The Seven Sources of Distrust in Bank Marketing. Hooman Estelami Professor of Marketing Graduate School of Business Fordham University

Transcription

1 The Seven Sources of Distrust in Bank Marketing Hooman Estelami Professor of Marketing Graduate School of Business Fordham University 1

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4 Identifying the Sources of Distrust in Banking What are the underlying decision drivers that provide the context for lack of trust in financial transactions? What specific marketing actions cause distrust? What measures can be taken to reduce distrust? 4

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6 Consumer Decision Drivers of Distrustful Exchanges 1. Cognitive Circuitry of the Human Brain: Limited processing power of the human cognitive system. 2. Emotions. 3. Lack of necessary information. 6

7 Mr. Osborne, may I be excused? My brain is full.

8 (1) The Magical Number 7 Consumers cannot store more than 7 items in short-term memory. As a result: -Difficulty in conducting mental arithmetic -Difficulty in remembering numbers (e.g., # swim laps) -Difficulty in appreciating interactions among product attributes (e.g., high monthly payment x number of payments) -Difficulty in evaluating products with more than 7 attributes. 8

9 Factors in Consumer Credit Products Product Factors Home Mortgage Auto Loan Line of Credit Credit Card 9

10 Factors in Consumer Credit Products Product Factors Home Mortgage Auto Loan Line of Credit Interest rate, variable vs. fixed rate, lock-in period, origination fee, processing fees, service arrangement, escrow accounting, penalties, brand name, etc. Interest rate, origination fee, conditions for use of vehicle, penalties (wear and tear, excess use, etc.), optional balloon payment Fixed vs. variable rates, interest rate, origination fee, penalties, line vs. loan, etc Credit Card Brand name, annual fees, interest Rate, minimum payments, bonuses, penalties, loyalty program, processing fees, etc. 10

11 Before paper and scissors

12 (2) Hyperbolic Discounting - Good news you have a $2,500 tax refund this year you should receive it in about 6 weeks, but we can pay you $2,400 cash for it now if you want Implied discount rate è 36% 12

13 Hyperbolic Discounting The Reason - Economic theory states that for a specified time frame, the discount rate applied to each payment must be constant - In practice, consumers use very high discount rates for immediate events and very low discount rates for very distant events. - Higher discount rates are used for smaller dollar amounts. - Primary reason: lack of self-control and poor will power 13

14 Who Uses (suffers from) Hyperbolic Discounting - Purchase of energy saving appliances undervalued by consumers - Most Americans under-save for retirement. The nation s savings rate is close to 0. - The average person has over $10,000 of revolving credit and fixed payment loans, excluding mortgage obligations 14

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16 (3) Labeling Money O George and Jill recently returned from a vacation in Europe. On their way back, the airline lost one of their bags and compensated them $250. George and Jill decided to spend the entire money dinning out at an expensive New York restaurant. They ve never spent so much dinning out together. o Mental accounts: Daily expenditures Yearly expenditures Windfalls o Each expenditure is associated with one type of mental account o Price sensitivities are lower for shorter-term accounts 16

17 Who Uses Mental Accounting - For the price of a cup of coffee save the life of a third world child - For less than 50 cents a day, you too can have term life insurance - For the price of 3 cups of coffee you too can lease a Toyota Tacoma 17

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19 (4) Poor Estimation of Risks Causes of Death Actual Consumer Estimate Vitamin poisoning Fireworks Venomous bites Flood Electrocution Drowning Suicide Stroke Heart Disease 19

20 (4) Poor Estimation of Risks Causes of Death Actual Consumer Estimate Vitamin poisoning 102 Fireworks 160 Venomous bites 97 Flood 736 Electrocution 766 Drowning 1,684 Suicide 4,679 Stroke 7,109 Heart Disease 23,599 20

21 (4) Poor Estimation of Risks Causes of Death Actual Consumer Estimate Vitamin poisoning Fireworks Venomous bites Flood Electrocution 1, Drowning 7,380 1,684 Suicide 24,600 4,679 Stroke 209,100 7,109 Heart Disease 738,000 23,599 21

22 Poor Estimation of Risks Consumers Estimated Probabilities 1 Ideal consumer Typical consumer 0 1 Actual Probabilities 22

23 Who Uses Risk Estimation Error Sale of optional auto insurance benefits (e.g., flat tire replacement) Politics of fear and of selling catastrophes Consumers over-estimation of cost of specialized insurance products. 23

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25 (5) Underperformance of Information Search In the Information Search phase of the consumer decision process, a minimum number of alternatives should rationally be examined by the consumer. Typically, consumers do 1/3 rd the amount of information search they should be carrying out. Number of life insurance companies contacted before selecting a policy Number of mutual funds considered before buying shares. 25

26 Who Uses Information Search Underperformance - One-stop shopping for financial products - Give us a call we ll find you a good deal, but if we can t we ll tell you who can including our own competitors - First time brokerage, bank, and insurance accounts 26

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28 (6) The Attraction Effect The insurance broker presents you with two different auto insurance policies provided by two well-known insurance companies. Price Liability Coverage Policy A $1,275 $150,000 Policy B $1,569 $200,000 28

29 The Attraction Effect contd. The insurance broker presents you with three different auto insurance policies provided by three well-known insurance companies Price Liability Coverage Policy C $1,725 $160,000 Policy D $1,275 $150,000 Policy E $1,569 $200,000 29

30 Attraction Effect continued Affordability Affordability A D B C E Policy Coverage Policy Coverage 30

31 Attraction Effect Definition: The attractiveness of an option increases when new options dominated by that option are introduced to the set of choices you have. Other Examples: - Real estate agents - Insurance brokers - Home mortgages - Pre-assembled computers Note: Use of such tactics by brokers may be punishable by law. 31

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33 (7) Overconfidence Individuals confidence about their knowledge of facts is higher than their actual knowledge. Overconfidence is more prominent for moderate and difficult questions and less prominent for simple questions. A 5-year study by Morningstar showed that many of the nation s biggest stock funds would have performed better if fund managers had not shown up for work during the 5 years! 33

34 Overconfidence Barber and Odean studied the investment records of 66,465 households. The average account turned over 75 percent of its portfolio annually. The average investor earned 16.4%, while the overall market return was 17.9%. The accounts with the highest turnover rates (top 1/5 th of turnover) only yielded 11.4%. Women achieved better results than men. 34

35 Hey, Sam wants in does anyone know how to work this thing?