Decision Science News

MAKING INFERENCES ABOUT WHAT INTERESTS

Behavioral Targeting is the ability to deliver ads to consumers based upon their recent behavior viewing web pages, shopping online for products and services, typing keywords into a search engine or a combination of all three. “Interest-Based Targeting allows large-brand advertisers… to target more precisely the audience they are trying to reach with the message they are trying to convey,” said Randy Kilgore, vice president of advertising, The Wall Street Journal Online. A recent white paper (requires registration) out of the Wall Street Journal Online and eMarketer discusses this recent phenomenon in terms of what it might mean for today’s business to adopt such an approach to advertising.

ABSTRACT:

Behavioral targeting has been around, in various forms, since the late 1990s. Previous attempts failed due to problems with privacy and technology, but this generation of software appears more robust, and marketers seem more accepting. Today’s behavioral targeting can be done on individual Web sites, on networks and via adware applications. While behavioral targeting will certainly be a part of a smart marketer’s online arsenal, issues of privacy, data sharing and implementation will keep it from becoming a dominant form of advertising in the way paid search has become. However, behavioral targeting offers a compelling benefit to marketers: the ability to deliver relevant branding messages to a highly targeted audience.

QUOTES:

“The basic premise behind behavioral targeting is that what’s important for online advertising is not necessarily a page of content or a section of a Web site, but the actual person who is viewing and interacting with that content. Seen in that light, behavioral targeting could presage a shift in the online advertising, paradigm — away from the notion of buying “pages” and instead toward the idea of reaching “people”. Instead of buying ads that would appear adjacent to certain content, ads would instead appear only to someone who has demonstrated, through previous actions, that they are potentially interested. The end result, theoretically, would be a perfect economy, where no ad is wasted.”

“Earlier this year, Snapple ran an ad campaign on the iVillage Web site that tested behavioral targeting. The beverage company wanted to pitch its Snapple-a-Day meal-replacement drink to women who care about health and exercise. Using technology from Tacoda, iVillage pinpointed users who visited its Diet & Fitness channel three times within the past 45 days. Then, no matter where within the iVillage site these targeted visitors surfed, they were shown the Snapple-a-Day ads. By comparing those targeted visitors with a control group that saw the same Snapple-a-Day ads only on the Diet & Fitness channel, researcher Dynamic Logic found that the run of site behavioral targeting ads increased brand metrics across the board. For example, the behavioral targeting ads increased ad awareness by 51%, while content targeting resulted in only a 33% boost.”

“One behavioral targeting campaign, from American Airlines on the Wall Street Journal site, tracked readers of WSJ.com’s travel columns and features. Since the “one flight-a-year site visitor was the airline’s target,” as reported in Advertising Age, the “rich media, large-format ads, which featured testimonials from customers” were served across the site to those visitors who “spent time eyeballing a travel article on one occasion.” In this case, “Revenue Science made an educated guess that that person traveled once a year on business.” This example indicates how behavioral targeting may be used to pinpoint a group within a group. In this case, the American Airlines campaign narrowed the funnel not just to identify anyone reading travel articles—after all, visitors who read that section frequently might well be frequent travelers—but to the once-a-year business traveler. The campaign showed that audience composition was improved with behavioral targeting. Against especially high-frequency business travelers, audience composition increased 145%, according to Revenue Science. Brand metrics showed improvement, and in some cases, message association for targeted business travelers increased as much as 218%.”

“All the players involved in behavioral targeting take great pains to stress that they do not collect personally identifiable information (PII) in order to deliver advertising. This is one important distinction from some of the targeting systems of the past. However, behavioral targeting still inhabits some rather gray territory when it comes to consumer knowledge and acceptance.”

ABOUT THE AUTHOR:

Debra Aho Williamson is the senior analyst for the eMarketer research firm.

WHAT IS LOSS AVERSION?:

Loss aversion, or the tendency for people to prefer avoiding losses over acquiring equivalent gains, is a much-cited psychological concept receiving more and more attention in economic analysis. A recent article presents a behavioral definition of loss aversion and dicusses implications for original and cumulative prospect theory.

ABSTRACT:

“A behavioral definition of loss aversion is proposed and its implications for original and cumulative prospect theory are analyzed. Original prospect theory is in agreement with the new loss aversion condition, and there utility is capturing all effects of loss aversion. In cumulative prospect theory loss aversion is captured by both the weighting functions and the utility function. Further, some restrictions apply for the weighting functions involved in the latter model.”

QUOTES:

“It has first been proposed by Kahneman and Tversky (1979) in the framework of prospect theory, and later it has also been defined for choice under certainty by Tversky and Kahneman (1991). The popularity of loss aversion is due to the fact that it can explain many phenomena which remain paradoxes in traditional choice theory. Well-known examples are the endowment effect (Thaler, 1980), the equity premium puzzle (Benartzi and Thaler, 1995), and the status quo bias (Samuelson and Zeckhauser, 1988). In recent years loss aversion has also frequently been applied in behavioral finance (cf. Barberis et al., 2001; Barberis and Huang, 2001; Berkelaar and Kouwenberg, 2000a, b; Roger, 2003; Gomes, 2003). A further important aspect of loss aversion is the fact that it can resolve the criticism on expected utility put forward by Rabin (2000) and Rabin and Thaler (2001)who showed that reasonable degrees of risk aversion for small and moderate stakes imply unreasonable high degrees of risk aversion for large stakes.”

“Kahneman and Tversky’s (1979, p. 279) view of loss aversion is as follows: An individual is loss averse if she or he dislikes symmetric 50–50 bets and, moreover, the aversiveness to such bets increases with the absolute size of the stakes. This clearly is a behavioral concept defined entirely in terms of preferences. As such, the concept is model independent. Kahneman and Tversky (1979) showed that, in the framework of prospect theory, this definition of loss aversion is equivalent to a utility function which is steeper for losses than for gains. As probability weighting played no role in the derivation of this result, it appears that the effect of loss aversion is captured solely by the utility function. It is, therefore, not surprising that nearly all work on loss aversion employed utility as the carrier of loss aversion. For instance, Tversky and Kahneman (1992, p. 303) assume that utility is steeper for losses than for gains. Wakker and Tversky (1993) propose a preference condition based on a cardinal utility index independent of probability weighting. The latter condition has empirically been confirmed in a recent test in Schmidt and Traub (2002). In a review of non expected utility theories Starmer (2000) highlights the descriptive advantages of rank and sign dependent models, and summarizes loss aversion as utility being steeper for losses than for gains. Benartzi and Thaler (1995) view loss aversion as a property of utility exhibited at the status quo. This view is also adopted in K¨ obberling and Wakker (2003), where an index of loss aversion is defined as the ratio of the left and right derivative of utility at the status quo. All the previous conditions employ a comparison of utility differences between gains and losses of equal absolute size. In contrast Neilson (2002) suggests stronger conditions by dropping this symmetry requirement.”

“The way loss aversion is currently understood, it is essential to identify utility independent of probability weights prior to any analysis of loss attitudes. Moreover, given that most definitions of loss aversion are not formulated in terms of pref erences, it follows that loss aversion is no longer model independent. Since most studies mentioned above do not use original prospect theory but the modern cumulative prospect theory instead, their notion of loss aversion does no longer agree with the behavioral concept proposed by Kahneman and Tversky (1979).”

ABOUT THE AUTHORS:

ULRICH SCHMIDT
Lehrstuhl fuer Finanzmarkttheorie, University of Hannover, Germany. The research interets of Ulrich Schmidt are decision theory, public economics, finance and experimental economics. He has publshed more than thirty articles in journals like Management Science, Journal of Public Economics, Journal of Mathematical Economics, Journal of Risk and Uncertainty und Journal of Mathematical Psychology. He is member of the editorial board of Theory and Decision and officer of the Economic Science Association. Homepage.

HORST ZANK
“Horst Zank teaches at the School of Economic Studies, The University of Manchester, UK. Horst received his Master’s degree in mathematics from the University of Technology Aachen (Germany) in 1994. He was a PhD student at Maasticht University (the Netherlands) between 1995 and 1999. The topic of his PhD study was “Individual Decision Making under Risk/Uncertainty.” From Horst’s homepage at the University of Manchester.

TIME IS MONEY: TIME PRESSURE, INCENTIVES, AND THE QUALITY OF DECISION-MAKING

Do time pressure and time-dependent incentive schemes have an influence on the quality of decision-making in economics and finance? A recent discussion paper on strategic interaction out of the Max Planck Institute (series) investigates the effects of time pressure on the quality of economically relevant decision-making. In particular, the article address two research questions: (i) Is there a tradeoff between the quality of decision-making and time pressure? (ii) How do time-dependent incentive schemes affect the (possible) trade-off between the quality of decision-making and time pressure?

ABSTRACT:

“Many decisions in economics and finance have to be made under severe time pressure. Furthermore, payoffs frequently depend on the speed of decision-making, like, for instance, when buying and selling stocks. In this paper, we examine the influence of time pressure and time-dependent incentive schemes on the quality of decision-making in an experimental beauty-contest game. We find that convergence to equilibrium is faster and payoffs are higher under low time pressure than under high time pressure. Interestingly, time-dependent payoffs under high time pressure lead to significantly quicker decision-making without reducing the quality of decisions.”

QUOTES:

“Investment decisions – like trading stocks – are the prime example for the relevance of time pressure and time-dependent incentive schemes. Watching the floors of the New York Stock Exchange, for instance, convinces even the layman that trading is, typically, prone to severe time pressure, yielding the conclusion that there is not much time to decide in order to make money in some instances. But, more than that, time is money, because profits from trading (both for the principal investor and the agent trader) may depend crucially on the speed of the trader’s reaction to relevant new information…”

“Finally, consumers – the main decision-making agents in economics – often have to make decisions under time pressure. Think, for instance, of shopping a few minutes before shops close or participating in an auction. Some companies seem to be willing to exploit the existence of time pressure as part of their sales strategy by offering special discount prices for a typically rather narrow time period. Shopping TV-channels, like Home Shopping Europe (HSE), provide another example for deliberately inducing time pressure. When selling products with a limited number of available items (or at least, when the impression of scarcity of items is intended), the number of sold or still available items is updated and shown on the TV-screen after each purchase, thereby pushing consumers to make a quick decision if they are interested in the product…”

“Psychology offers several explanations for a negative influence of time pressure on the quality of decision-making. Time pressure induces subjects to rely more heavily on heuristics or so-called rules of thumb for decision-making in complex environments.6 It has long been established that such heuristics – even in the absence of time press – frequently result in systematic decision-making errors (Tversky and Kahneman, 1974; Wickens and Holland, 2000). Time pressure adds to the pitfalls of heuristics, because it prevents a thorough (and time-consuming) check of the internal logic of decisions and its consistency with the expected behavior of other subjects and because it induces subjects to focus on the most salient cues when making a decision, even if these cues are of no importance for the decision to be made (Wallsten and Barton, 1982). Besides affecting actual decisions, time pressure has also an influence on the willingness to gather information and process it before even making a decision. This phenomenon is known as ‘closing of the mind’ (Kruglanski and Freund, 1983), meaning that people seek cognitive closure and stop considering multiple alternatives…”

“Our results suggest that convergence to the game-theoretic equilibrium is faster and payoffs are higher with a very weak time constraint (practically no time pressure), compared to a situation where subjects face a rather tight time constraint of only 15 seconds to decide. Hence, time pressure has a negative effect on the quality of decisions and on subjects’ performance. Our time-dependent incentive scheme in case of time pressure induces significantly quicker decision-making and, on average, even improves the quality of decision-making instead of reducing it, even though the latter effect is not statistically significant. We suspect that the time-dependent incentive scheme induces a shift in the effort levels exerted by subjects that offsets the negative effect of the decrease in decision-making time on the decision’s quality. The opportunity to gain considerably higher payoffs seems to trigger higher concentration or effort levels. Hence, our results suggest that if decisions have to be taken under severe time pressure, the use of time-dependent monetary incentives should be considered as an appropriate means to speed up decision making significantly without generally deteriorating decision-making quality…”

ABOUT THE AUTHORS:

Martin G. Kocher is an Assistant Professor in the Department of Economics, Institute of Public Finance, University of Innsbruck, Austria. Homepage

Matthias Sutter is Professor of Economics, Max Planck Institute for Research into Economic Systems, Strategic Interaction Group. Homepage

2005 ANNUAL MEETING OF THE SOCIETY FOR JUDGMENT AND DECISION MAKING CALL FOR ABSTRACTS:

The Society for Judgment and Decision Making (SJDM) invites abstracts for symposia, oral presentations, and posters on any interesting topic related to judgment and decision-making. Completed manuscripts are not required.

LOCATION, DATES, AND PROGRAM:
SJDM’s annual conference will be held at the Sheraton Centre in Toronto, ON, Canada, from November 12-14, 2005. As in 2004, we’ve added a full day (Saturday) to the schedule to make room for more presentations and for two keynote speakers:

Keynote speaker #1: Michael Posner, Professor Emeritus of Psychology, University of Oregon, and author of many path-breaking articles on neural mechanisms and structures underlying selective attention.

Keynote speaker #2: Xg4k%h Sh8&v@!, Due to heightened security, we cannot provide the name of the second keynote speaker at this point.

SUBMISSIONS:
The deadline for submissions is July 15, 2005.
Submissions for symposia, oral presentations, and posters should be made through the SJDM website at http://sql.sjdm.org. Technical questions can be addressed to the Webmaster, Alan Schwartz, at www@sjdm.org. All other questions can be addressed to Judy Lin, at judylin@mit.edu.

ELIGIBILITY:
At least one author of each presentation must be a member of SJDM. Joining at the time of submission will satisfy this requirement. A membership form may be downloaded from the SJDM website at http:/ www.sjdm.org. An individual may give only one talk (podium presentation) and present only one poster, but may be a co-author on multiple talks and/or posters.

AWARDS:
The Best Student Poster Award is given for the best poster presentation whose first author is a student member of SJDM.

The Jane Beattie Travel Memorial Scholarship subsidizes travel to the United States for scholarly pursuits related to JDM research, including attendance of the annual meeting. Further details regarding these awards are available at http://www.sjdm.org.

PROGRAM COMMITTEE:
Craig Fox (institutional memory)
Dan Ariely (program chair)
Derek Koehler (conference coordinator)
Ellen Peters (speaker coordinator)
George Wu (poster chair)

BEHAVIORAL ECONOMICS:

“Behavioral economics [applies] scientific research on human and social cognitive and emotional [patterns] to better understand economic decisions and how they affect market prices, returns and the allocation of resources. The fields are primarily concerned with the rationality, or lack thereof, of economic agents. Behavioral models typically integrate insights from psychology with neo-classical economic theory… Behavioral analyses are mostly concerned with the effects of market decisions, but also those of public choice…

At the outset behavioral economics […] theories were developed almost exclusively from experimental observations and survey responses, though in more recent times real world data has taken a more prominent position. fMRI has also been used to determine which areas of the brain are active during various steps of economic decision making. Experiments simulating market situations such as stock market trading and auctions are seen as particularly useful as they can be used to isolate the effect of a particular [heuristic] upon behavior; observed market behavior can typically be explained in a number of ways, carefully designed experiments can help narrow the range of plausible explanations. Experiments are designed to be incentive compatible, with binding transactions involving real money [as] the norm. ” (from Wikipedia)

BEHAVIORAL ECONOMICS ARTICLES:

*Save More Tomorrow: Using Behavioral Economics to Increase Employee Saving by Richard H. Thaler; University of Chicago and NBER and Shlomo Benartzi; UCLA Anderson

*Behavioral Economics by Sendhil Mullainathan; MIT and NBER and Richard H. Thaler; University of Chicago and NBER

*Behavioral Economics and Institutional Innovation by Robert J. Shiller; Yale University

*Amos Tversky and the Ascent of Behavioral Economics by David Laibson; Harvard University and Richard Zeckhauser; Harvard University

NEUROECONOMICS:

Neuroeconomics is a multidisciplinary research field incorporating neuroscience, economics, and psychology aimed at developing an understanding of how we make choices. It looks at the brain when we evaluate decisions, categorize risks and rewards, and when we interact with others. (from Wikipedia)

“Neuroeconomics is an interdisciplinary research program with the goal of building a biological model of decision making in economic environments. Neuroeconomists ask, how does the embodied brain enable the mind (or groups of minds) to make economic decisions? By combining techniques from cognitive neuroscience and experimental economics we can now watch neural activity in real time, observe how this activity depends on the economic environment, and test hypotheses about how the emergent mind makes economic decisions. Neuroeconomics allows us to better understand both the wide range of heterogeneity in human behavior, and the role of institutions as ordered extensions of our minds.” (from the Neuroeconomics Explained post from professor Kevin McCabe’s Weblog)

RECENT NEUROECONOMICS ARTICLES:

* From The New York Times: Brain Experts Now Follow the Money:

“People are efficient, rational beings who tirelessly act in their own self-interest. They make financial decisions based on reason, not emotion. And naturally, most save money for that proverbial rainy day. Right?… Well, no. In making financial decisions, people are regularly influenced by gut feelings and intuitions. They cooperate with total strangers, gamble away the family paycheck and squander their savings on investments touted by known liars…

Such human frailties may seem far too complicated and unpredictable to fold into economic equations. But now many neuroscientists are beginning to argue that it is time to create a new field of study, called neuroeconomics…

To explore economic decision-making, researchers are scanning the brains of people as they engage in a variety of games designed by experimental economists. The exercises are intended to make people anticipate what others will do or what others will infer from the person’s own actions. These researchers are busy scanning the brains of people as they make economic decisions, barter, compete, cooperate, defect, punish, engage in auctions, gamble and calculate their next economic moves. Based on their understanding of how fluctuations in neurons and brain chemicals drive those behaviors, the neuroscientists are expressing their findings in differential equations and other mathematical language beloved by economists…

The brain needs a way to compare and evaluate objects, people, events, memories, internal states and the perceived needs of others so that it can make choices. It does so by assigning relative value to everything that happens. But instead of dollars and cents, the brain relies on the firing rates of a number of neurotransmitters — the chemicals, like dopamine, that transmit nerve impulses. Novelty, money, cocaine, a delicious meal and a beautiful face all activate dopamine circuits to varying degrees; exactly how much dopamine an individual generates in response to a particular reward is calibrated by past experience and by one’s own biological makeup.”

* From Business Week: Why Does logic often takes a backseat in making decisons?: This question may suggest that the study of neuroeconomics may topple the notion of rational decision-making.

“The National Hockey League and its players wrangle over a salary cap. The impasse causes the season to be canceled. Everybody loses. What went wrong?

According to the new science of neuroeconomics, the explanation might lie inside the brains of the negotiators. Not in the prefrontal cortex, where people rationally weigh pros and cons, but deep inside, where powerful emotions arise. Brain scans show that when people feel they’re being treated unfairly, a small area called the anterior insula lights up, engendering the same disgust that people get from, say, smelling a skunk. That overwhelms the deliberations of the prefrontal cortex. With primitive brain functions so powerful, it’s no wonder that economic transactions often go awry. “In some ways, modern economic life for humans is like a monkey driving a car,” says Colin F. Camerer, an economist at California Institute of Technology.”

* From The Princeton Weekly Bulletin: Take it or Leave It: Brain imaging study reveals interplay of thought and emotion in economic decisions. By Steven Schultz

* From PLoS Biology: A Neuroeconomics Approach to Inferring Utility Functions in Sensorimotor Control:
Economists use the concept of a utility function, which increases with increasing desirability of the outcome, to characterize human decision-making about physical movement.

* From Science: Separate Neural Systems Value Immediate and Delayed Monetary rewards: by Samuel McClure, David Laibson, George Loewenstein and Jonathan Cohen. Are the two birds in the bush a better choice than the one in your hand?

*From Science: The Involvement of the Orbitofrontal Cortex in the experience of regret: Neural responses associated with regret in gambling tasks.

POST-DOCTORAL RESEARCHER – CENTER FOR RESEARCH ON ENVIRONMENTAL DECISIONS, COLUMBIA UNIVERSITY

The Center for Research on Environmental Decisions (CRED) at Columbia University is seeking an outstanding researcher for a one-year post-doctoral position to start in the Fall of 2005, renewable for a second year. The post-doc will carry out research and coordinate lab activities.

CRED is directed by Professors Elke Weber, David Krantz, Roberta Miller, and Kenny Broad and includes researchers from psychology, management, economics, engineering, climate science, anthropology, and history. CRED studies individual and group decision making under climate uncertainty and, more broadly, decision making in the face of environmental risk. While research is conducted both in the lab and in various countries around the world, the post-doc will be responsible for lab projects. For more information please visit www.cred.columbia.edu.

Qualifications: Candidates must have a Ph.D. in a discipline relevant to decision making. May 2005 graduates will be considered for the position. Applicants should be interested in applied research that is ultimately aimed at improving stakeholders’ decision making. Being highly organized is a must; being comfortable running a Linux Web server and having other excellent computer skills would be a definite advantage.

To apply, please send a CV, two letters of recommendation, one writing sample, and a cover letter describing your research interests and expertise carrying out experimental research. Review of applications will begin mid-April and continue until the position is filled.

Applications should be sent to:
Sabine Marx, sm2234 (a) columbia DOT edu
Sabine Marx, Associate Director
Center for Research on Environmental Decisions (CRED)
Columbia University
406 Schermerhorn Hall
1190 Amsterdam Ave
New York, NY 10027

Columbia University is an Affirmative Action/Equal Opportunity Employer.

ASSISTANT PROFESSORSHIP AT TILBURG UNIVERSITY, THE NETHERLANDS

FACULTY OF SOCIAL SCIENCES
Tilburg University is a modern, specialized university. The teaching and research of the Faculty of the Social Sciences are organized around the themes of Health, Organization, and Relations between State, Citizen, and Society. The faculty’s inspiring working environment challenges its workers to realize their ambitions; involvement and cooperation are essential to achieve this.

DEPARTMENT OF PSYCHOLOGY AND SOCIETY / SOCIAL PSYCHOLOGY GROUP
The teaching and research at the Department of Psychology and Society focus on the influence of the social environment on the behaviour of individuals. This theme is approached from economic, organizational, social, and cultural perspectives. At present, the social psychology group are David de Cremer, Eric Igou, Thijs Poppe, Marcel Zeelenberg, and 7 PhD-students. Currently we are looking for a colleague for the position of: ASSISTANT PROFESSOR IN SOCIAL/ECONOMIC PSYCHOLOGY (M/F), 1,0 fte, TENURE TRACK POSITION, vacancy number: 400.05.01

JOB DESCRIPTION
As an Assistant Professor (lecturer) you will teach in our Bsc and Msc programs and in our graduate program, and you will supervise students at all levels (in internal and external research projects). Your teaching will be primarily in the area of consumer behavior, behavioral decision making and economic psychology. You will do basic research and have some administrative duties. We are looking for a strong candidate with interests in consumer/economic psychology, individual and social decision-making, and/or the psychology of emotion.

JOB REQUIREMENTS
The ideal candidate has a Ph.D. in psychology or decision sciences and experience with experimental and/or applied research. He or she has a proven record of research in one of the fields mentioned above and is committed to excellence of teaching. Moreover, the candidate is ambitious, able to work independently but willing to cooperate with the colleagues in the social psychology group. Excellent communicative skills are indispensable for this position.

TERMS OF EMPLOYMENT
Tilburg University belongs to the top of the best employers of the Netherlands and is known for her good terms of employment. The salary will be determined according to the job ranking system of the University (in Dutch: universitair functie-ordenen UFO). You will be offered a contract for a period of 4 years. After 4 years a tenure position is possible, depending on your job performance.

INFORMATION AND APPLICATION
You can find more information about the University of Tilburg and the Department of Psychology and Society on: www.tilburguniversity.nl. You can also contact prof. dr. Marcel Zeelenberg (tel.+31-13-466 8276 or m.zeelenberg at uvt dot nl). Your application, accompanied by a CV, a statement of research and teaching interests, one or more published
or unpublished papers, and the names of at least three references, can be sent until April 15, 2005 to: M.J. Bassie, Managing Director of the Faculty of Social and Behavioural Sciences, Postbus 90153, 5000 LE, Tilburg or pz-fsw@uvt.nl (indicating the vacancy number 400.05.01).

FULL PROFESSOR OF MARKETING; Vrije Universiteit Amsterdam

The Vrije Universiteit Amsterdam, The Netherlands, invites applications for the position of a Full (tenured) Professor of Marketing in the Department of Marketing at the Faculty of Economics and Business Administration.

THE VRIJE UNIVERSITEIT AMSTERDAM
Amsterdam, the capital of the Netherlands, has been a renowned cultural, scientific and commercial center for many centuries. It was here, in 1880, that the Vrije Universiteit first opened its doors to students. The VU (www.vu.nl) aims to be inspiring, innovative and involved. It now comprises twelve faculties and has teaching facilities for 17,000 students. The university campus and university hospital are situated in the south-western part of Amsterdam, one of the most dynamic and fast-growing business districts in the Netherlands. The international airport of Schiphol-Amsterdam is just 8 minutes away by train. Both the research and the educational programs of the Vrije Universiteit are of a high quality (the work of different research groups have been evaluated to be of world class; the educational programs of Economics and Business Administration have been rated by students among the best in the country).

THE MARKETING DEPARTMENT
The Department of Marketing is a young, ambitious and expanding group oriented towards the international marketing community. Currently, the Department has about 10 faculty members, 5 adjunct faculty and 4 Ph.D. students. Although the Department hosts different specialization areas within Marketing, we focus particularly on Marketing Strategy. The Department is committed to creating a stimulating working environment. We strive for high quality in both research and educational programs. We offer a broad scope of marketing courses, including a full-time Master of Science in Marketing program (fully in English). Our research program especially focuses on topics within the area of marketing strategy, such as innovation and customer relationships. For more information, see: www.feweb.vu.nl/marketing

THE CANDIDATE
The Department of Marketing seeks to further strengthen its position. We are therefore looking for candidates with a Ph.D. in Marketing or related areas and who are enthusiastic about contributing to the ambitious goals of the Department. Especially, we seek a candidate who is committed to excellence in both research and education. This should be visible from the candidate’s high quality past performance, such as an international research profile and good teaching evaluations. Both applicants with demonstrable potential for high quality research as well as senior candidates with high quality past performance are welcome to reflect. Given the specialization area of the Marketing department, we favor candidates who are especially interested in strategic issues in marketing. Also, applicants should have a positive attitude towards inspiring junior faculty members and cooperation in joint research projects. The teaching load will be limited. Senior faculty members will share the administrative tasks. Candidates do not need to have knowledge of the Dutch language (passive knowledge of the language after 2 years is required), but should be fluent in English.

INFORMATION/APPLICATION
We offer a stimulating working environment with many opportunities for growth and new initiatives. Salaries are negotiable and include additional benefits.

For information, please contact Ruud Frambach, Chair of the MarketingDepartment (see for contact details below). Candidates who are interested to apply for this position are requested to send a detailed resume containing educational data, a list of publications, teaching experience and evaluations, administrative experience as well as any other information that may be relevant for the position to the address below. Applications can be submitted by regular or electronic mail to:

Prof. dr. Ruud T. Frambach, Chair
Department of Marketing
Vrije Universiteit Amsterdam
Faculty of Economics and Business Administration
De Boelelaan 1105
1081 HV Amsterdam
The Netherlands
Phone: +31 20 598 6002
Fax: +31 20 598 6005
Email: rframbach at feweb.vu.nl

CONSUMER COGNITION AND PRICING IN THE 9’S IN OLIGOPOLISTIC MARKETS.

Marketing research has confirmed what many know, that a large number of goods are priced to the end in a 9, for example hamburgers for 99 cents or shoes for 49 dollars, what is referred to as odd-pricing or psychological pricing. With a look at a spreadsheet analysis of both wholesale and retail prices, you will see that wholesale prices (when looking at the last two right digits) are distributed very evenly over the range of 00 to 99, but when you look at retail pricing you see the obvious, that many prices end with 09, 19, … , 99.

Do consumers do this out of irrationality or only when they expect the time cost of fully calculating the exact price to exceed the expected loss caused by the slightly erroneous but higher price paid by failing to accurately incorporate the rightmost digits? What kind of effect does pricing in the 9’s have on a market where there may be some non-strict equilibrium found where even or non-9 price ending occurs? A recent article out of The Harvard Institute for Economic Research (HIER) investigates what effect this phenomena may have on oligopolistic markets and attempts to build a model of the kinds of markets we may expect to result from pricing in the 9’s.

ABSTRACT:

“The paper fully characterizes the Bertrand equilibria of oligopolistic markets where consumers may ignore the last (i.e. the right-most) digits of prices. Consumers, in this model, do not do this reflexively or out of irrationality, but only when they expect the time cost of acquiring full cognizance of the exact price to exceed the expected loss caused by the slightly erroneous amounts that is likely to be purchased or the slightly higher price that may be paid by virtue of ignoring the information concerning the last digits of prices. It is shown that in this setting there will always exist firms that set prices that end in nine though there may also be some (non-strict) equilibria where a non-nine price ending occurs. It is shown that all firms earn positive profits even in Bertrand equilibria. The model helps us understand in what kinds of markets we are most likely to encounter pricing in the 9’s.”

QUOTES:

“Given the limits of the human brain, it is reasonable to assume human beings will not be fully informed. When a person goes through a supermarket buying goods, is it worthwhile for him to study and take in the price information of each product in full? It is not evident that the answer to this will be yes, contrary to what early textbook models of economics suggested. Indeed it may not be rational to take in so much information.5 If, for instance, he looked only at the dollar part of the prices and took his purchase decisions based on that, he would make a few wrong decisions, true, but the time saved by using this strategy may be well worth that little loss. I shall later model the circumstances where such time-saving is worthwhile.”

“The model predicts that prices will generally end in 9s but in some markets there will be two modal price endings, one of which will invariably be 9. It is interesting to note that the asymmetric equilibrium in which the non-9 ending occurs would exist only if the indifference axiom holds. It is arguable that for products where people buy large amounts of some commodity or agree to a per unit price and then buy the commodity or service over a long period of time the indifference axiom is less likely to be satisfied. In such cases a small price difference translates into a large loss or gain for the buyer and hence consumers are more likely to take cognizance of the exact price. Hence for these kinds of goods multiple prices are less likely to occur in the same market.”

“There is a large literature in psychology that illustrates how human beings often use simple rules of thumb to make decisions, instead of collecting all relevant information and then making decisions; and how these “fast and frugal” rules may in fact turn out to be reasonable (Gigerenzer and Goldstein, 1996; Gigerenzer and Selten, 2001). If for instance, people were given pairs of cities and asked which of each pair had the higher population and people named the city they were more familiar with*, Goldstein and Gigerenzer (1999) showed that they would be right significantly more often than if they chose the answer at random. Given that the collection of information can be costly in terms of time and money, for certain purposes the use of this heuristic may be the rational course. It is this general idea that I shall now use in the context of consumer decision-making concerning what to buy.”

* It would be more correct to say “the city they recognized” – Ed.

“Unlike in the model of monopoly discussed in Basu (1997), we find that firms benefit from this phenomenon of pricing in the nines. This enables (sophisticated) Bertrand oligopolists to sustain a price above the marginal cost (and even above the prices that could prevail in the standard Bertrand oligopoly model with an exogenously fixed smallest unit of change). Also, unlike in a monopoly, some non-9 endings are now possible in equilibrium.”

“Another natural way to extend the model is to suppose that, if a person is planning a very large purchase, he takes cognizance of the exact per-unit price of the product since even a tiny difference in per-unit price could make a big difference to his cost. While I have not modeled this formally here, it is reasonable to expect that in such situations the indifference axiom discussed above will be violated and so we will invariably see only one price for each good. If we go a step further and introduce the idea of ‘cautious behavior’ on the part of consumers, which is defined behavior that takes into account the possibility of ‘trembles’ in prices whether or not there exists any actual price variability in the market, then it is likely that the dominance of 9 endings will break down. For goods, where the consumer places large orders (that is, several multiples of the unit) on the basis of a per-unit price, there will be a unique price but there will be no special reason for this to have a 9-ending. Hence, for goods like cement, house paint, phone calls and long-term lawn-mowing contracts we will be less likely to see nine price endings. By the same kind of reasoning we would expect to see a wider use of prices ending in 9 in the retail market, where small quantities of goods are purchased, or in the market for perishable goods, as opposed to, for instance, the wholesale market.”

“…instead of assuming consumer irrationality and consumer psychological delusion, if we simply recognized that consumers have limited time for decision-making and limited brain capacity and they act rationally subject to these limitations, then we can get results which elude the standard literature on industrial pricing and mimic some of the results which behavioral economics derives only by assuming consumer irrationality. This is not to suggest that consumers are never irrational but simply that we must not be too hasty in jumping to the conclusion of irrationality either.”

ABOUT THE AUTHOR:

Kaushik Basu

Kaushik Basu is a Professor of Economics and the Carl Marks Professor of International Studies at The Department of Economics, Cornell University. He received his PhD from The London School of Economics in 1976. His expertise includes Economic development, economic theory, industrial organization and political economy. His research interests include economic development, economic theory, industrial organization, and political economy. He has held visiting positions at CORE (Louvain-la-Neuve, Belgium), the Institute for Advanced Study (Princeton), and the London School of Economics, where he was a Distinguished Visitor in 1993. He also has been a Visiting Professor at Harvard University and Princeton University.

Kaushik Basu Homepage at Cornell University

THE 2005 EUROPEAN ASSOCIATION FOR CONSUMER RESEARCH (EACR) CONFERENCE

The seventh European ACR will take place June 15-18 in the second largest city in Sweden, Göteborg. The aim of the conference is to contribute to the development of consumption research by including a wide range of phenomena, perspectives and disciplines.

“We hope to create a conference together that will be rich in rewards both professionally and socially. We hope the conference will strengthen the ties between researchers who work within the field of consumption. We want to set the scene for a conference that makes use of the full potential of in-depth specialization as well as interdisciplinary cooperation. It is our hope that presentations and discussions will enhance our knowledge of consumption. Göteborg is the second largest city in Sweden located between the sea and the forest. We are sure that the weather will be at its best with long light evenings. You will be able to enjoy stimulating conversations with old friends and new acquaintances.”

From the EACR Homepage

The EACR welcomes researchers and doctoral students from universities all over the world. Registration is now open. Click here for more information.

The EACR 2005 Program Committee consists of:

*Eric Arnould, University of Nebraska-Lincoln, USA
*Russell W. Belk, University of Utah, USA
*Janet Borgerson, University of Exeter, United Kingdom
*Richard Elliot, Warwick Business School, The University of Warwick, United Kingdom
*Asim Fuat Firat, University of Southern Denmark- Odense, Denmark
*Jim Gentry, University of Nebraska- Lincoln, USA
*Margaret Hogg, Lancaster University, United Kingdom
*Robert Kozinets, Kellogg School of Management, USA
*Pauline Maclaran, De Montfort University, USA
*Lisa Penaloza, University of Colorado, USA
*Linda Price, University of Nebraska- Lincoln, USA
*Michael Saren University of Leicester, United Kingdom
*Alladi Venkatesh, University of California, USA & Stockholm School of Economics, Sweden

Doctoral Symposium:
Jonathan Schroeder – University of Exeter, United Kingdom