Wednesday, March 7, 2012

How To Understand The Notoriously Irrational Consumer

Companies put in lots of Market Research efforts to nail down the needs, wants, wishes and whims of the elusive consumers. But, how reliable are the results? Are there logical – or illogical – reasons why consumers sometimes say one thing and still do the other? In this blog, Bengt Järrehult uses the findings of Daniel Kahneman, the Nobel Laureate in Economy 2002 to understand more of this in the area of innovation.

Sometimes we come up with an invention which we believe is a no-brainer. It is a "sure winner, the innovation of the year", but later we are surprised that it is not appreciated at all on the market as it was internally within the company. In other cases we conduct thorough Customer Preference Tests (CPTs), just to find when the real launch is made –there is a totally different reaction from the market than the CPT earlier indicated. Why is this so? Well, it may be due to the Endowment Effect and the Status Quo Bias. Two effects coined by the Nobel laureate in economy 2002, Daniel Kahneman, who actually was a psychologist (!), not an economist….

The Endowment Effect

You overvalue what you are given by roughly 3 times.

You overvalue what you are given by roughly 3 times.

In this case a test was conducted where one group of people was given a sum corresponding to 15 dollars and told to keep the money for a week, but they were not allowed to spend it. They borrowed the money under the condition that it be used in a game. A second group was given a coffee cup and urged not to use it. After a week the first group was told that they were to buy a coffee cup looking like the one the second group had received – and they were to write down the price they thought was fair for this cup – they should buy it for that price and give the rest of the money back together with the cup they purchased. The average sum corresponded to 5 dollars. The second group was told that they should sell their cups and that they could not keep the money. The average sum they appreciated for the cup was 14 dollars.  This shows that you overvalue what you are given ~3 times.

The Status Quo Bias

You overvalue what you have and your final choice is not reflected by your initial preference.

You overvalue what you have and your final choice is not reflected by your initial preference.

A group of 100 persons was presented with a choice of getting coffee cups or chocolate bars, both roughly worth the same. About 50 persons chose the cups, the other 50 chose the chocolate bars – although there was an abundance of both. Therefore, the preference was 50% for each choice. Another group of 100 new people, but from the same population, were divided in 2 groups of 50 each and they were not given the possibility to choose, but the cups were given to the first group of 50 and chocolate bars were given to the second. We then learned that 25 persons in each group (50%) was not satisfied with what they received.

After 1 hour the groups were asked whether they would like to change to the other option, but only about 15 persons (30%) of each group wanted to change, not 50% as would have been expected.  When the question was asked 1 week later only 1 %, not 50%, wanted to change.

Two lessons learned

  1. Consumers overvalue what they have or have been given  (are you surprised??)
  2. The Consumers' final choice was not reflected by their initial preference. Although they actually stated they wanted to have something else in the beginning, e.g. a cup, they got strongly attached to what they were given instead, the chocolate bar. Therefore if a customer survey would have been carried out and a product  development of coffee cups was made based on the outcome of that survey – we would have developed the wrong product.

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