The psychology of purchasing decision-making (part 1)

(We're pleased to welcome a guest post from Ginny Smith, a psychologist with a particular interest in cognition and decision making.)

Economists have historically modelled humans as rational decision making machines, who weigh the available evidence before making the most beneficial decisions. This may also be how most procurement executives like to see themselves- it is much more comfortable to believe that the decision you have made is the best possible option, and is only influenced by the evidence.

Psychological experiments, however, show that this 'Homus Economicus' is in fact a figment of the economists' imaginations, and we are influenced by more factors than we would like to believe.

One example that is very relevant in the procurement world is that of comparison.Experiments have shown that when given then choice between a £50 camera and a £100 camera, people are split reasonable evenly. When a £200 model is added to the mix, however, the majority of people choose the £100 version (ref.1).

Suppliers can use this to their advantage, by including an extremely high tech and expensive version of their product in the options. If you have ever been to buy a new television, you have probably experienced how reasonable the standard version seemed when compared to the brand new, state of the art version- what you probably didn't realise is that you may have walked away with a more expensive TV than you would have otherwise, just because you compared it to an even pricier version.

Much of our decision making is unconscious, and is guided by what are known as heuristics. These are short-cuts, which come into effect in situations where we do not have all the available information, or where there is too much information to take into account. However, these heuristics are not necessarily a bad thing- they have evolved to be effective in the majority of situations, and in some situations rational and deliberative is in fact worse!

It has been shown, for example, that when making a difficult decision (between 4 options, with 12 pieces of information about each), subjects did better when they carried out another memory task for 3 minutes than when they thought about the actual problem for 3 minutes, or when they made the decision straight away (ref. 2). This shows the amazing power of the subconscious mind to deliberate on difficult problems even when we are doing something different.

Most people have had the experience of solving a crossword clue when coming back to the puzzle after doing something different for a while, and this is another example of the same thing- it is important to trust our instincts and unconscious judgements, as often, they know better than we do. So it may, literally, be worth sleeping on that major decision before you make the final choice of supplier!

And tomorrow we'll look at why a Mars a day can quite literally help you work, rest and buy better...

 

1  Context-Dependent Preferences, Amos Tversky and Itamar Simonson Management Science Vol. 39, No. 10 (Oct., 1993), pp. 1179-1189
2  Think Different: The Merits of Unconscious Thought in Preference Development and Decision Making. Dijksterhuis, Ap

Voices (3)

  1. Peter Tarlan:

    Interesting article Ginny. I saw a good whitepaper on Twitter the other day actually on http://www.lovehatedata.com/download/love/whitepaper which highlights how business intelligence has revolutionised the way data is analysed and used for decision-making nowadays. Worth a read.

    Peter

  2. Gordon Murray:

    Excellent. Not that enthuusiastic about encouraging procurement to shoot from the hgip but thinking about something else for a while does seem to work. Looking forward to next piece.

  3. Rob:

    Great article Peter. One of my favourite topics.

    One book worth reading on the same topic: ‘Predictably Irrational’. We do like to compare…irregardless of how we (are supposed to) apply logic.

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