17 Sep 2001  Research & Ideas

Is There Help for the Big Ticket Buyer?

Buying a house, buying a car, investing for retirement. These are among the most important purchasing decisions people make. But who is there to advise them? HBS professor Max H. Bazerman has some ideas.

 

As a professor of decision making and negotiation, I often receive unsolicited phone calls from relatives, friends, and acquaintances seeking my advice on consumer matters such as negotiating for a house, bidding on eBay, and investing in the stock market. While the callers' questions cover wide territory, all of them are looking for guidance on how to make more rational consumption decisions. Those who know me will not be surprised to learn that I have strong opinions on these issues, many of them informed by research on decision-making and negotiation. As I reviewed the Journal of Consumer Research to write this essay, I expected to find that consumer decision-making research grappled with the types of tough purchasing and investment decisions that were on my callers' minds. To my surprise, I found that this literature has been largely silent regarding many of consumers' most important buying episodes.

JCR has had a significant effect on the teaching and research directions of marketing departments and on the marketing strategies of major consumer product firms. My vision of consumer research is that it should be equally influential in improving consumer decisions. Consumer research can best help society by encouraging citizens to purchase products that will improve their own welfare. However, most researchers appear to have neglected consumers as even an indirect target audience for their work. By and large, consumer education is limited to specific product advice from sources such as Consumer Reports; little information is available to help consumers think clearly and abstractly about the toughest buying decisions. I believe there is a strong need for a closer link between rigorous, theoretical consumer research and consumer education. This essay is an attempt to outline a consumer-oriented research agenda that will provide individuals with good advice about core purchase decisions.

My anecdotal experience is that many homebuyers search until they fall in love with one house, negotiate only for that house, and forget that they have alternatives.
—Max H. Bazerman

The consumer decision-making literature has paid great attention to the information processing and decision making (or choice) of consumers. In the vast majority of this literature, the dependent variable is some variation of a consumer's decision to buy or not to buy, rather than the "rationality" of the decision, when rationality is defined as maximizing the consumer's expected utility. The consumer's decision of whether or not to buy a product is a highly appropriate dependent variable for consumer research targeted toward companies selling goods. However, it is less useful in helping individuals make wise consumption decisions. Behavioral decision researchers in consumer research have used the rationality criterion to demonstrate consumer bias, but this descriptive research typically has not been applied prescriptively to consumers' lives.

As I think about my own most important purchases and the consumption dilemmas that lead friends to seek my advice, they rarely deal with buying products such as toothpaste, breakfast cereal, or washing machines. I am not arguing that this section of the economy is unimportant. However, the consumer decisions that most concern people are a smaller number of big decisions: buying a house, buying a car, dealing with a building contractor, investing for retirement, etc. These consumption decisions tend to be made on an irregular and infrequent basis or are new in structure because of a change in distribution channels (e.g., online auctions). By contrast, consumption decisions about items purchased frequently via simple transactions (e.g., cereal) are easier to make on a trial-and-error basis and can be easily improved. Because these decisions are routine and relatively inexpensive, they exert a much smaller influence on the life of the consumer.

An important assumption of the perspective developed in this paper is that we can identify what is rational for consumers. There are strong views about the appropriateness of rationality as a criterion. I use rationally simply to refer to the decision that will maximize the consumer's expected welfare. One way to think of this is to ask whether a better-informed consumer would move in the directions suggested by prescriptive models. Generally, I predict that as a consumer received more information, they would behave more compatibly with prescriptive models inferred in this paper.

A final general observation is that the decisions that most challenge consumers involve other parties. Rather than reiterating Bagozzi's (2000) discussion of the number of people in the decision-making unit, I am emphasizing that the most challenging consumption decisions occur in environments where we must negotiate with others, bid against others, make deals through agents, and so on. This view is quite different from the standard consumer decision paradigm that looks at how the lone consumer decides between multiple related products.

Negotiation

Kotler (1997) provides a dichotomy between routinized exchange (where the terms of exchange are established by a program of pricing and distribution) and negotiated exchange (where the terms are set through coordinated decision making). Most consumer research has focused on the former. In fact, in the past twenty-five years, the Journal of Consumer Research has published just three articles on negotiation (Dwyer 1984; Schurr and Ozanne 1985; Corfman and Lehmann 1993). In addition, as I consider the negotiation literature outside of JCR, I realize that it has neglected a number of consumer anomalies. I now turn to three aspects of decisions unique to consumer-negotiated exchanges that would benefit from greater attention from consumer researchers.

One piece of advice that negotiation experts commonly offer is very simple: Before you enter into any important negotiation, you should consider what you will do if no agreement is reached. That is, what is your Best Alternative To a Negotiated Agreement, or BATNA (Fisher and Ury 1981)? By thinking about this alternative, you can better assess your reservation price, or the point above or below which you will not go in the negotiation (Raiffa 1982). This logic leads to the obvious conclusion that when faced with major purchases that require negotiation, consumers can obtain great value by searching for and improving their BATNA.

This advice is easy to follow, and can provide great benefit to negotiators. Yet, consumer decision making may be the most common realm in which this advice is ignored. Most homebuyers have access to a number of options, and can search more thoroughly to develop even greater options. However, my anecdotal experience is that many homebuyers search until they fall in love with one house, negotiate only for that house, and forget that they have alternatives. Once this love affair begins, the homebuyer has often effectively thrown away their chief source of power in the negotiation, their BATNA. Research that examined why consumers so frequently behave against their long-term best interest, and suggested ways of changing such behavior, would be of great value.

Negotiation researchers also frequently advise negotiators to learn as much as they can about the other party (Thompson 2001). Perhaps the most vivid consumer negotiation is car buying, a process many people find intimidating and annoying. Much of this intimidation comes from a lack of information (about the negotiation process, about the other side's reservation price, etc.). In recent years, however, a large number of Web sites (e.g., www.cartalk.com) have sprung up that reveal the exact dealer cost of any car you might wish to buy. Why do so many computer-literate consumers fail to do this homework before visiting a car dealer? Helping consumers appreciate and effectively use this information should be at the forefront of the consumer research agenda.

Decision analysts also try to help negotiators avoid the pitfalls of positive illusions, including the well-documented tendencies to be overconfident and to act on overly optimistic assessments (Thompson 2001). Interestingly, many people know that they have these tendencies, but fail to notice them in the context of a specific decision. For example, when people are asked to place 98 percent confidence intervals around numerical estimates (e.g., how many members are there in the Association of Consumer Research?), they typically place only 3-7 correct answers (out of 10) within the 98 percent confidence bands. Yet, after setting these bands, when participants are asked to estimate the number of questions for which the correct answer will be within their confidence interval, they tend to make fairly accurate global estimates (Gigerenzer, Hoffrage, and Kleinbolting 1991). Kahneman and Lovallo (1993) explain this inconsistency by positing that humans have an insider and an outsider view of decision making. The insider is the decision-maker at the point of a decision—emotions and all; the insider is prone to bias and regards each decision as one of a kind. The outsider is the decision-maker who later can assess a group of decisions more objectively, understanding that all people, including themselves, are strongly influenced by biases.

Perhaps the best example of this insider/outsider distinction, among even well educated consumers, can be found in their negotiations with contractors for new house construction or major renovation. From listening to our friends' complaints, we have all learned that residential construction projects typically take far longer than the estimated time and cost up to 20 to 50 percent more than originally projected (outsider view). Yet, despite our knowledge of this phenomenon, when we begin our own home renovation project, we tend to believe (wrongly) that it will end on time and near the projected cost (insider view). Consumer research is needed to better understand why positive illusions are so powerful and to help improve decisions from the start.

Excerpted with permission from "Consumer Research for Consumers," an HBS Working Paper. Copyright © 2000 Max H. Bazerman. All rights reserved.