1
Neuroeconomics
2
Introduction
The process of decision making which occurs in brains of human beings has always
been a mystery for the nat...
3
As a rule, these models use the issue of the external world as the inputs state and after
the analysis they get outputs ...
4
events which lead to particular decision. As a consequence, the psychological theories are
much more complicated than de...
5
The second state would promote creation of new algorithms by means of development
of new neurobiological insights; new h...
6
and particular behavior, but also identify systems which are neural or specialized on some
particular tasks, such as con...
7
Neuromarkieng has been created approximately 30 years ago and Ale Smits, who in
2002 worked as a Professor at Erasmus Un...
8
Latter, in 2000, more studies were dealing with monitoring of the brain of people who
were watching television advertise...
9
Since the theory of decisions making, which has already been mentioned above, is
frequently violated, there were alterna...
10
The researchers also identified a relationship between a range of theoretical
frameworks and practical decisions in ord...
11
use of the dorsomedial system which serves to calculate versus the visceral representations in
the more primitive ventr...
12
The first one is believed to be the place where planning occurs. It is also responsible
for cognitive control and cross...
13
It considers all functional modules outputs at once they occur; after that the system
involves a hypothesis considering...
14
Neuroeconomics is used in commerce with aim to stop the process of losing
customers, sale opportunities, experiencing n...
15
increase the likelihood the customer will place an order or look for service on the web rather
than calling the call ce...
16
company in the future
Increase charity activities These activities are very important for the
company; it is necessary ...
17
3. Anticipating Errors. People make mistakes and it’s possible to design a choice
architecture which anticipates these ...
18
Customers experience priming and framing is one more approach which is used by the
companies to influences the process ...
19
These companies build particular reputation and become brands. On the basis of
experience of using their products, cust...
20
what they are looking
for
year of record;
People are going to a
restaurant in order to
have some meal
what they need;
T...
21
working memory and capabilities to foresee all possible incomes are involved in the process
as well.
It is not a secret...
22
be driven by a habit or affected by some
feelings; they might be made quickly,
similarly to the decisions which are bas...
23
However, as practice demonstrates, usually customers try to make decisions at the
first level as it is less time consum...
24
- Minimizing the cognitive effort required for making a choice;
- Maximizing the accuracy of the decision;
- Minimizing...
25
The strategies of decision making which are described as those to be applied at the
third level, can be characterized o...
26
sophisticated approach to our web strategy…to insure it puts the user experience at the heart
of our business (Notonthe...
27
weight, but it involves simplicity
assumption which is of great
importance to each attitude.
Selection of the most impo...
28
Elimination on the basis of some aspect
rejects the good which do not meet
minimal requirement value for the most
impor...
29
It is important to pay attention to the fact that frequently customers combine these
strategies, i.e. take features fro...
30
IBM Global Innovation Jam
Health & Medicine How to get rid of tonsil stones
Last FM Radio on the internet
Lego Mindstor...
31
are created by the companies might be developed in order to increase their profits through
penalties which are applied ...
32
Such unlawful actions inevitably reduce reputation of the companies as the customers
never come back to the stores wher...
33
long terms; it is also necessary to identify
whether people who arrived first were not
served the last.
Interactional T...
34
Case Study
The company’s actions are aimed at development of the retail strategy, disruptive
breakthrough packaging des...
35
codify their understanding of the shopping process in order to reduce the complexity of
decision making.
The traditiona...
36
3. She often wonders, “Why is that the TV & print advertising for deodorant,
razors & body wash products feel so beauty...
37
The discussed company is a member of the TBWA family, so Disruption is practiced
by it. The company has adapted and dev...
38
The company also uses principles of shelf design which are:
- Inspiration
- Education
- Navigation
- Selection
As for t...
39
References
56th annual management conference, viewed 28 July, 2012,
<http://www.chicagobooth.edu/news/2008mancon/01-tha...
40
Notonthehighstreet.com partners with Maxymiser to enhance its website with customer
experience optimization, viewed 28 ...
41
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Neuroeconomics

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Neuroeconomics

  1. 1. 1 Neuroeconomics
  2. 2. 2 Introduction The process of decision making which occurs in brains of human beings has always been a mystery for the natural and social scientists. For nearly three centuries they used various method and approaches to explore the issue, but nobody had success. Since the end of the twentieth century a group of interdisciplinary scientists started combining various natural scientific and social approaches in order to create a new discipline which is today called Neuroeconomics. Neuroeconomics is based on the assumption that it is possible to provide better insight to the discipline of economics, psychology, and neuroscience if various tools, both theoretical and empirical, are combined to result into synthesis to study the disciplines. It is noticeable that all the studies in the field of Neuroeconomics which have been conducted to the present day support such statement. In order to promote the discipline, scientists engaged various theories from psychology and economics to change the structure of neurobiological decision making understanding. Moreover, some of the recent findings started suggesting theoretical models constraints of psychological and economic domains theoretical models of choice constraints. In order to identify the issues which Neuroeconomics can explain while standard economics fails, it is necessary to explore the whole systems of both disciplines in terms of studying human behavior and decision making process (Glimcher, 2008). Literature Review Prediction is the goal for many economists who try to study the process of decision making. These professionals try to develop various models based on some principles of mathematics, axiomatic as these are believed to predict choices of people.
  3. 3. 3 As a rule, these models use the issue of the external world as the inputs state and after the analysis they get outputs which are likely to be choices of people. Experience economists use such models successfully and they give them an opportunity to make accurate predictions. One of the models is demonstrated at the picture below: However, economists do not take into account a range of facts which are believed to be important by Neuroeconomics. As a consequence, models are considered to be abstract. Still, the final product of the discipline is revealed through behavioral hypotheses which are testable, normative, and of high quality. Psychologists investigate the mechanisms of decision making in greater details, trying to understand mental constructs which are used by people as a base for the judgment, which leads to taking a decision. Psychological choice models, unlikely those economical, are based on processes which occur in brain, such as fears, tendencies to overestimate possibilities, etc. The models give more thorough results than economic calculations as they capture and analysis mental Добавлено примечание ([A1]): название таблицы, откуда взяли?
  4. 4. 4 events which lead to particular decision. As a consequence, the psychological theories are much more complicated than decision models which are offered by the economists. However, psychological models are very difficult to be tested completely because they are complex and provide greater realistic insight to many issues and details. Neurobiologists explore the process of decision making at the deeper level, trying to explore various neural pathways which lead to particular behavior. They examine computations as well, trying to understand the way the brain studies its own computational architecture. However, neurobiology has made only its first steps of development and only simple decisions are studied; these, in their turn, are so simple that any psychologist or economist would consider them to be uninteresting to be studied. Neurobiologists’ goal to understand the way decisions are many by tracing the pathways, which have been already mentioned above, studying the simple decisions which are neglected by psychologists and economists. The disciplines combines all the three approaches in to a single science which provides insights from various levels of analysis, constraining and impairing insights at analysis of other levels. It is suggested that in the future the discipline will come to encompass more areas of science, such as basic statistics and theory of control, which would promote its studies of decision making. However, it is expected that adding of new disciplines to the Neuroscience will restrict possibilities of its cooperation with economics and psychology; it is believe that the studies in the flied will be divided into two stages. The first one would deal with social sciences high level theories which would be used to promote insights from biological point of view, creating unified framework of concepts.
  5. 5. 5 The second state would promote creation of new algorithms by means of development of new neurobiological insights; new high level theories are planned to be developed. Thus, it is possible to conclude that Neuroeconomics explores processes which occur in the brain of a human being, leading to making of decision, as well as various paths between the processes and the decision making itself. These two issues cannot be investigated by standard economics (Glimcher, 2008). All activities of people are based on the process of decision making. Multiple decisions are made every day and they influence people’s finance, well-being, health, future possibilities, etc. Recognition of importance of the process of decision making made many researchers interested in the reasons which influence selection of one or another option. Traditionally neoclassical economics was dealing with the way people should behave, while others disciples, tried to answer the question why people acted one way or another. However, Neuroeconomics is a new discipline which combines methodology and theory from various areas of psychology, economics, statistics, cognitive neuroscience, behavioral finance, theory of decision, etc. Neuroeconomics, being a combination of many sciences, has an opportunity not only to explain why people act in some particular way, but also predict their further decisions (Glimcher 2008). According to Gazzaniga (2002), “Neuroeconomics looks at the structure, functions, and development of the nervous system and brain, while cognitive Neuroeconomics studies how behavior and the nervous system work together in humans and animal. In other words, cognitive Neuroeconomics is the study of the neural mechanisms of cognition.” The area of studies of Neuroeconomics uses techniques to neuroscience in order to identify specifically how people make choices. Neuroeconomics does not only explore various regions of people’s brain which are associated width the process of decision making
  6. 6. 6 and particular behavior, but also identify systems which are neural or specialized on some particular tasks, such as control, preference, choice and judgment (Camerer et al. 2003). Development of Neuroeconomics During the last half a century, researchers have been experimenting with various hypotheses and scenarios, trying to create more accurate models of acting of people in situations which require decision making. According to Zak (2004) “before imaging technology, it was not possible to accurately investigate the influence of emotions and cognition on these economic models of decision making. However, behavioral economists have begun to challenge the assumptions of the rational agent and have found that psychological and emotional factors do indeed play an important role in people’s economic decision making process. Essentially, Neuroeconomics looks at two branches of choice: solitary choice and strategic choice.” According to the traditional theory of economic, people are entities who are rational when it comes to decision making; each person possesses clear sense of personal preferences and does his or her best in order to promote well being and make the right choices all the time. However, there is evidence that such model is often not followed do, because people try to outwit density and evolution. As for Neuroeconomics, it gives the scientists an opportunity to reveal indicators which would explain how all the process of decision making work in the brain, promoting assessment of risks, choices, and preferences (Glimcher 2008). Neuromarketing Neuroeconomics is an academic science which deals with the mechanisms which cause and run the process of decision making. Neuromarketing is the field of application of Neuroeconomics and particularly using brain scanning technology in order to find answers to traditional questions of marketing and reach goals of the marketing industry.
  7. 7. 7 Neuromarkieng has been created approximately 30 years ago and Ale Smits, who in 2002 worked as a Professor at Erasmus University, created the term of the science. The first conference which was focused on Neuromarketing took place in 1999 and it discussed Neuromarketing burgeoning field. It was acknowledged at the conference, at a range of techniques of Neuroeconomics are more effective than other ones, for example Functional Magnetic Resonance Imaging, Magneto Encephalography or Quantitative Electroencephalography are used more frequently. However, the earlier forms of the techniques were used already in the 1960s. Before the technologies were developed, researchers used divided which were involved into measuring spontaneous pupil dilation. This way they managed to indicate interest of people while they were viewing advertisements. Later, at the beginning of the 1970s, a new technology was developed. It allowed identifying at what part of a page or advertisement people focused most of all, and the image which was pictured there, was considered to be the best advertised one. Finally at the end of the 1970s, the processes which occur at both hemispheres of people’s brain in the process of decision making were started to be studied. As a consequence, researchers had to create new technologies and each one of them was heralded as groundbreaking at the time and none of them became widespread in terms of promotion of commerce. At the beginning of the 1980s, Steady State Topography technology was started to be utilized, as well as many devises which were aimed at brain scanning. They demonstrated areas of brain which were stimulated and produced brain snapshots. Studies which were conducted with this technology demonstrated that people tend to buy brand goods as their brain right parietal cortex was stimulated. Thus, the theory of “location of brand equity” occurred.
  8. 8. 8 Latter, in 2000, more studies were dealing with monitoring of the brain of people who were watching television advertisements. The studies allowed predicting the scenes which could be recognized by people in one week. It was found out that the scenes were recognized after certain activity in the left brain during the posterior region exposure in the frontal cortex. Later many similar studies were conducted; however, none of them brought any significant results. Various techniques were used to deal with neuromarketing, but all of them had their own weaknesses and strengths, so the researchers spent a lot of time in order to interpret the data. As Belden indicates, “Most imaging studies report activations arising from the difference between two tasks. For each brain area, the signal during the takes is compared to the signal at rest; those areas of the brain with stronger signals during the task are presumed to be processing the information. A very recent breakthrough however, may be able to detect the activity of an individual neuron in the future. At this stage however, the smallest brain area that can be represented – a voxel, is the size of a grain of rice and contains tens of thousands of neurons. It is interesting to note that there are about 100 billion neurons in the typical brain, but current FMRI resolution is only about 150,000 voxels. The changes in blood flow in a voxel thus, indicated increased activity of not a single neuron but a huge pod of tens of thousands of neurons.” Components of decision making As it has been identified by Neuroeconomics, there are multiple factors which affect the way people make decision. However, some of them are essentially important for the process of decision making and accepting or rejecting some options.
  9. 9. 9 Since the theory of decisions making, which has already been mentioned above, is frequently violated, there were alternative models developed in order to explain how choices are made and how risks are taken. Prospect theory is one of the alternatives. It contains a range of effects which might alter or lower the possible value of the gains and losses (Kahneman, Tversky, 1979). Kahneman and Versky also mention that “phenomena such as the certainly effect, which states that people are prone to underweight probable versus certain outcomes, or the isolation effect which finds inconsistent preferences for identifiable outcomes based on how the outcomes are framed, or anchoring, biases and correlation illusions effects challenge the notion that utility theory holds in real life causes of human judgment.” Researchers state that probability of calculation of relationship between some events and actions, as well as their possible outcomes is critically important for surviving. According to one of the studies, primate ventral midbrain dopamine neurons might be responsible for errors of coding, which are important for the process of decision making (Fiorillo et al 2003). Researching the same issue (however, in the context of gambling), Gold and Shadlen (2002) “it was found that dopamine levels increase during gambling, which indicates that uncertainty may be the mechanism tha induces this dopamine rush. It is hypothesized that this may explain the reward people feel when gambling, which cannot be explained by the monetary gain of gambling since losses usually outnumber gains. This uncertainty induced increase in dopamine may act to reinforce risk taking behavior, while the physic response after predication error may serve to mediate the reward reinforcement itself.”
  10. 10. 10 The researchers also identified a relationship between a range of theoretical frameworks and practical decisions in order to get to know how they were computed in the brain. The conclusion was that the decisions can be made after the evidence reaches a threshold value; the value, in its turn is under control of neural circuits which are responsible for calculation of the reward rate (Gold, Shadlen 2002). However, there are some factors which influence the process, described above and these factors deal with some moral values. For many people trust and cooperation are very important for the process of interaction and neural response. They allow promotion of mutual action and sharing gains over the choices of personal interest and also create a stability sense in long term scenarios. Fairness is one more important component. It is natural that people try to reject any cooperation and avoid the process of positive decision making when they are believed that they might be cheated. The issues of fairness and unfairness are very powerful when it comes to taking risks of gain and loss. However, these are still valuated and calculated in the brain and Neuroeconomics is the society to deal with the process Neuroeconomics. A range of experiments were conducted by Montague and Berns (2002) in order to develop a computational model which would anticipate a single-unit neural responses class in the striatal neurons and orbitofrontal. These and many other studies revealed that there are two choice systems. They are integrated functionally and at the same time they are independent one from each other; both of them can be characterized as sensitive to loss because of their anatomical structure and processing. Smith et al (2002) states that “the dorsomedial system processes loss when deliberating risky gambles, when subjects make a choice that results in loss, there is a greater
  11. 11. 11 use of the dorsomedial system which serves to calculate versus the visceral representations in the more primitive ventromedial system which animals most likely use to make decisions. Choice processing seems to be centered in the more medial structures with more ventral than dorsal distribution.” Many animals studies brought significant contribution to Neuroeconomics, as they helped to reveal new information about the way the animals are able to estimate benefits which they might get from particular actions. In the process of decision making people deal with the issues of choice and risk judgment, so Neuroeconomics studies them as well. The science states that risk aversion is related to the amyglada and frequently people are pushed towards some particular choice by their fear. As Bechara (1997) states, “cortical override of the fear response is demonstrated in animal studies using shock. Over time, the response will be “extinguished.” If the connections between the amyglada and the cortex are severed, the fear response will return. This demonstrates that the amyglada does not “forget” but the cortex is suppressing the response.” Neuroeconomics and brain There are four lobes of brain. According to Colins Camerer, from the brain’s front to its back and from its left torgiht, clockwise. These parts are called frontal, parietal, occipital, and temporal.
  12. 12. 12 The first one is believed to be the place where planning occurs. It is also responsible for cognitive control and cross-brain input integration. Areas of parietal type are the place for motor action; the occipital lobe controls the process of vision; the temporal – deals with issues of recognition, memory and emotions which are experienced by the person. Each of the areas has neurons and all of them are interconnected. The connection enables the train to give response to all stimuli. Human behavior is believed to be the “golden middle” between instructs and animal emotions and human foresight and deliberation. Gazzaniga talks about automaticity, sense- making, and modularity of the functions of human brain, stating that architecture of human brain is build in a way that enables its functional modules to become capable for working independently and at the same time cooperate. The modules have their own functions both outside and in parallel with conscious experience. External and internal behaviors are influenced by the modules on a regular basis. Interpreter is the system which is based at the left side of the brain and which is responsible for the process of monitoring. Добавлено примечание ([A2]): название рисунка, откуда взяли?
  13. 13. 13 It considers all functional modules outputs at once they occur; after that the system involves a hypothesis considering possible reasons of the action monitored (Camerer et al 2004).” The picture below demonstrates where each of the parts of brain which participate in the process of decision making and are studied by Neuroeconomics: Neuroeconomics and commerce Neuroeconomics is paid attention to by many professionals who represent various spheres of business. However, probably, the greater interest is demonstrated by those people who are employed in the sphere of commerce and trade as Neuroeconomics helps them to influence decision of the customers at various levels and thus, promote sales of their goods and products. Добавлено примечание ([A3]): название рисунка, откуда взяли?
  14. 14. 14 Neuroeconomics is used in commerce with aim to stop the process of losing customers, sale opportunities, experiencing negative reputation, meeting customers’ expectations, and ability of the company to remain competitive. Neuroeconomics brings innovations in the process of management by the companies and changing the tactics and approaches to attract more customers, they gain more profits. Customer Innovations is one of the companies which help other organizations to create experience to improve their retention of the customers, acquisition, and their profitability. As it is reported, application of Neuroeconomics knowledge by the company helped other organizations to reach: - Acceleration of their sales from the “outside in” - Retention of rapid revenue - Promote reactive insight of the customers - Improve design of signature experience - Effectively deal with aligning of the employees and intermediary experiences. There are various techniques which are used by this company and other ones in order to contribute to the process of decision making of their customers and increase the sales. Practical Part Neuroeconomics Approaches: Choice architecture A representative of Customer Innovations comments about this approach: “Well- designed experiences influence behavior. A well-designed customer experience can influence customers to return for additional purchases, spend more money during each purchase, and tell lots of other potential customers about the experience they’ve had with your business, etc… In addition, a well deigned-customer experience can influence customer behavior in a way that decreases the cost of service. For example, the experience can be designed to
  15. 15. 15 increase the likelihood the customer will place an order or look for service on the web rather than calling the call center. ” Earlier these issues were disregarded by the classical economics in order to make the process of running by the companies simpler; the whole approach was based on a relatively stable amount of actions which were taken on the basis of settled preferences. However, this approach cannot increase sales as in real life people tend to change their experiences, they tend to buy something better and use improved production. Moreover, sometimes they actually have little idea about the issues they want. Customers create some preferences and pass a process of decision making in order to put away all the alternatives which bring fewer benefits. As it has been already mentioned above, more and more attention is paid to Neuroeconomics. Moreover, nowadays usage of the science in order to influence customer decision making process is not only about directing innovative actions on the customers, but also improving attitudes and approaches in the employees of the company. Sunstein and Thaler give advice on the issue, sharing useful information which promotes the approach of choice architecture and contributes to the process of problem solving: Goal Decision Increase employees’ savings Encourage the employees to enroll the savings into various plans Increase supply of some products Create a plan which would promote increase of percentage of supply in the future, create conditions for the suppliers which would motivate them to increase the portions of the products which will be supplied to the
  16. 16. 16 company in the future Increase charity activities These activities are very important for the company; it is necessary to create a plan which would provide employee with further benefits if they become involved into charity and volunteer work. Respond to requirements of the market effective Design polices which would be aimed at meeting needs of the customers, demonstrating them that prices of the produces are equal to the quality, etc. The same researchers, Sunstein and Thaler, mention that there are three the most important elements which are aimed at creation of a choice architecture which promote better results for the customers and the society: 1. “Default Design. Whatever you choose as the default option has the highest likelihood of being selected. For example, the states that have organic donation as the default option when individuals get a driver’s license have a might higher acceptance rate. In fast food restaurant, highly profitable combo meals have become the default option…customers often need to explicitly ask for just the burger. Design architects need to pay careful attention to the default option. 2. Providing Feedback. People respond to feedback about their decisions. For example, in some markets electric utilities are starting to provide specially designed bulbs (called orbs) that glow red as homes use higher levels of energy. These devises have influences customers consumption behavior and have proven to reduce energy use during peak periods by 40 % in Southern California. Добавлено примечание ([A4]): название таблицы, откуда взяли? если сами сделали, то тоже просьба указать
  17. 17. 17 3. Anticipating Errors. People make mistakes and it’s possible to design a choice architecture which anticipates these mistakes and thus leads to better outcomes. [For example,] Save More Tomorrow is based on the same principle of expecting error… We ask people if they want to commit now to saving more lately, because all of us have more self control in the future. The first company that adopted it tripled savings rates, and the program is now spreading. They also use the example of the Paris subway card, which allows users to insert it into an electronic turnstile in any of four ways to gain entrance to the subway. Compared that to most payment kiosks in which there are 4 possible ways to insert your credit card…only of which will work. ” Neuroeconomical choice architecture in practice Advantages which are provided by Neuroeconomics and choice architecture are applied in numerous companies and most of them are successful. The most famous of them are Chicago GSB, Google, and Gmail. As Thaller said, “Good is developing choice architecture to remind Gmail users when they forget an attachment or may be about to send a rude email… if you mention the word attachment in the text of your email and you don’t include an attachment, it would prompt you… even better would be able an emotion detection system that will send you a warning if you are about to send an angry email.” For years the strategy of choice architecture has been used by Google and it made it the most popular search engine in the world – nowadays it is used by millions of people all over the world every day as the engine possesses characteristics which meet requirements of the users (56th annual management conference). Neuroeconomics approaches: Priming and Framing experience of the customers
  18. 18. 18 Customers experience priming and framing is one more approach which is used by the companies to influences the process of decision making. What is interesting about this approach is that it is not logical or rational. Experience of the customers demonstrates that their decisions are frequently influenced by subconscious shortcuts. These, in their turn, significantly influence the way people think, and as a consequence, the way they evaluate risks, gains and what decisions they make. This method of influencing the process of decision making in customers was researcher by Amos Tversky and Daniel Kahneman, who were pioneering economists of behavioral theory. It was found out by them, that framing which is loss-averted contributes to the lack of rational decision making. This factor was called framing effect and later it was identified to be added by the fact that experience of the customers is priming. Priming involves association activation in memory of the customers who are involved in the process of decision making; priming influences the customer’s decision just before the process of decision making is completed. Priming creates a kind of an “anchor point” and it affects decision of the customers significantly. However, working with leading retailers, it is necessary to pay attention to the impact of drawing customers’ signage into the shop, as well as on one’s opportunity to influence eventual purchase of the clients. Priming and Framing experience of the customers in practice Similarly to the previous case, the current strategy is used by many companies all over the world. Some of them are Wipro, Mariti Udyog, and Infosys Technologies. It is important to pay attention to the fact that nearly all companies, including such giants as Samsung, LG, Nokia, Philips, and Ariston use this strategy in order to attract more customers.
  19. 19. 19 These companies build particular reputation and become brands. On the basis of experience of using their products, customers buy more goods from these companies as they are sue that they quality is high (Concept of corporate strategy). Neuroeconomics approaches: Optimization of the elements of customer experience Elements of the customer experience are very important o be optimized in order to promote sales. However, it is impossible to influence all of them, so it is necessary to take into account those which are the most important for each particular sphere of business. In most situations these would be: 1) The choice of the customer to buy something; 2) The choice to have some recommendation; 3) The choice to continue visiting the store and continue making purchases. However, practice demonstrates that there are few companies which have adequate opinion considering alternatives of the customers and their choices. Moreover, many companies act in a way to create barriers in the process of decision making of their customers, and thus, prevent profitable behavior of the customers. According to the rational economic theory, if the client has more choices that are better only. Of course, there are several methods which are aimed at creation of greater level of satisfaction in the clients: Type Description Example Solution Preference matching experiences Customers start having some experience and they clearly understand Customers enter a music store, looking for a particular group disk, or particular Greater selection increases the opportunity that the customers will find
  20. 20. 20 what they are looking for year of record; People are going to a restaurant in order to have some meal what they need; The more items they find in the menu, the more likely that they will be satisfied Exploratory search experiences Customers looking for alternatives to some item, which matches their unique interests A customer might search for a perfume which he had in the past, but if it is not available, the buyer might try to find some similar smell. Availability of greater choice increases the opportunity that the customer would find the item he needs. However, there are many cases in which people have to manage the process of decision making in order to solve complex choice problem. Some people might experience conflicts cause of attractiveness of some product or its alternatives. In such situation some choose default option or just refuse from buying anything. It is suggested by the researchers that when the number of alternatives starts increasing, people tend to rely upon heuristics; this means that they take into account fewer alternatives, using the information which is valuable for them about the product. One of the research researches in the sphere of Neuroeconomics states that an approach which is based on bounded rationality is of more information processing type. The researcher demonstrates that people who make decision are usually limited on the basis of their motivational level and their processing information capacity. Such issues as limited Добавлено примечание ([A5]): название таблицы, откуда взяли? если сами сделали, то тоже просьба указать
  21. 21. 21 working memory and capabilities to foresee all possible incomes are involved in the process as well. It is not a secret that nowadays people are overloaded with information, various activities, and choices to the extent that these become challenging and this are one more barrier to promotion of profitable behavior of the customers. The method of optimization of customer experience, as well as any other one, requires taking into account various levels (there are four of them) of decision making. All the levels are complex and they are based on the goals of people, as well as on the level of their motivation and involvement intensity: First level – decisions which are based on recognition The current level is aimed at including various quick, and mostly automatic, unconscious, and habitual decisions. Such decisions are made by people every day and in the process of decision making, people do not pay a lot of attention to the attractiveness of the product because they know from their previous experience what decision should be made. Second level – decisions which are based at simple attractiveness The level involves decisions which are made with references to some features which are considered to be attractive by the customers. There are no conflicts between the features and frequently the solution to the problem is obvious to the buyer. Such decisions might
  22. 22. 22 be driven by a habit or affected by some feelings; they might be made quickly, similarly to the decisions which are based on recognition Third level – decisions which are based on alternatives Decisions of this type involve various choices between various types of the same products; in this case the process of decisions making involves not goals only, but conflicts as well. In most cases some features of the products might be favorable, while others might not bring any benefits. Any decision from this level might become transformed into decision of the first or the second level. it is necessary to pay attention to the fact that most researches which were conducted, addressed the problem of this particular level Fourth level – decisions which are made on the basis of innovation solutions of the problems Such situations can be characterized by alternatives which are not fixed; there are not attributes which might serve as features to characterize the alternatives. The forth level involves creative problem solving and it is an important process which promotes generation of more alternatives. Добавлено примечание ([A6]): название таблицы, откуда взяли? если сами сделали, то тоже просьба указать
  23. 23. 23 However, as practice demonstrates, usually customers try to make decisions at the first level as it is less time consuming. Buyers cannot become involved in the process of evaluation which is based on alternatives, nor they can solve innovate problems as a part of their usual experience. No matter what level of decisions making the customers are involved in, for companies which use Neuroeconomics it is very important to understand how decisions are made. The theory of decision making has been already described above. However, it is natural that theoretical knowledge sometimes differs from the facts and events which are faced by the processionals in practice. So, a representative of Customer Innovations shares experience of the company: “Customers follow decision strategies that are depended on the situation, their goals, and their persona. Rather than an invariant approach to solving choice problems, customers leverage a wide range of approaches, often developed on the stop. Since decision makers generally cannot process all of the available information in a particular situation, they develop problems representations by filtering or restructuring the available information. Hence, which information is selected for processing can have a major impact on their choices. In general, it is not true that customers follow complex decision process for complex, high involved decisions. In fact as the complexity of the decision increases, the complexity of the decision process often decreases. As decision situations become more complex, customers use rules of thumb or heuristics to reduce the complexity of the options and the information they must consider. For example, options that are superior on the most prominent of a small set of attributes are favored as the decision talk becomes more complex. The decision process that customers follow and the options they select will depend on the extent to which customers’ goals are:
  24. 24. 24 - Minimizing the cognitive effort required for making a choice; - Maximizing the accuracy of the decision; - Minimizing the experience of negative emotion during decision making; - And maximizing the ease of justifying the decision or some combination of such goals. The way customers make choices is also highly dependent on the way their choices are present or framed. This creates a significant opportunity for providers that understand the psychology of their customers’ decision processes to present options in a way that improves the customer experience and divest additional revenue. One of the ways to do this has to do with understanding customer attention. There are two types of attention: - Voluntary - Involuntary.” According to the expert, the first type of attention is devoted to data which is perceived to relevant to the customer given the aims. People are expected to devote their efforts in order to examine information which in their opinion should help them and promote attainment of goals. However, it is necessary to pay attention to the fact that attention might be captured involuntary by some environmental aspects – that is some events which are surprising, unexpected, novel, threatening, salient, etc. Thus, attention can be influenced both by goals and by some involuntary factors which are percepted. The current model is demonstrated on the picture below:
  25. 25. 25 The strategies of decision making which are described as those to be applied at the third level, can be characterized on the basis of the overall amount of data, comprehensiveness of attributes, and selectivity. Optimization of the elements of customer experience in practice Notonthehighstreet.com is one of the leading online markets of the United Kingdom and it uses the strategy of optimization of the elements of customer experience. In order to reach this aim, the management of the market uses various personalization, testing, prompting online shopping improvements and making experiences of the customers better. Moreover, the market does not only become promoted through such strategy, but it provides over 3,000 small businesses which are registered on in with the testings in order to help them promote their own activity. The Head of Product Management Department of the market, Dave Thomson, says: “We are a growing brand with products from over 3,000 small British businesses, so we need to make sure our visitors can easily find the original, quality items they desire. We have only just started on our testing programme, but already it is clear that you can’t base decisions on your instincts when it comes to making website content decisions… we can take a Добавлено примечание ([A7]): название таблицы, откуда взяли?
  26. 26. 26 sophisticated approach to our web strategy…to insure it puts the user experience at the heart of our business (Notonthehighstreet.com partners with Maxymiser to enhance its website with customer experience optimization).” Neuroeconomics approach: Seeking for novelty and differentiated experience design. Novelty is what every customer is looking for and this is why all the companies tend to bring some innovations into their products – this might be additional function, some extra devise, new look of good, new components, etc. However, it is necessary to pay attention to the fact that novelty seeking usually requires dealing with a more complex problem of decision making and in such cases the customers usually involve various strategies to choose the necessary product. Strategies which are applied to the process of decision making and which are used at the third level are: Strategy Actions Adding of weight The strategy involves taking into account only one alternative at a time and examination of all the attributes for this current option, as we as multiplication of each of the attribute value in order to weight it with greater importance. As consequence the product which has greater value would be the one chosen. Equal weight strategy This strategy is a variation of the strategy which deals with adding of the
  27. 27. 27 weight, but it involves simplicity assumption which is of great importance to each attitude. Selection of the most important attribute According to this strategy, it is necessary to provide a strong contract to adding of the weight – the alternative product which has the best value on its attribute which is the most important one, is the good to be selected. satisfying The strategy involves choosing the product which is the first option which meets requirements of the customer. All the options are viewed sequentially; if some attribute turns out to fail to meet expectations of the customer, it is simply rejected and the next good is analyzed. It is very important to pay attention to the fact that using such strategy, the process of decision making is influenced by the order in which the products are viewed. Elimination on the basis of some aspect The current strategy is aimed at combination of some elements of the strategies of satisfying and the most important features of the good chosen.
  28. 28. 28 Elimination on the basis of some aspect rejects the good which do not meet minimal requirement value for the most important feature. The second most important feature might be added to the process of elimination in order to make the search more sophisticated. Confirming dimensions majority The strategy involves alternatives which are processed and have the highest values of the alternatives; they compare each of the features. Voting of feature This strategy belongs to the simplest ones as it only counts the amount of positive and negative features which characterize various alternatives; then the strategy is aimed at the good which has the greatest amount of positive features and the smallest amount of negative ones. Choice Heuristics This strategy is used to solve problems with decisions making. The method is acquired through imitation, experience and training. Добавлено примечание ([A8]): название таблицы, откуда взяли? если сами сделали, то тоже просьба указать
  29. 29. 29 It is important to pay attention to the fact that frequently customers combine these strategies, i.e. take features from each one of them which are the most credible and relevant and apply them when it is necessary to choose some particular good. Seeking for novelty and differentiated experience design As it has already been mentioned above, all the companies in various spheres of activity and form various industries tend to introduce innovations to their goods in order to increase sales. Some of the companies are very successful, some are not as lucky as creation of innovative concepts is not the only thing which is required for increase of sales. The table below mentions the companies which are claimed to be the most successful ones in terms of innovations and promotion of the sales through these innovations: Company Innovation concept Adobe Customer feedback ideaspace on acrobat.com Amazon Marketplace Apple Web servers of open type BBC Backstage and labs of the company Cancer Research UK Challenge of open venture Dell Idealstorm eBay Online market Facebook Social networking Flickr Sharing by photographs and images Google Research engine, Googwave Guardian Storing of data, research on crowd source Hewlett Packard HP labs open innovation office
  30. 30. 30 IBM Global Innovation Jam Health & Medicine How to get rid of tonsil stones Last FM Radio on the internet Lego Mindstorsm Livework Streetcar service design MIT Open course ware Moodle Learning environment which has open source Mozilla Firefox Nokia Research network of open innovation P & G Connect and Develop Sony Imageworks Five digital image – software tools which allow manipulation under licenses of open source Twitter Microblogging Wikipedia Online encyclopedia YouTube Sharing by video Microsoft Direct Project data transfer of easy type (The Open 100) (See Annexes to find the complete list of the companies which increased their profits due to the current approach) Neuroeconomics approach: violation of justice There are numerous issues which contribute to the process of decision making Neuroeconomics states that violation of justice is one of them. A range of situations which Добавлено примечание ([A9]): название таблицы, откуда взяли? если сами сделали, то тоже просьба указать
  31. 31. 31 are created by the companies might be developed in order to increase their profits through penalties which are applied to the customers for violation of rules of behavior some of them are: Institution Violation of justice Video rental stores They generate a great part of their income through the late fees Credit card companies Provide approval rather than decline over transitions which re limited and later change fees of the customers banks Present check in inappropriate order of magnitude, that is in reverse. This way the greater amount of checks are more likely to be drawn against insufficient funds Cellular providers These companies limit their customers through contracts and do not tend to create any loyalty through excellent service Car dealers Rise costs of the models of cars which are popular in a shortage case shops Raise prices of issues when these are especially needed (umbrellas during some rains, winter clothes in winter) Добавлено примечание ([A10]): название таблицы, откуда взяли? если сами сделали, то тоже просьба указать
  32. 32. 32 Such unlawful actions inevitably reduce reputation of the companies as the customers never come back to the stores where they felt that they were not treated fairly. Moreover, people instinctively feel that such institutions should be punished, so the news about violation of justice spreads quickly and the companies which do harm to the customers quickly lose all their buyers. In some cases such actions from the part of the companies are intentional. However, sometimes they are not, so dealing with promotion of the sales by means of Neuroeconomics, it is necessary to pay attention to three types of justice which are related to the experience of the customer and might influence level of sales: Type of justice description Distributive In order to make sure that policies of the company do not violate this type of justice, it is necessary to take care about customers to perceive the outcome they receive through fair treatment at the levels of their investment, believes, and receiving. Procedural To promote this type of justice, management of the company should get to know if the process which was used to arrive to the outcome was fair concerning the customer, whether the buyers see that the their time was treated as a valuable issue or they believe that it was wasted in
  33. 33. 33 long terms; it is also necessary to identify whether people who arrived first were not served the last. Interactional The customers should be treated fairly; they should see that they are respected by employees of the shop or the company. Thus, it is possible to conclude that Neuroeconomics make a significant impact on the way business develops as it enables all the companies to influence the process of decision making in the customers. There are various approaches to achieve this aim and many companies prove to be successful addressing the issue. Добавлено примечание ([A11]): название таблицы, откуда взяли? если сами сделали, то тоже просьба указать
  34. 34. 34 Case Study The company’s actions are aimed at development of the retail strategy, disruptive breakthrough packaging design and strategy of merchandising. The actions are targeted with the usage of proprietary tools and frameworks. Integer’s proprietary insight frameworks are used: 1) 3-lens Model 2) The Shopper Continuum 3) Shopper Mindsets and Modes As for the key strategy frameworks, these are Disruption at Retail, shopper-Based Design Frameworks, and Principles of Shelf Design. The 3-Lens Model The company sees the world three the three lenses of Brand, Retailer and Shopper which are aimed at finding solutions to the problems of the clients. In order to target them, the three lens model was created. The company states that: - “We start by understanding the objectives, obstacles, and cultural relevance of the brand. - We understand the values, behaviors, and cultural context of the shopper, with a focus on purchase motivations and barriers. - And we understand the business goals, constraints, and shopping context of the retailer. This is how we attack business problems.” The Shopper Continuum The company views shopping not as a kind of linear affair, but as a complex and messy process. The company recognizes its need to understand the process which the shoppers are involved into and it created a framework which would help it to explore and
  35. 35. 35 codify their understanding of the shopping process in order to reduce the complexity of decision making. The traditional funnel of the purchase is limited, so the company created a framework which is more powerful and provides greater opportunities. The framework is called The Shopper Continuum and it involves three activities, which are aimed at understanding of motivations, decisions, and behaviors which occur in the process of development of shopping experience. Qualitative and quantitative information is used in order to map the shopping process complexity. The base model of The Shopper Continuum looks in the following way: Below an example mapping of the main points actions which are taken for making a purchase in the category “Girl Aisle” are shown: 1. “Beauty is important to her; she knows that looking good and feeling good go hand-in hand. 2. When it comes to looking good, she things of beauty products such as cosmetics & hair care; not deodorant, razors & body wash. Добавлено примечание ([A12]): название таблицы, откуда взяли?
  36. 36. 36 3. She often wonders, “Why is that the TV & print advertising for deodorant, razors & body wash products feel so beauty-oriented and inspirational, yet when I shop for these products in store, the aisle is void of both?” 4. I just used my last razor blade and am also running low on deodorant and body wash; guess it’s time to head to the store. 5. I could not get out of the Deodorant, Razors, & Body Wash aisle fast enough; now on to cosmetics, yeah – time to play! 6. When it comes to the current Deodorant, Razors & Body Wash products that I use, I feel like I am in a rut; am I really using the products that are best for me? 7. I will talk to my friends/family and read through current beauty publications for new product ideas and inspiration.” Shopper Mindsets and modes When people shop they are rarely in the same mind frame. The reason is that there are many factors which impact the way customers behave and think, so their purchasing decisions are changed as well. Thus, actions of the company which sells the products should be changed in different categories and browsing, researching and replenishing are the most important issues to be taken into account. Basing all the actions on such approach, the company takes an approach of understanding of the shopper mindset when he or she looks for some product in various categories. The company finds that there are broad and universal mindsets in operations and all of them are quite stable. The company also pays attention to the fact that shopping processes can never be alike since there are many situational factors which impact the mode of shopping. Thus, it is essentially important for the company to create mindsets understanding for various categories. The table to reflect the understanding might look in the following way:
  37. 37. 37 The discussed company is a member of the TBWA family, so Disruption is practiced by it. The company has adapted and developed many tools of TBWA in order to deal with the issues of promotion, retail, and shopping. After such approach has been implemented, the company managed to create its set of exercises and tools which were caused Disruption and retail Recipes. To make understanding to he issue better, the company draws the following example: “during a Disruption at Retail workshop for the PuR brand, we identified confusion in the brand’s in-store merchandising and messaging. It was unclear if the brand wanted to be perceived in the retail context as a home improvement brand or a self-improvement brand. This was a revelation for the client. As the Vision for the brand is to improve lives through cleaner water, the Disruption at Retail quickly became evident – to become a new form of self improvement brand.” Shopper Based Design Framework was developed on the basis of many years of shopper marketing experience. It is used as the foundational approach of the company, which establishes the guiding principles that “leverage key purchase triggers and shopper insights within the store context that address primary purchase barriers, improves shop ability and has a marked effect on improving sales.” Добавлено примечание ([A13]): название таблицы, откуда взяли? если сами сделали, то тоже просьба указать
  38. 38. 38 The company also uses principles of shelf design which are: - Inspiration - Education - Navigation - Selection As for the development of digital practice, the company establishes it on the five pillars: Добавлено примечание ([A14]): название таблицы, откуда взяли?
  39. 39. 39 References 56th annual management conference, viewed 28 July, 2012, <http://www.chicagobooth.edu/news/2008mancon/01-thaler.aspx>. Bechara, A et al 1997, Deciding Advantageously before knowing the advantageous strategy, Science, 275 Belden, Sarah. Science is Culture: Neuroeconomics and Neuromaketing. Practical Applications and Ethics Concerns, viewed 04 August, 2012, <http://www.aslab.upm.es/documents/journals/JMT/Vol0-No2/JMT_0_2-NEU- BELDEN.pdf>. Camerer C et al. 2003, Neuroeconomics: How Neuroscience can inform economics. Camerer, C& Loewenstein, G & Prelec, D, Neuroeconomics: Why Economics Needs Brains, 2004, viewed 28 July, 2012, <http://webs.wofford.edu/pechwj/Neuroeconomics%20- %20Why%20Economics%20Needs%20Brains.pdf>. Concept of corporate strategy, viewed 28 July, 2012, <http://www.scribd.com/doc/32211410/Strategic-Mgmt>. Customer Innovations, viewed 28 July, 2012, <http://customerinnovations.wordpress.com/tag/neuroeconomics/>. Gazzaniga, M 2002, Cognitive Neuroscience, New York: WW Norton & Company. Glimcher, P 2008, Neuroeconomics, Scholarpedia, 3.10: 1795 Gold, J & Shalden, M 2002, Banburismus and the brain: decoding the relationship between sensory stimuli, decisions, and reward, Neuroen, 36. Kahneman, D & Tversky, A 1982, Judgment under uncertainty: heuristics and biases, Cambridge: Cambridge University Press Montague, P & Berns G 2002, Neural economics and the biological substrates of valuation, Neuron, 36.
  40. 40. 40 Notonthehighstreet.com partners with Maxymiser to enhance its website with customer experience optimization, viewed 28 July, 2012, < http://econsultancy.com/ua/press- releases/6600-notonthehighstreet-com-partners-with-maxymiser-to-enhance-its-website-with- customer-experience-optimisation>. Smith, K et al 2002, Neuronal substrates fro choice under ambiguity, risk, gains, and losses, Marketing science, 48.6 The Open 100, viewed 28 July, 2012, <http://theopen100.wikispaces.com/>. Zak, P 2004, Neuroeconomics, Phil. Trans. R. Soc. Lond. B.
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