How Neuroeconomics Helps Negotiations
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But the most important observation is this: buying decisions depend on net value, i.e., the product value minus price.
A closer look at our buying behavior.
Our everyday buying behavior attracts the constant attention not only of marketers but scientists.
Let's see how neuroeconomics explains why we prefer one product over another and how price-sensitive we are.
Neuroeconomics - the science of buying.
Neuroeconomics is a new field of science that combines economic theories with neuroscience, computer models, and psychology. It is meant to explain what's happening in the consumer's brain when making everyday economic decisions.
Notably, it explains how consumers decide to purchase (or not to) one product over another based on an analysis of our neural functions.
We will briefly summarize the neuroeconomics research on simple purchasing decisions and propose conclusions for corporate fellows.
Science will inevitably prove that our brain puts value above the price.
The scientific model of value-based choices
The Attentional Drift-Diffusion Model (aDDM) describes how simple value-based choices are made.
It integrates response time and visual fixations in the decision process, computing a decision value (i.e., which choice a subject makes) as a function of the time spent fixating on each alternative.
The aDDM proposes that the brain, faced with a simple choice between an orange and an apple, computes a relative decision value (RDV) that evolves over time.
How consumers choose between two products.
When a subject faces a choice between two products (positioned side by side), the decision value function is defined separately for whether the subject fixates on the left or right-hand product.
The model accounts for biases in the integration process while discounting the non-fixated item's value. When the RDV process reaches a particular 'choice barrier,' the computation stops, making a choice.
Consumer's buying decisions: price or product?
While the "apple or banana" choice case was generally informative, the following will trigger some interesting ideas and conclusions.
As explained above, aDDM assumes that every buying decision involves the dynamic computation of RDV, which evolves over time until a choice is made.
During fixations on the item (product), the RDV evolves with an average rate that underestimates the price and the net value. This makes it more likely that the "purchase barrier" is reached.
The opposite is true during price fixations.
Therefore, consumers' purchasing decisions largely depend on which fixations are longer - on a product or its price.
The following graph represents the probability of a purchasing decision as a net value function. The positive net value attracts the likelihood of purchase above 0.5.
No.1 Negotiation Tip: Buyers look at the net value.
The same research shows that consumers tend to fixate more on an item than its price. Therefore, they're unconsciously inclined to buy the stuff more than not.
As a professional buyer, I always approached negotiations to make a deal. The worst-case scenario would be a sub-optimal outcome, which is still way more beneficial for the business than breaking an agreement.
Consumer choice is predominantly made based on net value. So, they're not exercising the lowest bid approach in everyday life but the highest value.
Indeed, any conscious procurement professional isn't primarily looking for the cheapest deal. So much is said and done about the value that we're basically forced into the value conversation.
If so, then what made us what we became wearing our corporate personas? Why do we force ourselves to buy cheaper but not more valuable?
The notion of procedural rationality explains that to some extent. First, we define rules and processes, and then our choices become casualties of our own creations - they become unnatural!
For the people taking the different sides of the negotiation table, the conclusion might be that we need to consider the net value and fixate our neural senses on products or services we intend to buy rather than their prices.
We should not allow subjecting ourselves to extreme time pressure, either at the end of a fiscal year or on Black Friday. In the aDDM, time pressure creates a significant rate of mistakes.
A mistake is not the act of buying itself. It is a choice with a negative net value.
Be bold, buy stuff, and think value!
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