Marketers – What are your customers thinking?

Recently I came across an interesting blog on the Freakonomics website. If you’re not familiar with their blog then it’s worth checking out, they explore the hidden side of everything. This particular blog looked at consumer buying behaviours, in particular the role of projection bias. So I thought I would look into a rational decision process vs. projection bias. (I’m not an economist specialist, so I will keep it simple)

A common decision making process is the ‘classical utility theory’. The theory focuses on instrumental rationality; every alternative has a consequence, the decision is made based on the alternative with the best outcome.

The decision process starts with three conditions:

  1. Certainty – the outcome of the action (or purchase in this case) is certain.
  2. Risk – the outcome is not certain but the probabilities are known.
  3. Uncertainty – the probability of the outcome is unknown.

Here’s a very simple example of the classical utility theory in action. James is currently renting a property; he wants to get on the property ladder and has found his perfect flat. He’s not sure whether to put an offer on the flat because there is a possibility that he may be relocating with work.  He is concerned that if he is relocated he would be forced to sell the flat and potentially at a reduced price for a quick sale.

  1. Action – Buy the flat or don’t buy
  2. Condition – Will he be relocated or not
  3. Outcome – Own his dream flat or not

For most of us a property is the biggest ticket item we will purchase. The classical utility theory is a reasonable decision making process for James to follow. Researchers have found evidence of projection bias when choosing a new car or house.  For those that have not come across the term projection bias, it’s the tendency to unknowingly overestimate the degree to which your future taste will resemble your current taste.

Most people know that if you go food shopping when hungry, you will end up buying more food than what you intended. This is because projection bias has kicked in; when you’re hungry you predict that your future taste for food will reflect your current hunger.

The research explores if the weather impacts buying behaviours. The evidence demonstrated that people over value specific features of a car or property depending on the weather. Most of us would agree that the weather does impact our buying behaviour, but for most people these are financially the two most expensive items they will purchase and keep for a number of years.

Using data from forty million US vehicle sales they established that sales of 4×4’s increased when there was snow fall of 10 inches or more. Black cars are less likely to be sold when it’s warm, a 20 degree increase in temperature leads to a 2.1% reduction in black vehicle sales. It’s not just the heat that affects black cars, if it’s overcast or completely clear then sales of black vehicles reduced by 5.6%. When it’s warm and the skies are clear common sense suggests that convertible sales will increase, which is correct. That said if there is a 20 degree increase in temperature this also drives convertible sales regardless of the season.  However, unusually warm weather does not impact convertible sales if it is already warm (where the average daily temperature is over 80 degrees).

The vehicle data was collated over a seven year period, so they were able to track the cars and establish if they were re-sold. Analysis suggests cars purchased on a day with abnormal weather conditions were more likely to be owned for a shorter period of time, – evidence in favour of projection bias.

Buying a certain type of car based on the weather is one thing, but purchasing a house based on the forecast is quite another. Generally speaking mortgages are taken out over a number of years, and unlike a car it’s not as easy to ‘trade in’. Wales isn’t known for its hot summers, but like with the vehicle data this research was carried out in America, so please excuse the reference to swimming pools!

They studied houses with swimming pools and air conditioning; they found that the house value increased when it was sold in the summer compared to the winter. Again this may sound like common sense, but buying a house isn’t an instant purchase. As is often the case its a few months before the person can move in, so if an offer on the house is accepted in August they may not move in until November. It’s unlikely that they would be able to utilise the pool until the following summer – projection bias. There wasn’t any evidence to suggest that weather influences the hedonic value of a fireplace or the plot size.

Before I started writing this blog, I set up a poll to find out if you thought that the weather influenced consumer purchasing decisions. As I anticipated the general consensus was yes, which I believe to be the common sense answer.  Purchasing a car or house is a low-frequency high ticket price decision, a decision that should really be made using the ‘rational’ classical utility theory. Yet something as simple as the weather can throw many consumers decision process, they are caught up in the here and now. These findings are significant for marketers, they need to identify and correct these systematic errors (or if you’re a rogue marketer capitalise on them). It is thought that projection bias maybe prevalent in other important decisions. Is your product one of them?

Please leave a comment below or email me at jodi.stuart@realradio.co.uk or tweet me @realradiojodi

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