Week 7 Writing Assignments Options:

Common wisdom suggests that successful managers tend to be confident individuals. At the same time, academic research indicates that individuals tend to be overconfident. It is also clear, that researchers consider overconfidence to be a mistake. How do you reconcile these views? For what kinds of jobs/tasks do you think overconfidence might be most helpful (or least harmful)? For what kinds of jobs/tasks do you think overconfidence might be most harmful?

Session 7: (Feb 17/18) Mental Accounting and Consumer Choice

PowerPoint slides (to be available Feb 19th)

Topics:

How do consumers make choices?
Mental Accounting
Multi-attribute choice
Minimizing Regret
Self Control
Fairness
Regret

BEFORE-class Readings:

**** Thaler, “Mental Accounting and Consumer Choice”, Marketing Science, 1985. CP #14

*** Shafir, Simonson, and Tversky, “Reason-based Choice”, Cognition, CP #15

*** Bell, "The Toro Company's No Risk Program", Havard Case, CP #16

Class Preparation and Discussion Questions:

Thaler (1985) reviews the aggregation rules of prospect theory. How do humans code gains and losses differently, and therefore, how should marketers frame decisions or choices to benefit from that coding? Do consumers always aggregate losses?

What is the concept of transaction utility? How does transaction utility explain examples where the purchase price seems too low (e.g. World Series tickets)?

The present value concept argues that we should accelerate our revenues/gains and postpone our costs/losses. Nevertheless, we observe decision makers withholding more taxes than they must and putting off free dinner at a fancy restaurant. Why do we sometimes see these intertemporal inconsistencies?

Discussion questions for the Toro case:

Note: You may want to use the snowfall date (to be posted) to answer some of the questions below.

Was the program a success? Why? Why not?

Analyze the risks of the program from the point of view of (i) Toro; (ii) the insurance company; (iii) consumers.

How would one attempt to calculate the fair cost of insurance? Why is the insurance company raising the rates so much?

Try to think like a snowblower buyer. How were the paybacks structured and how might they be structured differently to be more attractive to the consumer at equal or less (insurance) cost?

Should Toro repeat the program? Be prepared to argue why or why not to your boss.