MARK 5342 Advanced Topics Neuro -Science and Decision-Making Module

1. 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

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 Origination What prompts the customer to action? Information Gathering Pre-purchase What factors influence the customer’s decision? Because value creation is basedon understandingand meeting customer needs. Evaluation What attributes of the product does the customer consider? Purchase Decision What options does the customer identify?What decision(s) does he make? Purchase Postpurchase Evaluation and Behavior Post-purchase What does the customer do about his decision? 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)