Friday, October 30, 2009

Consumer Behavior Analysis - Part - 2

In the second lecture, Mr Thaler,  progenitor of behavior economics and esteemed professor at Chicago Booth decision research center, opened-up the discussion with a concept. He orchestrated a website (conceptually) that would read disclosures from various companies like credit cards and cell phone companies. The website will be a hub to research and select best service or product per individualized needs. His assumption was that every company should provide two electronic files as a part of disclosure. One that would enlist under what conditions will the fees be charged and give all the formulas for how fees will be calculated. The second would enlist all the charges levied on that customer's account. These files together will be crunched by the website to analyze customer's usage. Further, a compiled list of disclosures from various companies would allow the website to suggest which company would better fit a particular customer's needs. cool, isn't it? But, wait a minute...

Who is going to enforce that companies provide this disclosure? Even if government regulates this, who will ensure that disclosures are comprehensive and meet a particular standard. Fine, these problems are easy. But, why companies would not try to obscure? After all, they are there to make profits!

To this, Mr Thaler argued that market will ultimately regulate these companies. Citing example of Amazon and eBay, he stressed that if this website's CEO is smart and a company tries to camouflage information or refuse to cooperate, then this website can put a black spot against this company. Nobody wants to lose customers that way. But, questions were raised about brand reputation and trust that a brand builds over the years. Why would someone believe this website when he has 4 to 5 years of experience with this company. Mr Thaler then took the discussion into a broader arena stating, its interesting when is it in the interest of companies to obscure information and does that help or hurt customer. Companies are driven by repeat business. After several discussion around why hotels do not state parking charges etc the discussion took a different direction.

What is perceived value of a product and how to evaluate historic value of a product? Historic value is the value of the product at the time of purchase when it has been experienced by customer for some time. This is where all the reviews on a company or products come into picture. Imagine a genuine customer goes to Bestbuy to buy a digital camera. He is flooded with options that he do not even know how to comprehend, bar compare. It is often seen that consumer would buy a product that has more options than the one with less. He uses them or not is a separate story. There were other examples of how consumer creates a translation of features that can't be valued and everyone has his own translation. Further, it was demonstrated that the sequence in which the features (choices as well) are presented to the customer decides if he is going to chose this product or not.

The gist of the story was that when you buy products, you should look for options that matters to you most and then compare them and that is it. You should try to eliminate products one by one and not zero down to few and then chose one. Make a list of your must haves in sequence. Then, if you want something and this product is less in that feature than the other, drop it!

Sunday, October 25, 2009

Sway - Irresistibly Irrational Behavior

We all get swayed by our beliefs, prejudices and the way we perceive situations around us. We form believes from our life experiences and use those believes to assess our surrounding. For example, we often leave items on sale just because the price is too low. This is driven by our inner feeling that reduced items are often defective or not liked by many.We sometimes even pick the item, like it, but then get swayed thinking that it on sale so there has to be something wrong with it. I myself value clothing based on its brand. A CK shirt has to be good but Aeropostale...I tend to wear it at home. This is an irrational behavior as there are plenty of companies who manufacture equally good products as known brands and tag them much lower. The end result is that I usually pass those items paying extra for the same quality to CK.

Other situations that sway us frequently relates to avoiding short term loss. We frequently cross road on yellow light or change lane quickly to save few seconds. This results in getting a ticket, higher insurance for few years and in some cases collision and loss of life. A similar situation is sticking to a sinking stock that you recently purchased. We all tend to wait for it to re-bounce to atleast the original purchase price. In this chase, we disregard pieces of information that are clearly indicating that this is a loser stock now. As the stock goes down further, we think that its going to come back to the value it was sitting when you made the nasty decision of keeping it for now. The desire to recover loss does not end until no value is left in the stock.

In all the examples above, the point is that we form instincts that become hindrance to our rational thinking. We take decisions in the influence of such instincts, disregarding facts and information that may be indicating otherwise. Such a behavior leads to making wrong choices. When we have to decide, we should take a long term view and see how the decision/choice that you are about to make fits into the long term view. Imagine you had sold the stock when it lost $2 to purchase something that gained $3 in next couple of weeks when your stock lost another $4.

Checkout this book: Sway: The Irresistible Pull of Irrational Behavior

Friday, October 23, 2009

Consumer Behavior Analysis - Behavioral Economics?

Prof Richard Thaler from Booth school of business gave a very good lecture on why study of consumer behavior is important to understand economics. He further explained how feedback and choice architecture streamlines what consumers choose. Some of his examples, such as a thermostat that tells you how much more it is going to cost per degree change in temperature or a glowing bulb that tells you how much energy you are using, are intriguing. I also liked the idea of credit card machines. I think these examples provoke thoughts around general problems around us and economically viable solutions for them.

The basic idea is to understand the best interest of consumers and markets together and develop policies (choice architecture) around it. Consider the choice of donating organs example. If you provide a choice to the survivors of a person, they are likely to override the default option beating the whole purpose of default (of having more donations). Making a decision clear at some point (at the time of issuing drivers license for organ donation example) helps.

I was not very convinced with the solutions provided for dealing with compliance with medication. Even though non-adherence to some treatment schedules could be impacting all of us (like antibiotic or TB treatments), I don't think a lottery or false alert alone are the solutions. I think a pill box that can learn patient's behavior and present a combination of these (i.e. false alert, incentive or just a reminder) could be one expensive solution. Another way could be that the doctor enforce a choice when patient is diagnosed i.e. a box with particular attribute is given to the patient based on doctor's perception of the patient behavior. I think making doctor a choice architect may work.

Read the full story here:

Thursday, October 22, 2009

Free MBA Application Resources

1. A collections of comments (in order) on essays from Stacy Blackman, Adam Markus, Clearadmit, veritas prep,
2. Readability Check with
3. Improve your bschool essays with
4. School Visits and Interview Sections on above mentioned websites
5. Gmatclub

Most Importantly, school's student body / alums. Contact them early and request them to review your crap...

Wednesday, October 21, 2009

Decision Theory

So, how do you feel about this: If you are an atheist, you are at loss.

According to Pascal, if God exist then the rewards of believing in God are numerous (contrary to not believing). If he does not exist, then neither theist nor atheist lost or gained anything.

Confused? Well, I was more confused when I started to read about decision theory. I am not going to get into lecture on decision theory (I'll not be able to anyway). But, I learned that decision theory is about making a choice (Decision!) under uncertainty.

Today I felt as if I usually make wrong judgment calls - joining a start-up right before economy started to doom or selling dollars after $ moved from its 52 week high!  When I look at the other side of it, benefits from joining start-up (not going into personal details) were huge too. But that good feeling that comes when benefits are availed has passed. Now, challenges of a start-up (bench time, furlough days) are beefing up and throwing me back to the days when I made that choice.

As per veterans, decisions should be well informed. However, most of the times decisions are to be made in uncertain circumstances. I recently read Micheal Useem's book "The go point". The book clearly delineated the process of making decisions with illustrations and practical examples and is a must read. However, now I am looking for something that can tell me how to evaluate decisions you took five or ten years back. Lets see what decision theory has in its kitty...