Topic: Otimally Biased Attention Allocation: Implications of Information-Theoretic Bounded Rationality
Speaker: Qitian Ren, Graduate School of Business, Columbia University
Time: Wednesday, 01 November, 13:30-15:00
Location: Room K01, Guanghua Building 2
Consumers may engage in costly information acquisition to reduce the uncertainty about a product's fit before purchasing it. We model the information processing decision of a consumer using a framework based on information theory in which a consumer determines how much and which information to process by choosing the structure and the precision of the signal he obtains about product fit. Specifically, the consumer decides how much to focus on positive and negative information, where the former (latter) enhances the signal when the product fits (does not fit). We obtain a number of insights regarding consumer information processing behavior and firm marketing strategy. Regarding consumer behavior, we show that “confirmation bias”, in which a consumer conducts his information search to confirm prior beliefs, can be optimal behavior rather than biased behavior as it is typically interpreted. We also find that if purchase and consumption are separated and consumer preferences are unstable, i.e., they can change between purchase and consumption, then more stable preferences may lead to a lower purchase probability because the consumer will engage in more disconfirmation behavior. As information processing cost increases, these effects become stronger in magnitude. Regarding firm strategy, we find that firm price and profit may first decrease and then increase in information processing cost. We also find that offering a return policy induces a consumer to focus more on positive information, and the firm should offer such a policy except if information processing cost is very high.
Qitian Ren, Ph.D. Candidate in Graduate School of Business, Columbia University. He is interested in Incorporating Behavioral Phenomena in Analytical Models, Consumer Information Processing and Firm Information Design and Competitive Strategy.
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