How Context Affects Choice

Raphael  Thomadsen; Robert P. Rooderkerk; On  Amir; Neeraj  Arora; Bryan  Bollinger; Karsten  Hansen; Leslie  John; Wendy  Liu; Aner  Sela; Vishal  Singh; K.  Sudhir; Wendy  Wood

Article | Customer Needs and Solutions | March 2018

How Context Affects Choice

by Raphael Thomadsen, Robert P. Rooderkerk, On Amir, Neeraj Arora, Bryan Bollinger, Karsten Hansen, Leslie John, Wendy Liu, Aner Sela, Vishal Singh, K. Sudhir and Wendy Wood

Abstract

Due to its origins in the literature on judgment and decision-making, context effects in marketing are construed exclusively in terms of how choices deviate from utility maximization principles as a function of how choices are presented (e.g., framing, sequence, composition). This limits our understanding of a range of other relevant context effects on choice. This paper broadens the scope of context effects to include social (e.g., with friends or family) and situational factors (e.g., location, such as home or store; time; weather). We define contexts as any factor that has the potential to shift the choice outcomes by altering the process by which the decision is made. We use this lens to integrate the psychology literature on habitual choice, System I and II decision-making, and a recent stream of empirical work that involves social and situational effects into the scope of context effects. We distinguish between exogenous and endogenous context effects, based on whether the decision-maker chooses the context. We then discuss issues of empirically identifying context effects when using either experimentally generated data or naturally occurring secondary data. We conclude with a discussion of trends and opportunities for new research on context effects.

Keywords: Decision Making; Decision Choices and Conditions; Situation or Environment; Consumer Behavior;

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Citation:

Thomadsen, Raphael, Robert P. Rooderkerk, On Amir, Neeraj Arora, Bryan Bollinger, Karsten Hansen, Leslie John, Wendy Liu, Aner Sela, Vishal Singh, K. Sudhir, and Wendy Wood. "How Context Affects Choice." Special Issue on 2016 Choice Symposium. Customer Needs and Solutions 5, nos. 1-2 (March 2018): 3–14.

Firms do not typically disclose information on their costs to produce a good to consumers. However, we provide evidence of when and why doing so can increase consumers’ purchase interest. Specifically, building on the psychology of disclosure and trust, we posit that cost transparency, insofar as it represents an act of sensitive disclosure, fosters trust. In turn, this heightened trust enhances consumers’ willingness to purchase from that firm. In support of this account, we present six studies, conducted in the field and in the lab. A pre-registered field experiment indicated that diners were 21.1% more likely to buy a bowl of chicken noodle soup when a sign revealing its ingredients also included the cafeteria’s costs to make it. Five subsequent online experiments replicated and extended this basic effect, providing evidence of when and why it occurs. Taken together, these studies imply that the proactive revelation of costs can improve a firm’s bottom line.

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In August 2017, Commonwealth Bank of Australia was looking for ways to differentiate itself from competing banks and was also trying to improve the financial well-being of its customers. One domain where this was particularly relevant was in its bank-issued credit card business, where customers routinely selected cards that although profitable for the bank could be a poor fit for customers’ needs—leading to low satisfaction scores, cancellations, and occasionally, financial distress. To that end, the company’s Behavioral Economics team had developed a provocative experiment dubbed “The Good and the Bad.” Rather than just presenting the strengths of its various credit card offerings, they proposed also promoting each credit card’s less-obvious drawbacks. Being transparent with customers might help them make better choices, but would those choices come at the expense of bank performance? Should a company choose to be in the sales prevention business?

Teaching Note | HBS Case Collection | September 2019 (Revised February 2020)

Commonwealth Bank of Australia: Unbanklike Experimentation

Ryan W. Buell and Leslie K. John

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This Teaching Note explains the theory of the case and teaching plan for the case: Commonwealth Bank of Australia: Unbanklike Experimentation (619-018). In August 2017, Commonwealth Bank of Australia was looking for ways to differentiate itself from competing banks and was also trying to improve the financial well-being of its customers. One domain where this was particularly relevant was in its bank-issued credit card business, where customers routinely selected cards that although profitable for the bank could be a poor fit for customers’ needs—leading to low satisfaction scores, cancellations, and occasionally, financial distress. To that end, the company’s Behavioral Economics team had developed a provocative experiment dubbed “The Good and the Bad.” Rather than just presenting the strengths of its various credit card offerings, they proposed also promoting each credit card’s less-obvious drawbacks. Being transparent with customers might help them make better choices, but would those choices come at the expense of bank performance? Should a company choose to be in the sales prevention business?

Keywords: transparency; experimentation; Banks and Banking; Credit Cards; Customer Focus and Relationships; Competitive Strategy; Banking Industry; Australia;

Citation:

Buell, Ryan W., and Leslie K. John. "Commonwealth Bank of Australia: Unbanklike Experimentation." Harvard Business School Teaching Note 620-041, September 2019. (Revised February 2020.) View Details

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