As marketing becomes more data driven there is an increasing need for models which can explain consumer behavior, develop recommendations for action and predict results. This has proven to be a difficult task because so much of consumer behavior seems irrational. For example, why would someone buy an article at full price knowing that in a short period of time it will be available on sale? Or why would someone buy an article at full price on the internet when it is available at a discount at a nearby store?
Richard Thaler (http://en.wikipedia.org/wiki/Richard_Thaler) provides an explanation of reasons why consumers make what appear to be unreasonable choices. He uses examples from various simulations to illustrate his points. He explains that the difference between what he calls "quasi rational economics" and classical economics is, at least in part, the result of substituting the concept of "values" for what has been classically known as "utility." The concept of "values" enables the inclusion of non-monetary variables into decision models. For example the weight given to either "pain" or "pleasure." Another difference is the inclusion of the context of the decision-maker. For example a decision regarding winning or losing $10 will be made differently by someone worth $10M than it will by an unemployed person with no income or assets. Another set of siituations are those with either forward looking or backward looking costs. One involvies "sunk costs," (when a person already has made a partial investment, say in buying a membership); another is "regret avoiidance" in which an individual reduces his future alternatives in order to avoid missing a clear opportunity (all-inclusive vacations are an example).
Many of the hypotheses of quasi rational economics have been tested and validated against data sets like stock market transactions and pari-mutual betting which have very defined start-and-stop periods.
Thaler indicates an interest in finding other types of data which might prove relevant over longer time periods. We are struck by the ability of quasi rational economics to explain consumer decisions involved in the multi-year process of developing and maintaining "life style." For example, having a livingroom already full of a certain style of furniture would represent a "sunk cost" for a consumer who is considering adding an additional piece. The prior choices (called "prior disposition") would heavily influence the current consideration. This might also relate to what Thaler terms "framing."
In a similar fashion the importance we have recorded in people's desire to avoid criticism or attention for making a choice would be analogous to "regret avoidance." Such factors would help explain the equivalent of "opportunity loss."
Regarding the initial example of a person choosing to buy now or wait and buy on sale, life style research has idnetified the explicit value of "trendiness" to which some consumers gives great weight (and get psychic pleasure) to having an article early in the fashion cycle. In any event, we are encouraged that our data and metrics may prove useful demonstrations of quasi rational economics. It certainly will provide a powerful economic explanation for why consumers maintain life styles.
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