Choices under uncertainty: Shopper Vs Marketer

The marketer must think how a Shopper does. A Shopper rarely thinks the way a marketer does. If both think the same way, the world of selling would get transformed. Some algorithms of today are trying to get this sorted out.

The high priced dress in a fashion store, which is prominently displayed, has higher chances of getting sold than if the prices are dropped. The MIT scholar in his latest study reveals the mystery of ‘shoppers regret’; the shoppers have the habit of regretting a lost opportunity as they assume that the chances of a prominent dress being sold off is much higher and they would lose that opportunity if they postpone their decision.

No fashion store ever says, ‘limited stocks’. In absence of information people assume that every dress is unique. No one has ever seen two identical dresses displayed in the shop, but if one gets sold, it is replaced with the one that is locked in some cupboard. I have checked this by trying on a dress and finding fault with it, and the next one was instantly made available for trial.

Decision under uncertainty in this case is one of being biased, as most shoppers to fashion stores are, to the fact that the chances of sales is higher for branded items that are prominently on display. They also assume that fashionable items are not stocked with replacements. Postponing the decision to buy in this case will be a crucial one.

Some decisions are simply made without any single data point being verified; more than the absence of information, it is about the binary nature of mental action, almost resembling an ultimatum situation. More importantly if the loss aversion takes over, the decision becomes palpably more certain against the purported loss.

Kahneman proved with his probability weighting function, used in Prospect Theory extensively, that people put much higher weights to the low probability events and much lower weights to the high probability events when these events are almost impossible to predict or there is complete lack of information. This is one of the solutions of the St. Petersburg paradox.

Some marketers do better to influence this feeling of loss aversion. No one can do this better than the intermediaries selling airlines tickets or hotels doing on-line bookings. If there are twenty empty seats on a plane, it never gets published; then the chances of a quick booking will be that much more delayed.

I have never found a hotel advertising twenty empty rooms ever. On the contrary three to five rooms being available on a given day are a normal affair. They could be absolutely honest on both occasions. In the former (when the number of rooms vacant is not known) the absence of information could be construed as non-availability of rooms.

In the book, “The intelligent investor”, the best book ever written on investment decisions, Benjamin Graham in the section, ‘The New speculation in common stocks’, cautions us about the “speculators’ guise”, when it comes in form of advanced mathematics, to him elementary algebra and a bit of calculus is what should be sufficient to draw conclusions with. But he was very frank about the nature of uncertainty when more than the intrinsic factors, the factors extrinsic to the firm and the industry influence decision making. In the same section he has given the example of IBM trading at 7 times the book value, which had no reason to be so, but such was the nature of speculation as it was possible to speculate that much more in the air as future data on growth was fuzzy. This proved to be the starting point of a cascade for the entire technology sector stocks.

We have seen this happening in the dotcom boom and I remember one of the companies cited in the National Geographic covering the changing lifestyles related with the dotcom boom, where a company called Astral Systems, which almost had no revenues on their balance sheet was valued at the same level as a brick & mortar giant Goodyear Tyres, which perhaps took several decades to reach such a valuation.

When the future data is blurred, it makes a stunning case for extrapolation of the speculation based on herding around an idea which is not verifiable. Speculative drive is never backed with data that can be falsified. So the herd must follow the trend and bucking the trend in this case could be a risky strategy.

The choice of an individual on the other hand has a time dimension, if it was a purchase of an item from a store where the purchase is already intentioned, the time could be limited. When someone is looking at on-line stuff, the attention span to a specific item could be a matter of seconds and the connection must be made within that nick of time.

Some research on blogging has revealed that the heading of any article or discourse is what constitutes 75% of the decision whether a reader would go through the piece and the starting few lines constitutes the remaining 25%.

When we are confronted with a plethora of choices the attention to these are competing against each other. The renowned Choice Theorist Sheena Iyengar, was asked by me when she was here in India in December 2011, about this subtle tension between the limited attention span and the competing choices that could have a range of utility functions. She had written a full book, ‘The Art of Choosing’ on this very subject.

How does the excessive attention to the trivia sometimes vie against the obscure attention to the fundamentals? This balancing act becomes even more difficult when the mind is not enough conversant with the aspects of data and information that needs verification. The human tendency to get to the solution takes the better off finding the solution through a scientific process.

Here again the Kahneman example triumphs, in his concept of availability heuristic, the corner stone of his Prospect Theory. If the solution is easily available without a trouble, who will ever struggle to verify; this is where shoppers and marketers play, each on its own.