Consumer perception is dependent
on context. The way in which information is framed can affect a consumer’s
preferences in relation to the options available. In turn, this can lead to
consumer biases.

Framing can influence consumer
behaviour in the following ways.

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·        
Attribute
framing.
Consumers can react differently depending on how a product’s attributes are
described—for example, whether a fee is expressed in percentage terms or in
absolute terms. An administrative tax of 3.5% may be considered better value
than a charge of €100, even if the two are in effect the same. Attributes can
also have loaded meanings. Charges that appear to be externally imposed may be
treated differently (on fairness grounds) from those that appear to have been
imposed by the vendor. Likewise, if a product is described as being free of
charge’, this can elicit a positive emotional response. Imagine that the U.K.
is preparing for the outbreak of an unusual Asian disease, which is expected to
kill 1200 people. Two alternative programs to combat the disease have been
proposed. Assume that the exact scientific estimates of the consequences of the
programs are as follows:

“Gains” Frame:

If Program A is adopted, 400 people will be saved.
(72%)

If Program B is adopted, there is a one-third
probability that 1200 people will be saved and a two-thirds probability that no
people will be saved. (28%)

“Loss” Frame:

If Program C is adopted, 800 people will die. (22%)

If Program D is adopted, there is one-third
probability that nobody will die and a two-thirds probability that 1200 people
will die. (78%)

In this empirical example, one group of subjects
were asked to choose between Programs A and B. Another group choose between
Programs C and D. The percentages of program choice are indicated in parentheses
above. Note that Programs A and C yield the same final outcomes in terms of the
actual number of people who will live and die Programs B and D have the same
final outcomes too. If decision makers care only about the final outcomes, the
proportion of decision makers choosing A (or B) in the first group should be
similar to that choosing C (or D) in the second group. However, the actual
choices depend dramatically on whether the programs are framed as gains or
losses. When the problem is framed in terms of gains, the reference point is
the state where no lives are saved, whereas when framed as losses, the
reference point becomes the state where no lives are lost. In the “Gains”
frame, most decision makers choose the less risky option (A) while they choose
the more risky option (D) in the “Loss” frame.

·        
Anchoring
effects.
Anchoring is a specific framing effect in which consumers’ preferences, and in
future their appraisal of different available options, is affected by what is
presented as an initial reference point or anchor’.

·        
Salience
effects. Faced
with complex information, consumers may use as a reference point what they
perceive to be the most salient information available. They may focus on
upfront prices and ignore add-on fees; they may compare some features of a
product and ignore other important features (eg, looking at the megapixel
capabilities of digital cameras, but not the viewer size); and they may place
weight on the fees charged (eg, by pension providers) rather than on prospective
returns. Some of these are pure framing effects, while others also concern the
substance of the information provided (and relate more to decision-making).

·        
The
endowment effect.
Because consumers are often loss-averse (the endowment effect), the way in
which they respond to information can depend on the initial reference (anchor)
point, and on whether subsequent deviations from this reference point are
presented in terms of gains or losses. They value the same product more highly
if they already own it than if they do not yet own it.

 

Systematic biases in decision making

Over the
years, it has been possible to understand the nature of a number of these
biases – or deviations from rational decision making – which now support many
of the propositions of what has become known as ‘behavioural economics’. For
example, people have been found to have:

Cognitive limitations (‘bounded rationality’) –people cannot collect and process all the available information
potentially relevant to making a rational decision.

Consequent
behaviour:

·        
People simplify decision
making by adopting simple heuristics (or procedural rules-of-thumb); for
example, simplifying the problem by focusing only on price and style (ignoring
technical information).

·        
People may rely on the first
piece of relevant information they receive; for example, the first in a list on
a comparison website.

·        
People are influenced by the
way a choice is presented to them (framing) even when the alternative
presentations are equivalent; for example, preferring A over B based on the
quality and prices of the goods, but reversing this preference presented as
‘50% off’if B’s price is.

Biased beliefs – people
often act as if they distort objective information on probabilities

Consequent
behaviour:

·        
People
tend to place a greater weight on both very low probability events and on
certainty; for example, buying both lottery tickets and expensive insurance
that covers 100% replacement.

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