This brief summarizes what's advertising content worth? Evidence from a consumer credit marketing field experiment in South Africa. The bank offered loans with repayment periods ranging from 4 to 18 months. Deadlines for response were randomly allocated from 2 weeks to 6 weeks. Firms spend billions of dollars developing advertising content, yet there is little field evidence on how much or how it affects demand. The author analyze a direct mail field experiment in South Africa implemented by a consumer lender that randomized advertising content, loan price, and loan offer deadlines simultaneously. The author fined that advertising content significantly affects demand. Although it was difficult to predict ex ante which specific advertising features will matter most in this context, the features that do matter have large effects. Showing fewer example loans, not suggesting a particular use for the loan, or including a photo of an attractive woman increases loan demand by about as much as a 25 percent reduction in the interest rate. The evidence also suggests that advertising content persuades by appealing 'peripherally' to intuition rather than reason. Although the advertising content effects point to an important role for persuasion and related psychology, our deadline results do not support the psychological prediction that shorter deadlines may help overcome time-management problems; instead, demand strongly increases with longer deadlines.

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What's Advertising Content Worth? Evidence from a Consumer Credit Marketing Field Experiment

Rational choice theory enjoys unprecedented popularity and influence in the behavioral and social sciences, but it generates intractable problems when applied to socially interactive decisions. In individual decisions, instrumental rationality is defined in terms of expected utility maximization. This becomes problematic in interactive decisions, when individuals have only partial control over the outcomes, because expected utility maximization is undefined in the absence of assumptions about how the other participants will be- have. Game theory therefore incorporates not only rationality but also common knowledge assumptions, enabling players to anticipate their co-players' strategies. Under these assumptions, disparate anomalies emerge. Instrumental rationality, conventionally interpreted, fails to explain intuitively obvious features of human interaction, yields predictions starkly at variance with experimental findings, and breaks down completely in certain cases. In particular, focal point selection in pure coordination games is inexplicable, though it is eas- ily achieved in practice; the intuitively compelling payoff-dominance principle lacks rational justification; rationality in social dilemmas is self-defeating; a key solution concept for cooperative coalition games is frequently inapplicable; and rational choice in certain sequential games generates contradictions. In experiments, human players behave more cooperatively and receive higher payoffs than strict ratio- nality would permit. Orthodox conceptions of rationality are evidently internally deficient and inadequate for explaining human inter- action. Psychological game theory, based on nonstandard assumptions, is required to solve these problems, and some suggestions along these lines have already been put forward.

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Cooperation, psychological game theory, and limitations of rationality in social interaction

Contrary to the theory of rational choice, adding an alternative to a set of available options often affects people's judgement of the preexisting options. Here, we show that honeybees (Apis mellifera) and gray jays (Perisoreus canadensis) are also influenced by the addition of an option to a choice set (i.e., by a change in local context). Like humans, our subjects violated basic properties of rational choice. Their relative preference between two original options changed with the introduction of a third, relatively unattractive option. Such context-dependent choice violates the constant-ratio rule. Our subjects increased their relative preference for the more similar of two alternatives, contrary to the similarity hypothesis. The jays also increased their absolute preference for the more similar of two alternatives, in violation of regularity. Thus, the principle of irrelevant alternatives, which assumes that preference between options does not depend on the presence or absence of other options, is violated not only by humans, but also by an invertebrate and a nonhuman vertebrate. These findings contradict the view that nonhuman animals should be immune to such psychological effects and that they should conform with normative accounts, such as rationality or optimal-foraging theory, because their decision-making processes are evolutionarily adaptive. We discuss the potential generality of context-dependent effects and suggest that such effects should be incorporated into decision-making models in behavioral ecology.

Context-dependent violations of rational choice in honeybees (Apis mellifera) and gray jays (Perisoreus canadensis)

Context can influence decisions. This malleability of choice is usually invoked as evidence that people do not maximize stable preference orderings. In a market equilibrium, however, context conveys payoff-relevant information to consumers. Consequently, these consumers rationally violate naive formulations of standard choice theoretic principles. I identify informational asymmetries under which apparently anomalous behaviors, namely the compromise effect and choice overload, arise as market equilibria. Firms respond to consumers' contextual inference; in case of the compromise effect, a firm may introduce premium loss leaders (expensive goods of overly high quality that increase the demand for other goods).

https://economics.yale.edu/sites/default/files/files/Workshops-Seminars/Industrial-Organization/kamenica-080306.pdf

Contextual Inference in Markets: On the Informational Content of Product Lines

Experiments on decision making by humans show that the choices that we make can be very labile. The magnitude of our preferences, and even our rank ordering of options, can vary according to the number and type of alternatives available for comparison. This apparent irrationality has been argued to result from our use of decision heuristics that have evolved to enable us to choose quickly and efficiently between options differing in multiple attributes. Here, we argue that, because there is also selective pressure for animals to make mating decisions quickly, and because potential mates also differ in multiple attributes, similar decision heuristics might have evolved for mate choice. Following this reasoning, the attractiveness of a given mate will depend on the others with whom he or she is being compared, rather than being an absolute function of his or her underlying quality. We describe some of the ramifications of such comparative evaluation, and argue that it could offer new insights into some of the biggest outstanding problems in mate choice and sexual selection.

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Comparative evaluation and its implications for mate choice.

Given a choice set of two alternatives, the addition of a third alternative that is clearly inferior to one of the existing alternatives (but not the other), can result in a shift of preference to the alternative that dominates the new alternative. The basic asymmetrically dominated effect, as it is called, is first demonstrated under two different buying frames of mind (“What would you buy?” and “What would most people buy?”). It is then shown that the third alternative may be recognized as an unavailable option, yet still cause a preference shift. Finally, the asymmetrically dominated effect is demonstrated for real, in-store purchases. It is concluded that the effect is robust, has a wide scope, is quite sizeable, and is of practical significance. © 1999 John Wiley & Sons, Inc.

Gareth M. Reynolds

Papers

The robustness of the asymmetrically dominated effect: Buying frames, phantom alternatives, and in‐store purchases