Ending at square 1: Does order of good & bad events matter to consumers?

Hope for shareholders; warning for salesmen

In these roller coaster times for the economy, there is qualified hope: operations researchers report that peoples’ reaction to a sequence of occurrences in which an initial event is unexpectedly reversed is more favorable if the first event is a loss than if it is a gain, according to a study in a journal of the Institute for Operations Research and the Management Sciences (INFORMS®). “Our research supports the casual observation that surprising “bad news, good news” sequences leave a positive impression, and not just because the last event is freshest in mind,” says Akshay R. Rao, General Mills Professor of Marketing at the University of Minnesota’s Carlson School of Management.

“Close Encounters of Two Kinds: False Alarms and Dashed Hopes” is by Dr. Haipeng (Allan) Chen, Assistant Professor of Marketing at the University of Miami’s School of Business Administration and Dr. Rao. It appears in the journal Marketing Science, an INFORMS publication. A summary of the study can be found online at http://www.informs.org/Press/dashedhopesabstract.pdf

The Same Hundred Dollars, But…

The researchers, who apply operations research to marketing, approached the subject because they observed that consumers are frequently exposed to potentially attractive events that are unexpectedly reversed and to potentially painful events which are also unexpectedly reversed.

The authors framed the problem in terms of how people feel after being exposed to a series of two events of equal magnitude but opposite valence. Such a sequence, they note, does not change a person’s economic state – either way, a person who begins, say, with $100 ends with $100.

Their research shows that an individual’s psychological state changes even if the economic state does not, and that this has consequences. The authors report that the magnitude of this order effect is increased by the time elapsed between the two stimuli.

Practical Effects Strongest for Marketers

The authors, who specialize in operations research and marketing, see practical implications for business and regulators. The findings offer hints to retailers and marketers, they note, who can influence consumer perceptions and behavior simply by altering the order in which they present information, meanwhile reducing the costs associated with discounts, coupons, and other inducements. Looking at current economic news and the volatility of stock exchanges, there may also be acceptable, if not thrilling news, if investors find that the losses of recent months are reversed.

The findings have implications for regulators, too, they say. Public policy officials may consider protecting people from being manipulated by salespeople into purchasing a product simply because of changes in the sequence in which a series of offers is made. Beyond the arena of marketing, the findings can be applied to several other contexts that deal with providing information to a host of publics.

Accountants, financial analysts, and stockbrokers provide information to stockholders and can potentially influence psychological well-being by varying the sequence in which they present mixed information. The government provides information to the electorate on a host of issues ranging from the economic consequences of policy initiatives to the beneficial effects of a new drug. Also public interest and lobbying groups, as well as arms of the executive branch, provide information to Congress that has implications for how performance is evaluated and their budgets are allocated.

All of these information provision scenarios in which multiple items are presented in a series are subject to framing effects, say the authors.

Data

The study was conducted via a survey and experiments. The first stage was a mall intercept of 80 adults conducted by a market research firm. Respondents were asked to react to a scenario in which a driver’s auto insurance premium was first quoted at $350, then raised to $450 because of the applicant’s disqualification, and finally dropped to $350 when a penalty fee was waived. They were also asked to react to a reverse scenario. A similar situation was presented involving an applicant for a magazine subscription. The survey showed that order in which information was presented had a significant effect. When people felt a loss that was reversed by a gain of equal magnitude, they were significantly happier than when a gain was reversed.

The authors also conducted a series of experiments with college students to show the impact of elapsed time on order. A third set of experiments was conducted to rule out recency as an explanation for their findings.

The Institute for Operations Research and the Management Sciences (INFORMS®) is an international scientific society with over 10,000 members dedicated to applying scientific methods to help improve decision-making, management, and operations. Members of INFORMS work in business, government, and academia. They are represented in fields as diverse as airlines, health care, law enforcement, the military, the stock market, and telecommunications. 2002 is the 50th anniversary of organized operations research in the United States. 1952 was the year that the journal Operations Research and the Operations Research Society of America, one of the founding societies of INFORMS, were born