it both a quantitative science and qualitative art
Is applied consumer behaviour a qualitative art or a quantitative study?
- 1. BADIBANGA SAM APPLIED CONSUMER BEHAVIOUR MR WHITE ALISDAIR WHITE ASKS: Identify, document and discuss the interrelationship between the study of consumer behaviour and other fields such as, but not limited to, microeconomics, behavioural economics, culture, decision-making, marketing psychology, and marketing strategy. Consider the commonalities and the differences and draw conclusions concerning whether the study of consumer behaviour can be considered a quantifiable science or a qualitative art.! Your essay needs to identify the principal theorists and theories and demonstrate a depth of study commensurate with a Level Two masters programme. Consumer behavior is a field of study that aims to understand the mental process that consumers, as end-users, go through prior to, during and after the purchasing process. Increasingly seen as a separate field of study within social sciences, this field of research is now being “applied”, as it is now being specifically “applied” to the domain of microeconomics. In being applied to the market, applied consumer behavior theorists increasingly recognize that the human psyche can be as much affected by very tangible and predictable elements whilst consumer choice can also be very unpredictable and come from a vast range of subjective influences. To this, McFadden would argue that the assumption of the rational economic man, as held by classical economists (Adam Smith and Jonathan Bentham) is incomplete. He explains that homo economicus, originally presented as the standard economic human being, is in fact a rare sub-class of the human race, as explained through the notion of ‘heuristics’ and bounded rationality. Indeed, the assumption of the perfectly rational man was created to enable mathematical modeling of consumer choice,; second, the idea that preferences are fixed and so that the consumer would necessarily choose the product that brings most economic profit is simply not true. Naturally, the notion of perfect rationality is in practice wrong and this is proved in the false assumption that consumers are fully aware of all alternatives available to them. The actual lack of information and the Man’s limited capacity for sense making simply discredits this assumption of the perfectly informed consumer, originally presented as a standard representation of the economic human agent. In stark contrast, behavioral economists actually aim to more explicitly recognize the role that subjective experience and bounded rationality generally play within consumer choice. 4TH DECEMBER 2013
- 2. BADIBANGA SAM APPLIED CONSUMER BEHAVIOUR MR WHITE Thinkers of this school- Daniel Kahneman and Amos Tversky (2000)- have demonstrated that people actually make satisfactory decisions, as opposed to perfect ones, based on heuristic models of habitual behavior. They describe that during the learning process, human beings increasingly learn to associate particular stimuli in the environment with typical displays of behavior that have repeatedly revealed themselves to be adequate in the past, and in similar contexts. Explanations and predictions of people’s choices, in everyday life as well as in the social sciences have always been founded on the assumption of rationality essentially for the purpose of academia. Theoretical books of the time, written in the classical style, were much concerned with prescription and much less so with implementation. As such, previous writers in the fields of human sciences, ranging from anthropology, social sciences and into consumer behavior saw themselves as rational beings and used this to justify the highly prescriptive style in which articles and books were written; mostly concerned in guiding professionals such as marketers and psychologists, models were often created on the back of sometimes unrealistic assumptions that are in fact testament of our limited capacity for sensemaking. Theory was often presented as fundamental fixed dogmas as opposed to evolutionary science allowing for new variables to be implemented within microeconomic models. Bathed in microeconomics, the field of applied consumer behavior started to integrate anti-classical microeconomic and psychological input as firms around the world were faced with the increasing uncertainty that came with phenomenon of globalization. The factor of speed, the rate of obsolescence and the cheer amount of competition throughout all markets and industries have meant that suppliers (even more so than ever before) no longer have access to clear, on-time-in-full (OTIF) information, they do not possess the full knowledge as to how to collect and interpret this information and finally they simply do not have time to make rational decisions. This has forced people to slowly recognize that not only consumers, but also suppliers- seen often as the consumers of consumers in a system in which the “customer is king”- make decisions which satisfice as opposed to perfect ones. This once more supports Kahneman and Tversky’s idea that people value more what they are about to lose and already have as opposed that what is yet to be acquired. This historical trend in academic practice would further suggest that it is only when suppliers were threatened by the competitive and uncertainty challenges of globalization that attempts at amending the standard microeconomic model were made- note that many believe that the inception of globalization theory came to prominence in the 1980s as speculation on lowering trade barriers mounted (regional economic agreements). Having said this, globalization, also seen as the widespread and transnational crystallization of culture in many aspects of wider society (e.g. Americanization of media channels and cinema), has prompted not only a need to better understand consumer choice determinants, their intricacies and also culture as related to applied consumer behavior. The objective of academia still 4TH DECEMBER 2013
- 3. BADIBANGA SAM APPLIED CONSUMER BEHAVIOUR MR WHITE is to provide guidance and certainty to practice. Considering this, we now understand that amendments have been encouraged once suppliers of goods and services needed to find a better way to navigate through the mess of understanding the capricious demands of a consumer often faced with excessive choice. Alisdair White (2013) thereby argues against the idea of the consumer society, built on the notion of consumerism which promotes ‘the provision of an abundance of goods and services to consumers, the purchase of these far exceeding basic needs, and the disposal of these goods, often before the end of their economic life’. White explains that the consumer society model used in the Western World (more so the US and the UK) is a big reason why a microeconomic rethink did not occur earlier. Let me explain. The consumerist model is based on the assumption that an efficient market is one whereby demand meets supply and the consumerist model is presumably the best fit. The downside of this assumption has been that this is a ‘zero sum game’, in other words, both the consumer and supplier cannot be winners at the same time since very often demand is unequal to supply and in the case where the latter is higher, consumers are getting poorer whilst suppliers are getting richer. Whilst the intrinsic value of a good does not change, all too often the consumer is faced with prices, which keep on rising even during an economic crisis. Strangely so, this microeconomic model seems to favor the supply side of economies at the detriment of the consumer-side, it initially pretends to serve best as explained by utility theory as applied to a perfectly rational individual. In light of the research conducted for this essay, we now know that predicting purchasing behavior is made more challenging amid the fog and excessive amounts of goods, which often render consumer behavior more intuitive and less predictable. Thus the conclusion of A Time for an Economic rethink (2013) is the soul-searching question of whether we should adopt the non-consumerist economic model, which despite its greater fairness seems so irrelevant to the overly capitalist mindset of consumer societies. To this, White does warn of a need to change attitudes, beliefs and cultures, intangible elements of the human psyche, which are very hard to change. “Sovereign in tastes, steely-eyed and point-on in perception of risk, and relentless in maximization of happiness (The Economist, 27/04/2013)” McFadden criticizes this assumption of classical microeconomics and dismisses homo economicus as being the oddity and recommends that practitioners also borrow from the fields of anthropology and psychology in integrating the notion of emotions, subjectivity and experience in the recommended new microeconomic model. For example, consumers in reality do not have fixed preferences and instead display much fluidity and subjectivity in the choices made. For example, behavioral psychologists have demonstrated that a person would associate higher importance, and fitness for use, for a product towards which they experience a feeling of endowment. A person used to take a particular type of coffee every morning is likely to maintain this preference for the product despite discretionary rises in price. 4TH DECEMBER 2013
- 4. BADIBANGA SAM APPLIED CONSUMER BEHAVIOUR MR WHITE Thus, Adam Smith’s view that the standard version of the economic human being would always choose that which is most economically profitable is definitely a false assumption. In line with this, Kahneman’s and Tversky’s “prospect theory” holds that in the face of uncertainty, we tend to group risks and assign value functions to assess them. The interesting development is that people generally seem to be more concerned about the risk of losing something they already have rather than gaining something. In other terms, risk aversion compromises the linearity of the value functions that we use. Humans also assess groups of risks from a personal preference point and also tend to overweight low probability outcomes and underestimate medium to high ones and they Kahneman also describes other types of illusions in which people misjudged certain aspects of. This is highly relevant to the fields of decisionresearch, risk analysis and also enlightens the limited scope for application that the standard microeconomic model possesses. Indeed, Daniel Kahneman points directly at the fact there is an inherent inability for classical economists to account for the issue of memory and experience in determining consumer choices. Inspired form the fields of anthropology and psychology, there is a long-standing knowledge that accumulated knowledge and experience creates memory, and that the marketers can effectively learn to stimulate previously experienced sensations (feelings) that the consumer associates with a particular stimuli. As such, this is undeniable evidence that feelings, in stark contrast with ‘rationality’ play a significant choice we make in our everyday lives. A very good example of this would be the upcoming Christmas ‘promotional displays in supermarkets’. Marketers, building on the sense of magic, family, unity and joy that people generally associate with Christmas will generally promote traditional Christmas family presents and sell them in batches with the all too known “ Two for the price of one”. The effect is that consumers, highly swayed by the Christmas atmosphere, generally end up believing they are making a fifty percent profit whilst in truth they often do not need to buy as many articles and may only need one sock, which alone would still have the same retail price as the batch of two. Alisdair White (2013) uses this as a prime example of how irrational Man is to believe that he is Rational. White’s argument that human beings are the only species to display the irrational emotion, characteristic that is greed evokes an underlying understanding that marketers and marketing psychologists have on the matter. A major reason why economies have shifted from excessive demand to essentially exceeding supply is also because of the ability that marketers have found in inducing the consumer to buy into a feeling, the feeling that they need something which in reality they don’t. Indeed, the richer countries display the lowest percentage of disposable income as spent on basic needs and instead spend more on other things that they ‘feel’ they need such as leisure. 4TH DECEMBER 2013
- 5. BADIBANGA SAM APPLIED CONSUMER BEHAVIOUR MR WHITE The old marketing assumption that a need is merely something that must be acquired to secure survival (i.e. shelter, food, sex and water) is no longer applicable in today’s society. Today the term would rather be defined as ‘ a motivating force, highly driven by feelings, that compels action for its satisfaction. Having spent more than six decades observing and interacting people, trying to understand how people perceive themselves and their environment, Kahneman uses data and observations to establish how we use information and heuristics in making decisions. He concludes that’ that we navigate through life essentially trusting our impressions and feelings, and the confidence in our intuitive beliefs which are not always justified (Kahneman, 2011, p.32). Kahneman goes on to describe that there are two systems of though patterns- 1 and 2- the first being mostly unconscious and yet guides many of our final decisions based on heuristics. System 2, in contrast is not automatic nor unconscious but instead it is a though process that we are fully aware of and thus our rationality is bounded by the fact that we do not realize that System 1 thoughts are not taking place and where they actually come from. Moreover, psychologists are suggesting that experience and emotions should be more explicitly incorporated into the microeconomic model. Experiments have indicated that the order in which options are exposed to the consumer, and the intensity of pleasure/ pain at the peak of one experience is likely to make the type of consumer choice a much more predictable science, to the extent that a clear cause and effect continuum can be clearly demonstrated. Experiments have shown, that a spike in the level of pain or pleasure shortly before the purchase decision is likely to directly affect the purchasing decision that the consumer is likely to make soon after. In Thinking fast and Slow (2002), Kahneman and Kunreuther describe how victims and near victims of natural disasters or accidents such as earthquakes or an attempted burglary, display an inherent need for protective action despite the probability of the event reoccurring being very low. They describe ‘ after each earthquake, Californians are for a while diligent in purchasing insurance and adopting measures of prevention’ such as making a hiding place in the baseman in the case of a tornado, tying down the boiler to reduce quake damage and even sealing baseman doors against floods (Kahneman, 2011, p.136). In conclusion to our findings, indications are that applied consumer behavior is in fact a qualitative science more so than it is a qualitative art. We can say this in light of the many certified and approved experiments conducted by the likes of Tversky and Kahneman who have conclusively provided added knowledge in terms of how we think of ourselves, and how we perceive our environments. The conclusions we can bring to the issue of microeconomics as related to consumer behavior is that 4TH DECEMBER 2013
- 6. BADIBANGA SAM APPLIED CONSUMER BEHAVIOUR MR WHITE bounded rationality and heuristics require that we deviate from the indiscriminate and generic modeling offered by classical economists which fail to account for the complexities of the mind of Man, first as an individual, and second as an accurate representation of the typical economic man. The point where observers draw conclusions on this subject and make new discoveries on the workings of the mind, inherently implicates that the conclusions made following experiments and data analysis will themselves be colored by some measure of intuition, heuristics and subsequent ‘non-rationality’. We must not forget that the observers are the same as the observed. At this point Consumer behavior takes on the banner of quantifiable art; yet we must recognize the important and scientifically proven findings to give rigidity and relevance to the field, as something that people can trust. 4TH DECEMBER 2013
- 7. BADIBANGA SAM APPLIED CONSUMER BEHAVIOUR MR WHITE WORDCOUNT: 2455 REFERENCES Gilovich T, Griffin D, Kahneman D (eds). Heuristics and Biases: The Psychology of Intuitive Judgment. New York: Cambridge University Press, 2002. Kahneman D, Tversky A (eds). Choices, Values, and Frames. New York: Cambridge University Press, 2000. Kahneman D, Slovic P, Tversky A . Judgment Under Uncertainty, Heuristics and Biases. New York: Cambridge University Press, 1982. Kahneman D (2011), Thinking Fast and Slow, New York: Farrar, Strauss and Giroux. Tversky A, Kahneman D. The framing of decisions and the psychology of choice. Science, 1981; 211: 453–458. Risk Analysis: AN international Jouranl (author) , 1st July 2012 , vol. 32, No.7 Daniel Kahneman: How we think we choose by Michael Greenberg and Karen Lowrie, The Open University Library (accessed on 2/ 12/13) White A (2013), Time for an Economic Rethink, (blog) available at: pm.solutions.com, accessed on 28/11/2013. 4TH DECEMBER 2013