Research paper: Are we rational when we make buying decisions?

Melanie goes out and buys a dress. After so doing she pops into a coffee shop and meets a friend. They choose to share a pot of tea. On the way home it starts to rain so she hails a taxi. That evening she explains to her spouse, Tom, that the dress will be perfect for the office party. He pays little attention, but carries on searching online for the perfect pair of wading boots for his fishing trip.

In order to address the question of which psychological processes could be involved in buying the dress, choosing the tea, hailing the taxi or selecting the waders, and to determine how rational the buyers are, we have to:

Having done so, we will then look at which of the set psychological processes are involved in intentional buying, and then establish the extent to which the buyer can be said to be rational.

Psychological Processes

Stimuli trigger the mind to go through various steps resulting in behaviour. Those steps involve some or all of the following psychological processes: sensation, perception, learning, memory, language and thinking, (McLeod, 2015). The resulting behaviour manifests itself in a variety of ways: attitudes, beliefs, emotions, moods, judgements, actions and choices. The task of this paper will be to determine which processes impact an individual’s behaviour as a consumer.

Rationality

An economically orthodox model of rationality generally includes one or more of the following assumptions, (Blume & Easley, 2008) (Stigler, 1987):

This paper will firstly explore the psychological origins of a consumer’s perception of their own best interest, (or utility) on which economic orthodoxy is wholly silent. It will then look at how consumers make purchases of goods or services, and identify which psychological processes are involved. It will then go on to see if either the preferences or the decision-making processes to express those preferences could be said to be irrational.

Sources of utility

A consumer making purchasing decisions will be driven by their perception of their best interest, or expected utility, at the moment of considering the decision. But where does that perception come from, and what psychological processes are involved? We will look at the impact of personality, culture, social influence, persuasion and affect.

Personality

Marketers frequently segment potential buyers in order to tailor their pitch effectively. The most common segments are along economic, social and demographic lines defined by the likes of age, gender, profession, income, wealth and related factors such as post-code. The alternative approach, sometimes called “psychographics”, is to segment consumers using psychological variables including personality. The presumption is that personality will be a determinant of preference. In a study by Sandy, Gosling and Durant around 48,000 consumers were profiled demographically as well as according to the “big five” traits commonly used to describe human personality: extraversion, agreeableness, neuroticism, openness to new experience, and conscientiousness, (Costa, McCrae, & Dye, 1991):

But what about brand choice, (i.e. Toyota versus Ford) as opposed to product choice (minivan versus sports car)? One idea is that consumers invest brands with a “personality”. Then it may be that they choose brands according to how their own personality and the brand personality align, in the same way that people like those with similar personality profiles, In a study at Warwick University, Huang et al measured 468 participants’ own personality using the five factors above, and had them assign personality characteristics to their favourite brands. The study concluded that buyers tend to prefer to use brands that chime with their own personalities. (Huang, Mitchell, & Rosenaum-Elliott, 2012) This could be because products are seen as a form of expression of personality, or it may be simply that buyers like brands with similar personalities to themselves. Personality therefore does seem to play a significant role in both product choice and brand choice, though maybe more so in the latter than the former.

Culture

Along with personality societal culture may play a significant role in determining preference; (there’s an interesting debate about whether culture forms personality, or personality creates culture, but that is beyond the scope of this paper). The culture of a group and be characterised in three dimensions; values, symbols, (i.e. material items, rituals, artefacts) and links, (i.e. language, jargon, gestures, as well as means of communication), (Sojka & Tansuhaj, 1995). Culture is typically thought of nationally, but there are identifiable micro-cultures in regions, cities and class, and meta-cultures that transcend nations such as diaspora, ethnicity, and profession. (Craig & Douglas, 2006). Irrespective of the definition of a cultural group, one of the key elements of culture is its shared values. There a various frameworks to define cultural values, but one of the most commonly used is Hofstede’s, which measures the following dimensions:

The implications of for consumer decisions are complex, as with personality, but it seems that, for instance attitude to uncertainty drives willingness to use the internet for shopping (Al Kailani & Kumar, 2011). Similarly, a study of Korean and Chinese consumers found that the former valued social image given minimum quality standards, whereas the latter were more focused on experiential image, (Kim, Forsyth, Gu, & Moon, 2002).

Social influence

Culture is a driver of preference, but within that social influence can arise in a number of different ways. Partners or groups influence consumers in a number of ways as consumers will make their decisions in a social context, not in a vacuum, (Wood & Hayes, 2012).. There are several ways in which others’ influence may influence buyer’s preference:

Information; consumers may look to social groups, (friends, colleagues, family, neighbours), for information about a product’s quality, price, usefulness, dimensions. The influence of the group will likely be greater if it possesses some sort of expertise.

Reference groups; a social group can confer positive or negative associations on a product. If a group the buyer is (or aspires to) feel a member of likes a product, then that product takes on positive meaning. By contrast, if a group that the buyer wants to distance themselves from likes a product, that can cause negative meaning.

Relationships; consumers are likely to take account of the views and wishes of their romantic partner in setting their own preferences.

The role of affect

Consumers come to the market with their own preferences a function of their personality, their culture and the social influences around them. These preferences are not fixed, but change as the relative importance of these factors change in a given situation. And one of the forces than can determine the particular constellation of preferences at a given pint in time is affect. A buyer’s mood or emotion can have an impact on preference in three ways: affect as target, as information or as process.

Persuasion

So far we have looked at how consumer preference arise as a result of personality, culture, social influence and affect. But there is also the deliberate attempt to influence preference from suppliers. Advertising, marketing, product placement and all their derivations are designed to persuade the consumer to change preferences. Marketers use several techniques to persuade consumers, and these generally try to target one of the sources of preference already outlined. Cialdini provides a useful list, (Cialdini, 2001); liking, reciprocity, social proof, consistency, authority and scarcity. Consumers may find their buying preferences influenced because they like the supplier which taps into personality and culture; because they feel the need to reciprocate a favour, which taps into social influence, as does the use of social proof; because they want to be consistent with previous decisions, which is about identity; because they accept the authority of a third party, which again taps into social influences. The use of scarcity as a means of persuasion is not related to preference setting so much as to creating a sense of urgency and about the ability to meet that preference.

Consumer decision making

Having explored the sources of psychological preference – personality, culture, social influence, affect – and shown how marketers target those processes to try to influence consumers, we now turn to see how consumers actually make decisions to reflect those preferences.

Structured strategies

Consumers generally want to achieve various goals when making a purchasing decision. The want to make a good decision; i.e. they likely want to to be accurate (in the sense that they don’t want to overpay, or buy something they don’t value). They most likely want to minimise cognitive effort in making a decision. (Bettman, Luce, & Payne, 1998).

A consumer confronted with a purchasing decision will thus start to weigh-up the attributes of the product or service. The amount of energy and time put into the process will be a function of the importance and the irreversibility of the decision, (ibid); the more important and the less reversible the effort a buyer will likely put in. Consumers have a number of strategies that they could deploy, and the strategy brought to bear will depend upon the nature of the choice being made in various dimensions: the number of options available, the certainty of information about the attributes of an option, the extent to which options can be traded-off against one another (horsepower versus safety in a car, for example), and whether options are even in the same category, (dinner at the Gavroche or a smart TV, for example). Consumers will create a strategy to match the task from one or more of the following, (Bettman, Luce, & Payne, 1998):

There are ever more complex strategies in the literature, and consumers may use more than one serially or in parallel. The nature of these strategies is that they can make heavy demands on intellectual processing skills and working memory, and also imply the existence of reliable information about attributes. They are, however, rational. But rationality has its limits, and consumers may come up against those limits when trying to make a choice.

Bounded rationality

The economic orthodoxy of maximising expected utility requires that consumers act rationally, and hence the decision strategies outlined above. But such approaches struggle to cope with real-world problems such as risk, uncertainty, incomplete information and complexity, (Simon, 1972). Decision strategies can, to an extent, be modified to deal with the problems as follows; with risk by weighting outcomes by their probability, with uncertainty by assuming probabilities of outcomes, with incomplete information by approximation, and with complexity by ascribing a cost of simplification. These modifications, however, still make significant cognitive and memory demands on the buyer, and thus run the risk of failure.

Cognitive bias and the use of heuristics

Particularly in the face of risk, uncertainty, incomplete information and complexity consumers are subject to fallibility in their decision-making. There are plenty of instances where reason can let us down. Some classic examples of cognitive failure are, (Gilovich, 1991):

To think through a choice rationally, (even subject to the bounds of rationality and cognitive bias) is to engage an analytical, thoughtful and considered approach to the problem, or system-2 thinking. By contrast, consumers may make decisions using system-1 thinking, in other words swift, instinctive and heuristic, (Stanovich & West, 2000). When using system-1 many factors come into play that are on the face of it not connected to the maximisation of expected utility.

Under economic orthodoxy the end-state of owning an asset is what counts, no matter how one has travelled to that state. But contrast the investor who has invested £1,000 and ended up with £1,200 with another who invested £2,000 and ended up with £1,500. Just by comparing end-states, the latter’s position has greater “utility” than the former. However, the former is probably more content with the outcome than the latter. This insight gives rise to prospect theory (Kahneman, 2003). Its conclusion is that decision-makers do indeed take account of their starting point – the endowment effect – and that consumers feel the loss of something they own far more than gaining something they don’t. Similarly, the way a choice is framed can make a huge difference. If purely focused on expected utility then responses to, for instance, organ donation should not vary as a function of whether people have to opt in or opt out. But the different way the choice is frames has a significant impact; countries using opt-in systems see 18% enrolment, those using opt-out see 97%, (Kahneman, 2003).

Our reliance on heuristics to solve problems in decision-making seems pervasive, and the literature has a rich mine of examples of cognitive failures in perception, choice and judgement. Sometimes we spot that we are being slapdash, but generally we need some sort of prompt so to do. System 2, however, tends to lie dormant especially if we are distracted, under time pressure, or in a cheerful mood.

Evolution and cognitive fallibility

An interesting question is whether the intuitive use of heuristics is shared with other species. If so, it might be that there is an evolutionary justification of what look to economists like cognitive failure. In a series of experiments involving setting choice tasks to various primates, Laurie Santos and Alexandra Rosati found evidence that we share with them biases such as framing, the endowment affect, loss aversion and peak-end heuristics. They suggest that an animal’s version of utility maximisation should be understood in terms of maximising the chances of survival and reproduction relative to the competition. If you are a hungry chimp, the value of an immediate food source may well trump waiting for a longer-term gain. (Santos & Rosati, 2015). So it may be that our fallibility as rational decision makers has a biological or evolutionary origin that helps survival and reproduction, but doe not necessarily fit in with the rational decisions based on maximising of expected utility.

How rational is the buyer?

The consumer will have a set of preferences, and make decisions to express those preferences. The psychological processes involved in setting preferences include personality, culture, social influence in a number of forms, and affect, all manipulated to a greater or lesser degree by marketing techniques deployed by suppliers. Does that fact that the buyer is subject to these forces make them rational or irrational? In the narrow sense of rational decision-making theory in the context of orthodox economics, the answer is neither. The fact that Melanie wants a dress and Tom wants waders is simply an expression of preference.

When Tom looks on-line at the offerings of waders he may bring a coherent decision-making process to the task, weighing up the various types and brands using an approach depending on the quality of information available, his patience for exploring more options and the time available. When Melanie chooses her dress, all sorts of social and personality issues create her preference, and her decision-making strategy will try to meet as many of her requirements as possible. It is possible that either Tom or Melanie fall prey to a cognitive fallibility, and breach strict rationality, but to do so my be biologically coherent.

In conclusion, therefore, we can suggest that the formation of underlying preference is neither rational nor irrational – it is the result of a balance of psychological processes combining in different degrees at a particular point in time. The buyer will then typically attempt a rational process to make a given decision, but because of the bounds of rationality, (i.e. risk, uncertainty, the lack of information and complexity) they will have to make simplifications. And in some instances the heuristics they deploy may create a cognitive fallibility that breaches classic rationality.

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