Decision making and the brain
Ask catalog or Internet retailers what a return cost them, and they will likely be able to cite some very specific numbers reflecting shipping costs, processing labor, damaged packaging, and so on. But it turns out there’s a specific value that customers apply to returns, or, more accurately, the OPTION of returning a product. That value varies by the type of product, the product price, and other factors. […]
If the late Nobel Laureate Herb Simon were still around, I’m sure he’d be fascinated by neuromarketing. He did a lot to explode myths of human behavior, notably that people always behave in a rational, utility-maximizing, manner. I never met Simon during my student years at Carnegie-Mellon (though I did serve on a committee with his frequent collaborator, Allen Newell). Nevertheless, Simon’s diverse interests – artificial intelligence, computer science, cognitive psychology, management theory, sociology, and economics – make him a sort of patron saint of neuromarketing and neuroeconomics, at least for me. […]
One of my favorite chapters in How We Decide by Jonah Lehrer is The Brain is an Argument. In this chapter, Lehrer highlights how complex our decision-making process really is, and how competing options battle for supremacy. […]
As the current financial chaos moves toward some kind of resolution, there will no doubt be plenty of Monday morning quarterbacking to explain what went wrong. One group that one wouldn’t expect to have explanations are neuroscientists. As it turns out, neuroscience researchers actually can shed some light on why things went so wrong.
One of the first questions that everyone asks is how so many seemingly intelligent people could make so many errors in judgment. One simple answer, of course, is greed – at least some individuals saw a way to profit personally by making poor business decisions (loaning money to people unlikely to be able to pay it back, insuring such loans, rating securities based on these shaky loans, and so on). While there’s little doubt in my mind that personal interest was the biggest underlying factor, systemic factors and even biology likely played a role. By systemic factors I mean the way many of these markets were structured. Writing a shaky loan sounds like a bad business decision, but if there are buyers for loans of this type perhaps it really isn’t a bad decision for the originator. But, on to the brain science… […]
I’m a sucker for discounts. Show me something that costs $50, tell me I can have it for $25, and my hand will be reaching for my wallet while my brain is still trying to figure out whether I need the item at any price. Most of us respond that way – our brains are wired for it. Part of this effect is that the regular price is an anchor (see Anchor Pricing Strategies), and the discount price is a little voice in our head screaming, “bargain!”
Some dusty research at Ohio State shows that discount pricing isn’t always an unadulterated blessing. Beyond the obvious fact that it reduces profit margins, and that it might create a new, lower price anchor in the minds of customers, discounting can reduce customers’ enjoyment of the product! […]