MARK 5342 Advanced TopicsNeuro-Science and Decision-Making Module

2

Overview

Understand how consumers make decisions Physiological basis Psychological basis

Understand implications of these strategies on marketing methods Satisfaction Loyalty Brand attachment

3

Physiology and Psychology of Decision-Making

4

Classical view of decision-making

Pitched battle between reason and emotion

Reason often wins This view goes back to Plato Freud – multiple theories of the brain

Id – raw emotion Ego – conscious and rational self

5

William James, 1890

The Principles of Psychology Rejected Plato’s view of the rational

brain as the controller and emotions as evil impulses

Emotions provide a rich context of habits, pattern-seeking, and valence to decisions

Decision-making is selecting which of the two systems to utilize in specific situations

6

Evolution over the past 100,000 years

Primitive man had only the amygdala to drive two primary emotional urges Reproduction Flight or fight

Over time, the cortex evolved Center for higher thought▪ Future planning, develop and use language,

create and utilize tools, reflect on decisions, create ethics

Layered on top of existing brain structures

7

Major Structures of the Brain

Central Core – regulates basic life processes

Limbic structures – emotions and memory Amygdala, hippocampus, hypothalamus

Cortex – higher cognitive and emotional functions Frontal, occipital, parietal, and temporal

lobes

8

Structure of the Brain

The Human Brain.exe

9

Pattern seeking

Subconscious is good at seeking patterns

When a pattern it likes emerges, a positive signal is sent; when a negative pattern emerges, a negative signal is sent

We know this as “gut feel” Zaltman estimates that up to 95% of

purchasing decisions are made this way

10

Dopamine

Neurotransmitter molecule (Dopamine DHD9) in the brain that brain cells use to communicate with each other

Stimulation of nucleus accumbens (NAcc) releases dopamine, which produces a pleasurable feeling

Dopamine neurons activate as predictors using stored patterns

11

Error-identification

When Dopamine neurons are wrong, they fire an error signal to the anterior cingulate cortex (ACC)

This error signal forces a person to notice the unexpected event Conscious notice Hypothalamus speeds up heart rate,

produces adrenaline Uses spindle cell neurons to convey

emotion

12

Parkinson’s Disease

Dopamine neurons begin to die in the brain

These neurons control movement in the body

13

Memory and Processing

Two types of memory Verbatim – short term, vivid, detailed Gist – long term, vague, reconstructed

Impact of trigger words on reconstruction Loftus, 1974 Automobile accident recall

Memory with affective impact recalled more readily

14

Simultaneous Decision Processes

• The brain utilizes two simultaneous decision processes– Cognitive – deliberate, reasoned, unemotional– Affective – impulse, heuristic, highly emotional

• These two decisions race, and often conflict• For simple decisions, affect often wins• Even with complex decisions, there is an affective element• Up to 95% of our decisions are affectively driven– Made in the subconscious– This means we don’t know and often can’t tell why we made the

decisions we made

15

Simplified Decision Process

OriginationOrigination

Information GatheringInformation Gathering

EvaluationEvaluation

Purchase DecisionPurchase Decision

Postpurchase Evaluation and Behavior

Postpurchase Evaluation and Behavior

Pre-purchase

Purchase

Post-purchase

What prompts the customer to action?

What factors influence the customer’s decision?

What attributes of the product does the customer consider?

What options does the customer identify?What decision(s) does he make?

What does the customer do about his decision?

Because value creation is basedon understandingand meeting customer needs.

Because value creation is basedon understandingand meeting customer needs.

Source: Alba, Hutchinson, and Lynch (1990), “Memory and Decision Making,” Handbook of Consumer Theory and Research, Englewood Cliffs, NJ: Prentice-Hall, 1-49.

16

Affect and Decision-Making

Isen, 2005 Affect impacts cognitive decisions

Positive affect leads to generosity, helping, understanding

Affect impacts employee morale and satisfaction, which leads to impacts on customer satisfaction and loyalty

17

Impacts on Decision-Making

18

Damasio and Decision-making

1982 Patient had tumor removed from

cortex Result was a patient who could not

make even the simplest of decisions Cortical section involved was orbital

frontal cortex (OFC) which is the center for decision-making and incorporating emotions into decisions

19

Iowa Gambling Task

Damasio and Bechara, 2005 4 decks of cards – 2 low risk, 2 high

risk After about 80 cards, players could

emotionally develop high payout strategies of only drawing from 2 low risk decks

When testing patients with damaged OFC, those patients were unable to develop any strategies

20

Intelligence versus Effort

Dweck, 2006 12 NYC schools, about 400 fifth

graders Simple test of non-verbal puzzles Half of students praised for

“intelligence” Half of students praised for “effort” “Effort” students selected harder

subsequent test; “Intelligent” students selected easier subsequent test

Fear of failure inhibited learning

21

Random processes

Dopamine neurons try to find patterns that don’t exist

Can lead to faulty conclusions like “hot hand” or “slot machine payoff”

TV Show Deal or No Deal – when emotions can lead the decision-maker astray

22

Asian Disease Problem

Classic exercise in loss aversion Two choices presented to

respondents They had to choose option A or

option B

23

First Scenario

The United States is preparing for the outbreak of an unusual Asian disease, which is expected to kill six hundred people. If program A is adopted, two hundred people will be saved; if program B is adopted, there is a one-third probability that six hundred people will be saved and a two-thirds probability that no people will be saved. Which program do you favor?

24

When asked of physicians, 72% chose option A, the safe-and-sure strategy

25

Second Scenario

The United States is preparing for the outbreak of an unusual Asian disease, which is expected to kill six hundred people. If program C is adopted, four hundred people will die. If program D is adopted, there is a one-third probability that nobody will die and a two-thirds probability that six hundred will die. Which of the two programs do you favor?

26

When described in terms of deaths rather than lives saved, physicians reversed their choices, with 78% selecting option D, the risky strategy

Both scenarios are identical in lives lost or saved

Loss aversion is a way of skipping the math and using emotion to make the decision

27

Gains and Losses

Prospect theory, Kahneman and Tversky, 1979

Losses loom larger than gains Damasio and Loewenstein investing game

In each round, subject decides to invest $1 or invest nothing

No invest, subject keeps dollar Invest, researcher flips coin for $1 loss or

$2.50 gain Rational investors should always choose to

invest

28

Rationality and the Cortex

29

Rationality

Logical thinking Prefrontal cortex Metacognition – ability to reflect on

one’s own mind and thus regulate (to a degree) the emotions

Monitors emotions and decides what to take seriously and what to ignore

30

Marshmallow test of Self Control

Walter Mischel, 1970’s Four year olds Eat one marshmallow or wait a few

minutes to get two marshmallows Most kids couldn’t resist for long Kids who can’t resist tend to exhibit

behavioral problems later in life Tends to stabilize after the teen

years

31

Overthinking a Problem

Claude Steele Stanford sophomores took the

Graduate Record Exam (GRE) White students performed

significantly better than black students

Called the Achievement gap When students told it was just a

preparatory drill, no difference in scores

32

Placebo Effect

Power of prefrontal cortex to modulate most body signals, like pain

Fake pain-relieving cream provided relief

Electric shocks mitigated Sobe Adrenaline Rush – lower price

seen as producing less effective in problem solving

33

Fooling the Senses

CalTech and Stanford wine tasting experiment

Three levels of wine - $5, $45, $90 With blind testing, respondents could

sort them out fairly accurately When asked to take a short survey

about the wine characteristics, they became confused and selected incorrectly

34

Mental Accounting

Brian Wansink, Cornell Bottomless bowl of soup Whatever people see on their plate,

they eat They keep track by counting plates,

or scoops of M&M’s, not actual food

35

Anchoring Effect

Daniel Kahneman Random number generated by

roulette wheel and shown to respondents

Estimate the number of African countries in the United Nations

Those who saw higher roulette number guessed higher number of African countries, and those who saw lower roulette number guessed lower number of African countries

36

Social Impacts

37

Morality and the Cortex

Moral decisions tend to be regulated by emotions

Reason is invented as logical support for the emotional decision

Moral decisions require taking other people into account, not just oneself

38

Experiment in Morality

Scenario 1: You are the driver of a runaway trolley. The brakes have failed. If you do nothing, five maintenance workers will die. If you swerve, one maintenance worker will die.

Scenario 2: You are standing on a footbridge over a trolley track. Unless the trolley can be stopped, five maintenance workers will die. Standing next to you is a large man, who if you push over the bridge, will fall on the track and stop the trolley, but the large man will die.

39

Results

In scenario 1, when you are the driver, 95% of respondents agree it is better to swerve and save five men with one other man dying. This is a personal moral situation.

In scenario 2, almost nobody is willing to push the man over the edge, resulting in five people dying. This is an impersonal moral decision, and activates different parts of the brain.

40

Morality and Brain Regions For personal moral decisions, a rational

moral decision process activates to generate an optimal decision – one death is better than five other deaths

For impersonal moral decisions, the area responsible for thinking about other people (superior temporal suculus, posterior cingulate, and medial frontal cortex) activate and produce confusion and a sub-optimal decision – one death is capital murder

41

Sympathy and Fairness

The ultimatum game Two respondents One gets $10 and decides how to divide it The other decides to accept the offer or reject, in

which case both get nothing Economists thought most people would offer a

nominal amount like $1 and keep the rest The logical response is to accept any offer Most people rejected low offers as “unfair” and

walked away with nothing Proposers anticipated this response, and actually

made “fair” offers in the area of $5

42

Altruism versus Autism

The desire to help others The brain rewards altruism with a

pleasurable feeling Autism – people who can’t engage in

or understand social interactions with others

Results in inability to sympathize with others

Mirror neurons aren’t developed

43

Resulting Decisions

Decisions feel “unanimous” to us However, most decisions are the

result of weighing multiple conflicting factors

Stimulate the NAcc and pacify the insula Prime with highly coveted items Use promotional stickers to make the

deal seem like a good deal Credit cards are less like “real money,”

therefore result in more purchasing

44

Silencing Cognitive Dissonance

Brock and Balloun, late 1960’s Two groups – regular churchgoers,

committed atheists Played tape recorded message

attacking Christianity, with annoying static added

Listeners able to press button and remove static

Atheists removed the static, churchgoers did not - they each heard what they wanted

45

Bias for Certainty

Confidence in decisions is comforting That can lead to disastrously wrong

decisions Counter that by paying attention to

the details that don’t fit the overall pattern

George Day’s “small voices”

46

Limitations of the Cortex

Cortex can only handle about seven data elements at once

Car buying involves dozens of features, options, etc.

Dijksterhuis categorized products with a complexity score Simple things like simple kitchen tools

(oven mitts) and home accessories (light bulbs) are easy

Complex things like furniture is very hard

47

Results

With complex decisions, the longer people ponder them, the less satisfied they are with their decisions

The optimal strategy – use your rational mind to gather needed information, then don’t think about it – let your subconscious arrive at a good decision

48

Decision Guidelines

Simple problems require reason Novel problems require reason Embrace uncertainty You know more than you know Think about thinking

(Lehrer pp. 244-250)