106 research outputs found
Modeling the Psychology of Consumer and Firm Behavior with Behavioral Economics
Marketing is an applied science that tries to explain and influence how firms and
consumers actually behave in markets. Marketing models are usually applications of
economic theories. These theories are general and produce precise predictions, but they
rely on strong assumptions of rationality of consumers and firms. Theories based on
rationality limits could prove similarly general and precise, while grounding theories in
psychological plausibility and explaining facts which are puzzles for the standard
approach.
Behavioral economics explores the implications of limits of rationality. The goal is to
make economic theories more plausible while maintaining formal power and accurate
prediction of field data. This review focuses selectively on six types of models used in
behavioral economics that can be applied to marketing.
Three of the models generalize consumer preference to allow (1) sensitivity to reference
points (and loss-aversion); (2) social preferences toward outcomes of others; and (3)
preference for instant gratification (quasi-hyperbolic discounting). The three models are
applied to industrial channel bargaining, salesforce compensation, and pricing of virtuous
goods such as gym memberships. The other three models generalize the concept of gametheoretic
equilibrium, allowing decision makers to make mistakes (quantal response
equilibrium), encounter limits on the depth of strategic thinking (cognitive hierarchy),
and equilibrate by learning from feedback (self-tuning EWA). These are applied to
marketing strategy problems involving differentiated products, competitive entry into
large and small markets, and low-price guarantees.
The main goal of this selected review is to encourage marketing researchers of all kinds
to apply these tools to marketing. Understanding the models and applying them is a
technical challenge for marketing modelers, which also requires thoughtful input from
psychologists studying details of consumer behavior. As a result, models like these could
create a common language for modelers who prize formality and psychologists who prize
realism
Individual Differences in EWA Learning with Partial Payoff Information
We extend experience-weighted attraction (EWA) learning to games in which only the set of possible
foregone payoffs from unchosen strategies are known, and estimate parameters separately for each
player to study heterogeneity. We assume players estimate unknown foregone payoffs from a strategy,
by substituting the last payoff actually received from that strategy, by clairvoyantly guessing the actual
foregone payoff, or by averaging the set of possible foregone payoffs conditional on the actual
outcomes. All three assumptions improve predictive accuracy of EWA. Individual parameter estimates
suggest that players cluster into two separate subgroups (which differ from traditional reinforcement
and belief learning)
Measuring Imputed Cost in the Semiconductor Equipment Supply Chain
We consider the order-fulfillment process of a supplier producing a customized capital good, such as production equipment, commercial aircraft, medical devices, or defense systems. As is common in these industries, prior to receiving a firm purchase order from the customer, the supplier receives a series of shared forecasts, which are called “soft orders.” Facing a stochastic internal manufacturing lead time, the supplier must decide at what time to begin the fulfillment of the order. This decision requires a trade-off between starting too early, leading to potential holding or cancellation costs, and starting too late, leading to potential delay costs. We collect detailed data of shared forecasts, actual purchase orders, production lead times, and delivery dates for a supplier-buyer dyad in the semiconductor equipment supply chain. Under the assumption that the supplier acts rationally, optimally balancing the cancellation, holding, and delay costs, we are able to estimate the corresponding imputed cost parameters based on the observed data. Our estimation results reveal that the supplier perceives the cost of cancellation to be about two times higher and the holding costs to be about three times higher than the delay cost. In other words, the supplier is very conservative when commencing the order fulfillment, which undermines the effectiveness of the overall forecast-sharing mechanism
Choosing among residential options: Results of a vignette experiment
Older people who experience declining health are often faced with difficult decisions about possible residential relocation. The research aim was to determine how five distinct dimensions-functional status, features of current housing, social networks, features of retirement communities, and financial considerations-affect decisions to relocate to a retirement community. A vignette experiment with a factorial design was conducted involving both older people and adult children who were concerned with an aging parent. Use of the Internet for administration of the experiment made it possible to deliver information to research participants through video clips. Research participants were influenced by each of the dimensions; however, functional status of the vignette persons had the greatest impact, and financial considerations the least. Adult children were more likely to recommend moves than were older people. The research is suggestive of the potential for use of vignette experiments for a fuller understanding of relocation decisions
Using the internet to administer more realistic vignette experiments
This article illustrates an innovative method of administering stated choice studies (or vignette experiments) using computers and the Internet. The use of video clips to deliver information to research participants makes vignettes more realistic, helps to engage interest of research participants, and can reduce framing effects. The method also provides research participants with interactive options before making judgments. A study to determine the views of older people regarding residential options is used to illustrate the method. Even older people with limited experience in using computers participated successfully. The study findings showed that research participants responded both to the audiovisual characteristics of vignette persons and to the variables in the vignette structure
Self-tuning experience weighted attraction learning in games
Self-tuning experience weighted attraction (EWA) is a one-parameter theory of learning in
games. It addresses a criticism that an earlier model (EWA) has too many parameters, by
fixing some parameters at plausible values and replacing others with functions of experience
so that they no longer need to be estimated. Consequently, it is econometrically simpler
than the popular weighted fictitious play and reinforcement learning models.
The functions of experience which replace free parameters “self-tune” over time, adjusting
in a way that selects a sensible learning rule to capture subjects’ choice dynamics. For
instance, the self-tuning EWA model can turn from a weighted fictitious play into an averaging
reinforcement learning as subjects equilibrate and learn to ignore inferior foregone
payoffs. The theory was tested on seven different games, and compared to the earlier parametric
EWA model and a one-parameter stochastic equilibrium theory (QRE). Self-tuning
EWA does as well as EWA in predicting behavior in new games, even though it has fewer
parameters, and fits reliably better than the QRE equilibrium benchmark
Financing Universal Coverage in Malaysia: a case study
One of the challenges to maintain an agenda for universal coverage and equitable health system is to develop effective structuring and management of health financing. Global experiences with different systems of health financing suggests that a strong public role in health financing is essential for health systems to protect the poor and health systems with the strongest state role are likely the more equitable and achieve better aggregate health outcomes. Using Malaysia as a case study, this paper seeks to evaluate the progress and capacity of a middle income country in terms of health financing for universal coverage, and also to highlight some of the key underlying health systems challenges
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