Teck H. Ho

Modeling the Psychology of Consumer and Firm Behavior with Behavioral Economics

Marketing is an applied science that tries to explain and influence how firms and consumers behave in markets. Marketing models are usually applications of standard economic theories, which rely on strong assumptions of rationality of consumers and firms. Behavioral economics explores the implications of the limits of rationality, with the goal of making economic theories more plausible by explaining and predicting behavior more accurately while maintaining formal power. This article reviews six behavioral economics models that are useful to marketing. Three models generalize standard preference structures to allow for sensitivity to reference points and loss aversion, social preferences toward outcomes of others, and preference for instant gratification. The other three models generalize the concept of game-theoretic equilibrium, allowing decision makers to make mistakes, encounter limits on the depth of strategic thinking, and equilibrate by learning from feedback. The authors also discuss a specific marketing application for each of these six models. The goal of this article is to encourage marketing researchers to apply these models. Doing so will raise technical challenges for modelers and will require thoughtful input from psychologists who study consumer behavior. Consequently, such models could create a common language both for modelers who prize formality and for psychologists who prize realism.

Individual Differences in EWA Learning with Partial Payoff Information

We extend experience-weighted attraction (EWA) learning to games in which only the set of possible foregone payoffs from unchosen strategies are known, and estimate parameters separately for each player to study heterogeneity. We assume players estimate unknown foregone payoffs from a strategy, by substituting the last payoff actually received from that strategy, by clairvoyantly guessing the actual foregone payoff, or by averaging the set of possible foregone payoffs conditional on the actual outcomes. All three assumptions improve predictive accuracy of EWA. Individual parameter estimates suggest that players cluster into two separate subgroups (which differ from traditional reinforcement and belief learning).

How "Psychological" Should Economic and Marketing Models Be?

The authors discuss the potential of making the recently developed behavioral economics models even more “psychological” by (1) increasing their context specificity, (2) allowing different people to have different model parameters, and (3) capturing the underlying psychological processes more explicitly. They show that some of these models already make room for understanding context specificity and heterogeneity, and they discuss new ways to enrich the models along those two dimensions. The task of adding process details is more challenging in simple mathematical forms because these models must serve as building blocks for aggregate market models.

Choosing Among Residential Options: Results of a Vignette Experiment

Older people who experience declining health are often faced with difficult decisions about possible residential relocation. The research aim was to determine how five distinct dimensions—functional status, features of current housing, social networks, features of retirement communities, and financial considerations—affect decisions to relocate to a retirement community. A vignette experiment with a factorial design was conducted involving both older people and adult children who were concerned with an aging parent. Use of the Internet for administration of the experiment made it possible to deliver information to research participants through video clips. Research participants were influenced by each of the dimensions; however, functional status of the vignette persons had the greatest impact, and financial considerations the least. Adult children were more likely to recommend moves than were older people. The research is suggestive of the potential for use of vignette experiments for a fuller understanding of relocation decisions.

Using the Internet to Administer More Realistic Vignette Experiments

This article illustrates an innovative method of administering stated choice studies (or vignette experiments) using computers and the Internet. The use of video clips to deliver information to research participants makes vignettes more realistic, helps to engage interest of research participants, and can reduce framing effects. The method also provides research participants with interactive options before making judgments. A study to determine the views of older people regarding residential options is used to illustrate the method. Even older people with limited experience in using computers participated successfully. The study findings showed that research participants responded both to the audiovisual characteristics of vignette persons and to the variables in the vignette structure.

individual learning in games

Economic experiments on strategic games typically generate data that, in early rounds, violate standard equilibrium predictions. However, subjects normally change their behaviour over time in response to experience. The study of learning in games is about how this behavioural change works empirically. This empirical investigation also has a theoretical payoff: if subjects’ behaviour converges to an equilibrium, the underlying learning model becomes a theory of equilibration. In games with multiple equilibria, this same model can also serve as a theory of equilibrium selection, a long-standing challenge for theorists.

Trust but Verify: Monitoring in Interdependent Relationships

For organizations to be effective, their employees need to rely upon each other even when they do not trust each other. One tool managers can use to promote trust-like behavior is monitoring. In this chapter, we report results from a laboratory study that describes the relationship between monitoring and trust behavior. We randomly and anonymously paired participants (n=210) with the same partner, and had them make 15 rounds of trust game decisions. We find predictable main effects (e.g. frequent monitoring increases trust behavior) as well as interesting strategic behavior. Specifically, we find that anticipated monitoring schemes (i.e. when participants know before they make a decision that they either will or will not be monitored) significantly increase trust behavior in monitored rounds, but decrease trust behavior overall. Participants in our study also reacted to information they learned about their counterpart differently as a function of whether or not monitoring was anticipated. Participants were less trusting when they observed trustworthy behavior in an anticipated monitoring period, than when they observed trustworthy behavior in an unanticipated monitoring period. In many cases, participants in our study systematically anticipated their counterparts untrustworthy behavior. We discuss implication of these results for models of trust and offer managerial prescriptions.

New Product Design Strategy Analysis: A Modeling Framework

The development of new products inevitably leads to tradeoffs among product performance, time to market, and development costs. In addition, the unit cost of the product, which is determined by the product performance, is also affected by the design process. In this paper, we present a model framework that examines the interaction of these factors. We derive several managerial insights that have important implications for new product strategy planning. The model framework is applied to evaluate five industry practices: 1) the traditional approach (iterative), 2) the target costing approach, 3) the target performance approach, 4) the target timing approach, and 5) an approach based on minimizing break-even time. Each practice is a restricted case of an optimal procedure which considers all factors simultaneously. Our model framework allows us to benchmark each practice against the optimal procedure with respect to the size of the development team, time to market, new product performance level target, and unit cost of the product.