Editorial by Gurumurthy Kalyanaram

In this issue of the journal , we present five insightful articles. The first article addresses the moderating effects of service recovery and customer relations management on behavioural intent. The methodology, recovery zone of tolerance, make the manuscript worthy of our attention. While the study has been restricted to the banking sector, its applicability to other sectors is evident. The second paper is innovative and different. This paper addresses the relationship of emotional labour strategies, namely surface acting, deep acting with emotional exhaustion and emotional well-being in service organizations where employees are expected to regulate their emotions and express organizationally desired emotions. Consequently, service employees frequently engage in emotional labour. The third paper address a relatively well studied issue: the factors that influence the purchase intention of teenagers, particularly in the context of choice of fashion apparel. But the statistical technology, Relative to an Identified Distribution analysis (RIDIT analysis), employed in this paper is worthy of our understanding and has been under-employed by researchers. The fourth paper produces an interesting result in the context of options market in India: there is an asymmetry in frequency of violations of the boundary conditions in the ex-ante and ex-post formulations. And the final paper examines if the motivational needs can be robust predictors of various decision-making styles.

Please enjoy in reviewing these research contributions. And your comments and suggestions for improving the quality of future research is most welcomed by the authors and the Editor.

In this editorial, I want to briefly discuss the beginning and evolution of the behavioral approach to the study of individuals and markets in the following short essay.

Starting from 1973 when Amos Tversky and Daniel Kahneman published their path-breaking study on human decision making (Science 1973), there has been a large volume of interesting insights generated by behavioral economists and cognitive psychologists. As a result, a new framework to study of human cognition, behavior has emerged. This approach / science is called by various names, including Behavioral Economics and Behavioral Decision Science.

In their 1973 study, the Tversky and Kahneman presented decision makers with a series of gambling choices. They found that human decision making was not linear as generally postulated. The study discovered that decisionmakers consistently under weigh outcomes that are merely probable in comparison with outcomes that are obtained with certainty. This tendency, called the certainty effect, contributes to risk aversion in choices involving sure gains and to risk seeking in choices involving sure losses. Further, decision-makers generally discard components that are shared by all prospects under consideration. This tendency, called the isolation effect, leads to inconsistent preferences when the same choice is presented in different forms.

Based on these empirical results, Tversky and Kahneman developed The Prospect Theory (Econometrica 1979) as an alternative to expected utility theory. They showed that decision-makers assigned values to gains and losses rather than to final assets, and that probabilities are replaced by decision weights. They showed that “framing” of issues (i.e., the context) had a large impact on our choices and decisions.

Subsequent to this portfolio of seminal work by Tversky and Kahneman, there has been a large volume of interesting research (e.g., Eric Johnson, Daniel Goldstein, Daniel Kahneman, RichardThaler) in this domain. This research has produced many books including Blink (Malcolm Gladwell), Judgment and Decision Making (David Hardman), Nudge (Richard Thaler and Cass Sunstein), Stumbling on Happiness (Daniel Gilbert) and Thinking, Fast and Future (Daniel Kahneman). These books have been received well, and have enlightened us on the various elements ofhumandecision-making.

Scholars such as Thaler and Sunstein (2008) explain to us why we make apparently unwise decisions and choices when the correct choices should be evident as day light. Many biases shape many of our trivial and consequential choices and decisions. We make decisions on topics ranging from personal investments to schools for our children to the meals we eat to the causes we champion to decisions about war and peace. Each one of these decisions is subject to various biases which make us susceptible to errors in judgment. Individually and collectively as a society, our errors in judgment can be very consequential.

In the domain of biases, for example, we are consistently “over-confident” about our abilities and the outcomes of events, and how this leads to imprudent risk-taking. The “above average effect” is pervasive generating unrealistic optimism. The recent examples of “irrational exuberance” in the high-tech industry or the housing market illustrate this nicely. Of course, in both the case unrealistic optimism eventually led to pain and agony. On temptation and self-control strategies, the authors show the values of “mental accounting” and budgeting. In the budgeting context, monies are not fungible (if the money dries up in one budget, and even if the monies are available in another budget line, rules do not normally permit use of monies fromthe second budget for items in the first budget). In another illustration, human beings conform because they do not want to stand out i.e. be noticed as different from others. Human beings assume that the rest of theworld is observing them carefully, that they are in “spotlight.” As evidence shows, this is not a correct assumption i.e., the world is not as interested in us aswe think (Kalyanaram2011).

In a recent paper, Kahan, Dawson, Peters and Slovic (2013) examine why does public conflict over societal risks persist in the face of compelling and widely accessible scientific evidence? The authors conducted an experiment to probe two alternative answers: the “Science Comprehension Thesis” (SCT), which identifies defects in the public’s knowledge and reasoning capacities as the source of such controversies; and the “Identity-protective Cognition Thesis” (ICT) which treats cultural conflict as disabling the faculties that members of the public use to make sense of decision-relevant science. In their experiment, the authors found that, contrary to rational analysis but consistent with biases (in this case partisan bias), more numerate used their quantitativereasoning capacity selectively to conform their interpretation of the data to the result most consistent with their political outlooks.

The evidence on biases is growing.

Based on theories of framing, asymmetric comparisons, relative assessment, and other such related constructs, behavioral and cognitive decision theorists have explained biases and apparent irrationality in human cognition, behavior and choices.

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