Data Mapping

Consumer theory is a field that has emerged from research in both psychology and economics to help marketers better understand (and serve) their customer base. In particular, models of consumer behavior seek to identify the variables which impact purchasing decisions, including price (endogenous) and external factors such as preferences, habits and product presentation. Business analysts increasingly turn consumer models to help forecast market trends in order to set prices, as well as determining future product lines.

Behavioral analysts go beyond traditional regression analysis to seek out variables which are difficult to measure, such as heuristics (the “rules of thumb” which form cognitive biases), as well as market inefficiencies (such as “bubbles” and other non-rational forms of behavior.) While traditional models of consumer decision making, attributed to pricing, competition and income constraints can explain many purchasing decisions, researchers have found that intangibles, including habits and recommendations, often have a large impact upon consumer decisions.

In order to incorporate these factors, economists have moved beyond basic marginal analysis to understand decision making through prospect theory: developed by Nobel Laureates Kahneman and Tversky, Prospect Theory analyzes consumer behavior through the lens of bounded rationality – consumer make decisions using their existing information (reference points) relative to their expected goals. Data analysts often critique traditional economic models for assuming perfect foresight and information on the part of consumers; the theory, on the other hand, allows for an explanation of biases such as risk aversion. As a result, when firms set prices or make decisions on their market offerings, it is common for product managers to review larger (qualitative) market trends, which are increasingly being incorporated into data models. The future of consumer theory is creating data sets from behavior that has traditionally been difficult to measure.