ment agency that provides economic
policy suggestions to Prime Minister
David Cameron, says that simple rules
of thumb such as 1/N lead to thinking
blunders.
“In many cases, individuals make
pretty bad decisions that they would not
make if they paid full attention and possessed complete information, unlimited
cognitive abilities and complete self-control,” says Thaler, coauthor of Nudge,
a 2008 book arguing that institutions
and governments should steer people’s
choices in directions that would boost
personal health and wealth.
Less effort, more money
Yet when given the opportunity to
peruse a lot of financial information
before choosing investments, affluent
customers of an Italian mutual bank
say “no, grazie.” These savvy investors
consider only a few key pieces of infor-
mation when buying assets, Berg and his
colleagues contend. In their view, Ital-
ians seeking a good return on the euro
need a complex investment analysis like
they need a plate of overcooked pasta.
By brand in this example, brand is the most important feature. blackberry beats out
Nokia, which beats out samsung, which beats out sony. operating system further refines
choices within each brand, with microsoft considered preferable.
Decoding choice by studying consumers’ rankings of phones,
researchers recently tried to determine what rules of thumb the buyers used.
the scenarios outlined below portray hypothetical rankings based on two
features: brand and operating system.
Blackberry Nokia Samsung
13 5
24 6
Microsoft
Palm
Sony
7
8
Take the top in this example, the consumer has a preferred brand. blackberry is
selected first, regardless of the operating system. but after that first brand is chosen,
operating system becomes more important, with microsoft preferable. Within that preference, phones are again ranked by brand, with Nokia beating samsung beating sony.
Blackberry Nokia Samsung Sony
1 3 45
2 6 78
Microsoft
Palm
Elimination in this case, consumers make a decision by ruling out disliked
phone characteristics. the consumer does not want a sony, but after that a palm
operating system becomes least desirable. among the remaining microsoft-based
systems, samsung and Nokia are the least liked, leaving the buyer with the
microsoft-based blackberry as the first choice.
Blackberry Nokia
12
45
Microsoft
Palm
Samsung
3
6
Sony
7
8
source: m. yee E T AL / MARKE TING SCIENCE 2007
In a typical case, an individual will
choose the asset deemed least risky,
because risk of possible losses represents
that person’s most valued investment
characteristic. If neither choice is excessively risky, the investor will select based
on characteristic No. 2, taking the asset
considered likely to yield returns more
quickly. If that doesn’t produce a clear
winner, feature No. 3, the asset with
lower brokerage fees, receives consideration. If fees are comparable, the choice
is random.
In another computer task, participants similarly considered risk and a few
other investment features when deciding
how to allocate money to six investment
categories, including stocks and government bonds.
Bank clients said that brief, nontaxing
deliberations informed their real-life
investment verdicts as well. No one tried
to calculate probable profits and losses
for every potential asset when putting
cold, hard euros on the line.
Customer managers in large businesses
take a similarly straightforward approach
to crucial money decisions, apparently
for good reason. Rules of thumb guide
forecasts of which customers will remain
loyal and which won’t. That’s a big deal,
since flyers, special offers and other
expensive marketing efforts are targeted
at customers who are “active,” meaning
likely to buy more products.
One popular forecasting tactic in
the business trenches is called the
recency-of-last-purchase, or hiatus,
heuristic. Managers tag a customer who
hasn’t made a purchase within a certain
time window, say the past nine months,
as inactive.
Researchers have developed complex
statistical models, fed by exhaustive
data on customers’ purchase patterns,
to improve on managers’ intuitions. Yet
customer-finding formulas in the business world have proven about as popular
as pay cuts.
Customer managers have every right
to hold on tight to their heuristics,
says marketing researcher Florian
von Wangenheim of Munich Technical
University. To von Wangenheim’s
