Consumer Behaviour Online: A Playbook Emerges
As consumer touchpoints migrate online, it is increasingly important to understand how human nature manifests itself in a digital environment.
As consumer touchpoints increasingly migrate online, it is important to understand how human nature manifests itself in a digital environment.
the term ‘consumer’ triggered imIN THE NOT-TOO-DISTANT PAST, ages of people in brick-and-mortar stores, touching products, physically making comparisons and receiving face-to-face assistance. Back then, product and price comparisons entailed physical transportation costs, and the act of purchasing often involved waiting in queues and using payment mechanisms such as cheques or cash.
To state the obvious, the shopping experience has dramatically changed. Consumers everywhere are embracing ecommerce options and expanding the variety of products they purchase online. At the same time, the in-store shopping experience now includes elements of technology — either offered by the retailer (in-store shopping kiosks or information display screens) or by third parties (recommendation apps or productcomparison tools).
Today’s omni-channel reality is evident well beyond the retail sector. Banks, credit card companies and insurance providers are using digital channels for various purposes including sales, marketing and customer relationship management. At the same time, ‘pure play’ digital companies — those that rely solely on digital channels — are cropping up in the financial sector.
In this article we will attempt to answer some of the questions that are vexing service providers in finance and elsewhere: Why do consumers become paralyzed in the face of abundant choice online? How does the consumption of online information differ? And how and why do the choices of other people matter in decision making?
In their book Nudge, Nobel Laureate Richard Thaler and Harvard Professor Cass Sunstein make a distinction between two types of agents: ‘Econs’ and ‘Humans’. Econs are the mythical beings that inhabit Economics textbooks. Perfectly rational in the economic sense, they can process infinite amounts of information, are forward looking, unemotional, and always act in their complete self-interest. Humans, on the other hand, procrastinate, are cognitively lazy, freeze in the face of complexity and are highly influenced by context.
up confusing the consumer. This common misunderstanding often results in programs and policies that do not produce the desired behavioural change.
Five concepts from Behavioural Economics are particularly relevant to understanding online behaviour.
Given the limited capacity of our cognitive BOUNDED RATIONALITY. apparatus, consumers are ‘boundedly rational’. While standard economic theory assumes people have an unlimited capacity to process information, the everyday behaviour of humans suggests otherwise. Consider a relatively complex financial decision: Figuring out how much you need to save for retirement. A rational approach would require forecasting of future income, expenditures, inflation rates and other unknowns, and the calculation of net present values under several scenarios. The fact is, most consumers do not possess the computational apparatus to complete this analysis. Instead, they take mental shortcuts to approximate the normative approach.
Given the reality of bounded rationality, it is not hard to see why the challenge of information and choice overload is magnified online. Take online stock trading, for example. By simply entering a keyword into a search engine, consumers have access to all kinds of information, including aggregate data on historical performance and peer investors’ opinions and choices. The sheer volume of information to sort through and options to choose from can be paralyzing, and consequently, consumers are likely to ignore the information, choose not to choose, or rely on decision shortcuts.
As indicated, humans DECISIONS BY HEURISTICS AND SHORTCUTS. are cognitive misers who do not like to expend much effort on thinking. More often than not, we resort to simplifying ‘heuristics’ when making complex decisions. For example, we stick with the default option provided, look to the behaviour of close peers, or rely on information that comes to mind readily. This search for an ‘easy way out’ holds even for important decisions, like choosing a retirement savings plan or a selecting an investment product. Due to the number of available choices online, consumers are even more likely to rely on decision shortcuts. In the example of online stock trading, consumers may base their decision on peers’ opinions, or, as one study showed, on how often they have seen the stock in the news. Such shortcuts often lead to erroneous or biased decisions.
A common theme in BehavPROCRASTINATION AND IMPATIENCE. ioural Economics has to do with the manner in which humans deal with decisions whose consequences are spread out over time. The financial domain is filled with such decisions, as most saving, investing and insurance decisions have to be made at a point in time where the benefits will only occur far into the future.
This stream of research can best be illustrated by the seemingly inconsistent ideas of procrastination (the tendency to delay tasks) and impulsivity (the tendency to act immediately). People tend to procrastinate on tasks that yield long-term value but shortterm pain. For instance, completing arduous forms and meeting with a wealth manager to plan for retirement yields long-term benefits, but demands time and effort in the present. Conversely, people are often impulsive in domains where the product yields short-term benefits, but might not be good for the long term. For instance, spending $5 on an indulgence might yield immediate pleasure, but if done habitually, will deplete future savings (and perhaps have an adverse effect on one’s health). By making transaction costs lower, it is likely that the online environment both reduces procrastination and magnifies impulsivity.
Consumers are more honest when admitting sensitive information to a screen than to a human being.
A basic tenet of Behavioural EcoCONTEXT-DEPENDENT CHOICE. nomics is that behaviour and choice are context dependent. The way options are presented — how they are framed, the order in which they are presented, and whether a default exists—influences consumer preferences. For example, research shows that the majority of people prefer a savings account to a life annuity when the choice is framed as ‘an investment decision’, but this pattern reverses when the choice is framed as ‘a future consumption decision’. Another study reports that people select riskier portfolios when stock-portfolio data is presented as aggregates, instead of as a list of individual stocks. In an online environment, these subtle-but-powerful ‘contextual effects’ can be manipulated much more easily — for good or for bad. For example, online platforms can influence decision making by modifying the set of choices that are presented alongside the recommended alternative or by choosing which product attributes to make salient.
The effects of other peoples’ choices on human PEER INFLUENCE. decision making have been shown in a number of domains, ranging from tax compliance to herd behaviour in financial markets. As the connected world makes it even easier for consumers to observe the preferences of others in real time, the human tendency to conform to peer behaviour is likely even more pronounced online.
In our own research, we have identified three factors that differentiate the online decision-making environment from the offline environment.
1. The Screen Effect
Screens — whether on an in-store kiosk or an Internet-enabled device — allow consumers to view information differently. For example, a consumer can compare several mutual funds along key attributes rather than having to flip through prospectuses one at a time — and this can change decision making from an ‘alternativebased’ mode to an ‘attribute-based’ mode. Research by Rotman Professors Avi Goldfarb and Brian Silverman shows that the impersonal nature of online transactions reduces social frictions in purchasing. In particular, consumers are less shy about being honest on a screen, and this lack of ‘social oversight’ can lead to indulging in irresponsible and embarrassing behaviours.
The following three points elaborate on the different ways in which screens influence the way consumers process and evaluate financial information:
The way screens display information is very INFORMATION DISPLAY. different from the physical world, and one key difference lies in the simultaneity of information presented online. In a retail store, an appealing display might catch a consumer’s eye, leading her to examine the product closely, find it to her liking, and then look for fabric and pricing information. This sequential availability of information has the potential to create not just impulse purchase situations, but also quick appraisals that colour the interpretation of the information that follows. On the other hand, consumers shopping online are often presented information on the product and its price at the same time.
In the physical world, financial decision making often involves information that is received sequentially. For example, a consumer can select mutual funds by flipping through options one at a time, assessing each alternative holistically and in isolation (using an alternative-based mode of information processing). In the online world, consumers have the added ability of making side-by-side comparisons. For instance, investment comparison tables (accessible through sites like Morningstar, Fidelity Investments and Vanguard) rate selected funds on individual attribute dimensions, like returns and risk category.
By seeing attributes of different investment funds simultaneously on a screen, rather than having to wade through prospectuses, the consumer’s decision-making process may change from an ‘alternative-based’ mode to an ‘attribute-based’ mode. In an attribute-based mode, options are evaluated directly on how certain attributes compare across alternatives, and consumers are more prone to make substantial comparisons and trade-off analyses among attributes of given alternatives.
Further, research suggests that some attributes might be over-weighted in the decision-making process in a side-by-side comparison compared to a ‘one option at a time’ evaluation. In particular, attributes that are inherently difficult to evaluate in isolation — such as the risk or volatility of a stock — might play a significantly greater role in joint evaluation than in separate evaluation.
When choices are complex, picking the popular option is a common decision shortcut.
Decades of research shows that many judgments and VISUAL BIAS. behaviours are rooted in automatic, non-deliberative processing. A large part of automatic processing is visual, and first impressions are usually retained unless there is strong motivation to change them. Importantly, visual impressions have been shown to influence judgments of completely unrelated qualities. For instance, the greater a website’s visual appeal, the higher consumers rate its perceived usability and trustworthiness.
One experiment had participants evaluate the credibility of two finance websites. Results showed that whereas finance experts focused on information content and source to assess credibility, non-expert consumers relied heavily on overall visual appeal. This indicates that for non-experts, superficial first impressions on screens often disproportionately shape judgment in financial decision making.
Social interactions usually involve a THE EFFECTS OF ANONYMITY. degree of friction, arising from normal feelings of anxiety and self-consciousness of being judged. The online medium removes social friction by making consumers feel anonymous, and the result can be positive or negative. For example, consumers are more honest when admitting sensitive information to a screen than to a human being. Studies show that when asked about their health on a screen, patients tend to report more health-related problems and more drug use than when asked by a human being. In the context of financial decision making, we can imagine a scenario where a consumer embarrassed by his financial situation may not reveal all necessary information to a human (leading the financial adviser to recommend the wrong product), while he may be willing to reveal much more to an impersonal screen.
As indicated earlier, the downside of feeling anonymous is that people become more likely to indulge in irresponsible and uninhibited behaviour. A study done by a pizza franchise showed that sales of unusual, high-calorie orders increased when it introduced online ordering: Consumers ordered double and triple portions of toppings, and bacon sales increased by a whopping 20 per cent. Similar types of unhealthy behaviour, like overspending or buying high risk stocks, may also become more pronounced when there is low social oversight.
2. The Choice Engine Effect
When choosing between options online, consumers are often unable to evaluate all alternatives in great depth. Fortunately, technology allows them to employ choice engines that make decision making easier and more manageable. Following are two types of choice engines.
One group of choice enCUSTOMIZED RECOMMENDATION ENGINES: gines called recommendation agents (RAS) conducts initial screening of available products to create a personalized consideration set. These RAS can recommend products based on past behaviour (as with itunes’ music suggestions based on your current playlists), others’ behaviour (as with posts on Facebook’s newsfeed based on what your friends recently ‘liked’) or consumers’ explicit input of preferences. The result is a ‘personalized consideration set’ that enables consumers to zero-in on options that are of interest to them. Rather than being faced with over 100 pages of random options on Amazon, the choice engine can simplify the decision to choosing among a few options that are of actual interest.
Technology-enabled tools can also help consumers build and manage customized portfolios. Such online operations, called ‘robo-advisers’, started appearing in Canada’s online financial landscape in 2014. Consumers answer questions about their investment goals, time horizon, and appetite for risk; and using an algorithm, robo-advisers spread the consumer’s money into appropriate investments. These virtual advisers are accessible 24/7, and provide automatic adjustments to ensure the portfolio blend stays in line with the investor’s stated ideal mix as market situations change.
Other choice engines allow conPREFERENCE-FEEDBACK ENGINES. sumers to solicit feedback on their preferences in real time. For example, in the mobile app Fittingroom, consumers post photos of potential purchases and other app users give feedback using ‘up votes’ and ‘down votes’. Consumers can then use the instant feedback to inform their purchase decisions. Looking ahead, we can imagine the creation of a similar platform to solicit and receive instant feedback on financial and other decisions.
3. The Connectivity Effect
When connected to the Internet, consumers have instant access to an enormous amount of information, including other people’s behaviour. As indicated, consumers look to the choices of peers to inform their own behaviour. For example, investors find the market more attractive when more of their peers participate, and they are more likely to choose to invest in a certain stock when others have indicated a desire to do so. In short, the connected world highlights the human tendency to conform to peer behaviour by making it much easier for consumers to observe others’ preferences in real time. Two types of access are of particular interest here:
In this connected ACCESS TO AGGREGATE MARKET PREFERENCES. age, consumers have real-time access to aggregate market preferences. For example, Amazon and itunes publicize best-sellers on their site, and Kickstarter shows how much funding each project has received. With aggregate market behaviour displayed prominently, consumers find it easier to follow the crowd. As mentioned earlier, especially when choices are complex, picking the popular option is a common decision shortcut.
According to the EdelACCESS TO OTHER INDIVIDUALS’ PREFERENCES: man Trust Barometer, when it comes to credible advice, people rely on ‘a person like me’ just as much as they rely on experts. The connected world allows consumers to easily refer to peer behaviour for advice. For example, Tripadvisor displays the destinations that have been visited and recommended by the user’s Facebook friends, and many social media platforms allow consumers to see purchases made by their network.
The Way Forward
The digital revolution is here to stay, which means business leaders and policymakers alike need to embrace the following principles of operating in this environment:
Greater ability to make direct comparisons, resulting in
2. a lower degree of appraisal and a greater role of trade-off analyses among displayed attributes;
Greater access to information about other peoples’ choic3. es, resulting in a greater likelihood of being influenced by others;
Access to an abundance of alternatives and an overload of 4. information, resulting in a search for simpler decision strategies; and
Availability of decision-making tools and choice engines 5. that reduce the effects of cognitive burden.
One particular manifestation of these elements takes the form of a decision-making strategy that we call ‘avatar-based decision making’. The traditional approach to decision making can best be ‘algorithmized’ as follows:
a) For each alternative, identify all relevant attributes; b) Determine the relative importance of each; c) Score each alternative on each attribute; d)scale the importance and the score, and compute the cumu
lative weighted score; and e) Choose the alternative with the highest score.
Other models of decision making — such as mental accounting and valuation — use a slightly different algorithm, yet they all share the central idea that choice is driven by the inherent net value of the alternative. In contrast to this view, we found support for an avatar-based approach characterized by the following algorithm:
a) Identify an ‘avatar’ — a role model, a similar other, or an as
pirational figure that the consumer looks up to; b) Retrieve their choices; and c) Use those choices as an anchor and adjust for personal cir
Consider a bank that sets up a web page to help consumers navigate the complex world of financial products. That web page might have a number of sections, each for a different class of products, and each page might focus on providing the consumer with information and decision tools.
A financial institution that embraces the avatar-based approach would set up its web page differently. In one scenario, it might present a hypothetical consumer, Justin, as part of a limited number of caricatures that represent different profiles — avatars at different stages in life, career, family, goals and net value. Justin could choose the avatar that he thinks best represents him, and use its choices as the basis for his own. In a second scenario, another hypothetical consumer, Hillary, might be asked a few lifestyle, career and family questions, and an algorithm would generate a ‘closest-match’ avatar.
Our research suggests that an avatar-based approach is more likely than other approaches to result in a robust and meaningful conversation with financial advisers. Likewise, a regulator who believes in the avatar-based approach will recognize that while consumer Stephen — who follows a traditional alternative-based approach to choosing offline — will be influenced by standard product risk-related disclosures, consumer Kathleen — who relies on an avatar-based approach — will not. Indeed, for consumers like Kathleen, disclosures might be best embedded in the description of the relevant avatar.
By better understanding consumer decision making online, businesses can help consumers make better choices by providing appropriate decision support tools, and policymakers can design behaviourally-informed regulations. As indicated herein, decision making online is not merely the digitization of decision making in a bricks-and-mortar world. It is a playing field with completely different rules. Dilip Soman is the Corus Chair in Communication Strategy and Professor of Marketing at the Rotman School of Management and co-director of Behavioural Economics in Action at Rotman (BEAR), a research centre that combines research in decision-making with empiricallytested tools to facilitate behavioural change. Melanie Kim is a Research Associate at BEAR. Jessica An is a Risk Analyst at TD Bank Group’s TD Auto Finance and a former Project Lead at BEAR. The full report on which this article is based (“Financial Behaviour Online: It’s Different!) can be downloaded online.