Behavioral Decision Theory and Behavioral Economics

Consumers don’t always process information or make decisions in a deliberate, rational manner. One of the most active academic research areas in marketing over the past three decades has been behavioral decision theory (BDT). Behavioral decision theorists have identified many situations in which consumers make seemingly irrational choices. What such studies reinforce is that consumer behavior is very constructive and the context of decisions really matters. The work of researchers has also challenged predictions from economic theory and assumptions about rationality, leading to the emergence of the field of behavioral economics.⁴¹ Here, we review some issues in two key areas: decision heuristics and framing.

Decision Heuristics Consumers often take “mental shortcuts” called heuristics or rules of thumb in the decision process. In everyday decision making, when they forecast the likelihood of future outcomes or events, consumers may use one of these heuristics.

• 1. The availability heuristic—Consumers base their predictions on the quickness and ease with which a particular example of an outcome comes to mind. If an example comes to mind too easily, consumers might overestimate the likelihood of its happening. For example, a recent product failure may lead consumers to inflate the likelihood of a future product failure and make them more inclined to purchase a product warranty.
• 2. The representativeness heuristic—Consumers base their predictions on how representative or similar the outcome is to other examples. One reason package appearances may be so similar for different brands in the same product category is that marketers want their products to be seen as representative of the category as a whole.
• 3. The anchoring and adjustment heuristic—Consumers arrive at an initial judgment and then adjust it—sometimes only reluctantly—based on additional information. For services marketers, a strong first impression is critical to establishing a favorable anchor so subsequent experiences will be interpreted in a more favorable light.

Framing Decision framing is the manner in which choices are presented to and seen by a decision maker. A $200 cell phone may not seem that expensive in the context of a set of $400 phones but may seem very expensive if other phones cost $50. Researchers have found that consumers use a form of framing called mental accounting when they handle their money, as a way of coding, categorizing, and evaluating financial outcomes of choices.⁴² The principles of mental accounting are derived in part from prospect theory, which maintains that consumers frame their decision alternatives in terms of gains and losses according to a value function. Consumers are generally loss-averse. They tend to overweight very low probabilities and underweight very high probabilities.