The Rational Model and Online Decision Making

The Rational Model and Online Decision Making

Online decision making is a concept that describes the cognitive process that goes in the mind of customers before they make a decision on the web. The main focus of this article is to understand what drives users to choose a specific alternative over another, especially between products and services that differ in quality and price.

Traditional economic theory (The Rational Model) posits that choices are assumed to follow the principle of utility maximization. Utility can be thought of as levels of satisfaction, happiness or personal benefit. Individuals act in order to maximize personal subjective benefits by evaluating each alternative against the weighted criteria, and selecting the alternative with the highest total score. If, for example, the decision is about which car to buy and the weighted criteria is safety, the decision maker should evaluate each car in the list against its safety level; the car that gets the highest score will be the one to be chosen.

The second assumption of the rational model is that individuals' preferences are well‑defined and constant over time. This simply means that there are no ‘jumps’ in people’s preferences. Evidence shows that individuals’ preferences do not remain constant; for example, studies have shown that loss emerges as more important than comparable gain; in other words, losing $100 hurts more than the satisfaction of gaining the same amount of money. From a rational perspective, the economic value is identical; from a consumer point of view, the psychological value is different and thus leads to different choices.

Decision Making and Context

The psychological perspective suggests that, to a large extent, a decision is affected by the context in which it is made. It is focused on learning the factors that bring value to the alternatives. The value that people link to an alternative can vary depending on the number of alternatives, the decision maker's mood, their former experience with that kind of decision, and so on.

One of the factors that were found to influence decision is the manner in which alternatives are presented. Ironically, most people will probably state that they know what their preferences are; the truth is, however, that most people do not know what they want unless they see it in context. An excellent example can be found in Tversky & Kahneman's paper “The Framing of Decisions and the Psychology of Choice.”[1]

When introducing the following alternatives:

1. Imagine that you decided to see a play where admission is $10 per ticket. As you enter the theater, you discover that you have lost a $10 bill. Would you still pay $10 for a ticket for the play?
2. Imagine that you decided to see a play and paid the admission price of $10 per ticket. As you enter the theater, you discover that you have lost the ticket. The seat was not marked and the ticket cannot be recovered. Would you pay $10 for another ticket?

It was found that 88% of the subjects would buy a $10 ticket when faced with the first alternative, but only 46% of the subjects would be willing to pay the additional $10 when faced with the second problem. In both cases, the total amount of money is the same, but the context is different.

Why does this happen?

Relative Thinking in the Decision-Making Process

Previous studies suggest that information processing is directed by relative thinking. In other words, when making different financial decisions, people consider relative price differences, while according to the rationality assumption they should only consider the absolute price differences. If a customer has to choose between two different brands of granola cereal, as she reaches towards the cereals shelf, she notices that the expensive one costs $4 after a $2 discount, and that the cheap one costs $3 (no discount). In that context, the majority of consumers will choose the expensive one. But, with no further information, when asked to choose between the $3 cereal and the $4 cereal, most people will select the cheaper alternative. Thus, situational factors (including how choices are presented and the context in which the decision is made) limit people’s choices.

Decision making is always relative to the context in which it is made (reference point). People use context as a reference point from which they frame a decision. In the ticket example, the absolute price in both instances is $10. From a financial point of view, if a person chose to pay the $10 in the first alternative, that same person would not alter the decision in the second case. In actual fact, however, they would not pay $10 for a ticket that they just lost, but would pay for it after losing $10. The reference point in both decisions is different; it is relative to the context in which the problem is framed.

Decision-Making Essential Reads

Cultivating Discernment

Decision Strategies: 4 Steps to Success

Three different service plans:

Let's take an example from the finance industry, in which a company offers three different service plans:

• Free plan with limited services
• Low-price plan with more services than the free plan
• High-price plan including all services

an analysis of click and attention heatmaps of visitors to the plans page reveals interesting behaviors. Although the most popular choices are always divided between Option A (free) and Option C (high price), visitors spent a lot of time browsing the information in all alternatives, with an extreme degree of attention paid to Option B.

If this observation is analyzed from the rationality point of view, Option B is useless and so can be dropped. From a psychological perspective, however, it is not useless. People spend a great deal of time looking at Option B because it has psychological value; it enables them to understand what they want. Option B is a reference point from which all the other plans are viewed. If it is dropped, the majority of users will choose the free plan. The middle option is what drives people to choose Option C.

In another example, taken from Dan Ariely’s book “Predictably Irrational”, people are asked to choose between:

• A trip to Rome, all expenses paid
• A trip to Paris, all expenses paid

The results will reflect the subjective preferences of each individual. However, when asked to choose between:

• A trip to Rome, all expenses paid
• A trip to Paris, all expenses paid
• A trip to Rome, all expenses paid but with no coffee in the morning

Most of the people choose the first option that is a trip to Rome all expenses paid.

Why does this happen?

Given that one can have Rome with coffee, why would people possibly want Rome without coffee? It is an inferior option. The moment Rome without coffee is added, Rome with coffee becomes more attractive, looks superior – even better than Paris – and people will choose it.

The decision-making process is always relative to the context of the decision. If a business wants to promote a specific alternative, it should make it more attractive by using an additional option that will function as a reference point, from which the promoted alternative will look more appealing.

Ariely, D (2008). Predictably Irrational, Harper Collins.

Tversky, A & Kahneman, D. (1981). The Framing of Decisions and the Psychology of Choice, Science, New Series, Vol. 211, No. 4481. (Jan. 30, 1981), pp. 453-458.