skimspiration 2015: two ways of making decisions – when utility and regret come together
TRANSCRIPT
Jeroen Hardon, SKIM
Aaron Hill, Sawtooth Software | SKIMspiration 2015
Two ways of making decisionsWhen utility and regret come together
A short introduction to
Random Regret
Modeling
But first, what are we doing now, and why are we looking into
something new?
The market standard
Random Utility Model
(RUM)
RUM
Sum of utility
$ 1.75
350 ml
+3
$ 1.95
475 ml
+4
RUM
Sum of utility
$ 1.75
350 ml
+3
$ 1.95
475 ml
+4
$ 2.25
590 ml
+2
Do not change!
RUM
Sum of utility
$ 1.75
350 ml
+3
$ 1.95
475 ml
+4
$ 2.25
590 ml
+2
RUM assumes rationality
RUM (random utility model)
• Traditional economics
• Rational agents
• Independence of
irrelevant alternatives
Why change?
Random Regret Model
(RRM)
Behavioral economics
RRM
Sum of regret
parameters
$ 1.75
350 ml
- 4
$ 1.95
475 ml
- 2
RRM
Sum of regret
parameters
$ 1.75
350 ml
- 3
$ 1.95
475 ml
- 1
$ 2.25
590 ml
- 3
DO change!
A
Regret modelling: How to code?
Product A has 16 GB less compared to product B,
Product A has 48 GB less compared to product C,
So product A has 16 + 48 = 64 regret on GB
B C
64GB regret
A
Regret modelling: How to code?
Product B has 16 GB more compared to product A,
Product B has 32 GB less compared to product C,
So product B has 0 + 32 = 32 regret on GB
B C
64GB regret 32
A
Regret modelling: How to code?
Product C has 46 GB more compared to product A,
Product C has 32 GB more compared to product B,
So product C has 0 + 0 = 0 regret on GB
B C
64GB regret 32 0
A
Regret modelling: How to code?
For price we follow the same logic, however here we should use the
reverse, as paying less is better!
B C
64
0
GB regret
€ regret
32
50
0
150
In contrast to RUM, RRM acknowledges that context is relevant and that we are not always rational
RUM
• Traditional economics
• Rational agents
• Independence of
irrelevant alternatives
RRM
• Behavioral economics
• Bounded reality
• There is no such
thing as irrelevant
alternatives
• Context Matters
RRM
Except it is not that
easy!
RRM has its own limitations.
You can only simulate the same
amount of products as you
tested in the choice task.1
Only nominal attributes can be
coded with RRM, the others
give the same result3
Using a none option is not
possible.2
RRM is not suited if only price is
the nominal attribute4
RRM limitations
The Duct Tape Solution
RUM RRM
RUMRRM: A hybrid solution
Now we have the best of
both worlds.
Not all animals are mean
But that does not mean all
animals are cute either
We are able to incorporate
behavioral economics in our models,
in order to improve predictions1
We are continuously keeping an
eye out for new methodologies3
We are also looking in ways to
incorporate emotions in our
models2
But what does this mean for you?
Contact us
skimgroup.com
Jeroen Hardon
Director Methodology EU
Based in Rotterdam
+31 10 282 3503