Motivation :
Human decision making was considered to be rational by the Standard Theory of Economics. It was assumed that the consumer had an accurate idea of the worth of the goods and services he purchased and could accurately predict the amount of happiness each of his decision would produce. Researchers have shown, however, that the inherent rationality of human decision making is grossly overrated. We do not perform complex computations and apply logic before forming a judgement, rather we rely on certain shortcuts. These shortcuts, termed as heuristics, speed up the decision making process, but many a time, compromise on the accuracy.
We suffer the consequences of our irrational decisions on both the small and large scale. Unregulated capitalism and complacent dependence on the Invisible Hand of the free market gave us the 2008 financial crisis. It has been argued since, that government intervention in market is necessary, for the market is not always regulated by rational forces. Many a time, our simple decisions, made on a day to day basis, are erroneous. These errors in judgements are called cognitive biases.
Many heuristics and cognitive biases have been documented over the years. In my project, I explore the properties of the Anchoring heuristic and determine whether individual differences influence response to anchoring cues.
Background:
Consumers, when provided with initial information, tend to rely heavily on this initial input while making subsequent decisions. This phenomenon is termed as Anchoring and the initial input serves as an anchor in the decision making process. Marketing experts have time and again exploited this heuristic to their benefit as is illustrated in the following example.
The price of the iPhone, when it was launched in 2007, was $599. While rivals had advertised their new models as mobiles with upgraded features
, Apple projected the iPhone as some novel device, some sort of technology marvel. Steve Jobs, courtesy his presentation skills, had successfully imprinted this image on the consumer. The iPhone witnessed huge sales but interestingly and in violation of the conventional Law of Demand, Apple reduced the prices by one-third to $399. Sales sky rocketed. Apple did not suffer any loss even though prices were slashed. The initial anchor was set so high at $599 that selling the product at $399 was still a profitable deal. Consumers, overjoyed at the rate cut, ensured the increase in sales.
This strategy would not have worked for any other brand. Apple had ingeniously marketed its product as a novel device and consumers did not have any initial anchor to compare its price with when it was first released.
The anchoring heuristic was first theorised by Daniel Kahneman and Amos Tversky in 1974. Subsequently, a lot of research has been done on this concept. Researchers have also explored whether mood states and individual differences i.e. personality and intelligence affect our response to anchoring cues. My project aims to explore the effect of individual differences namely personality.
Human personality is divided into five broad domains in psychology. These are
Many tests exist which assess an individual's personality based on these five parameters. The gold standard for measuring these parameters is the 240 item NEO- PI-R (Revised NEO Personality Inventory). The Ten Item Personality Inventory (TIPI) is preferred in experiments, however,owing to the lengthy nature of NEO-PI-R.
Proposed Methodology :
The effect of individual differences on response to anchoring cues has been studied by two research groups. One group conducted two experiments and found that out of the five traits only openness to experience
seemed to affect response to anchoring cues. But this could be successfully demonstrated in only the first experiment and only partially in the second. The first group had used the TIPI test. The second research group used the NEO- FFI test to carry out the tests. Out of the five traits, they found only extraversion to have an effect on the response and that too in only one task. It can be seen, thus, that there is no unanimity in literature when it comes to this particular aspect of Anchoring.
In my project, firstly I am aim to study where and how the two research groups differed in their approach. I will attempt to figure out the reason behind the difference in results. Subsequently, I would be conducting my own set of experiments on a group of around 400 students and form my own conclusions based on the data collected.
References :