Important psychological error that marketers should be aware of when determining a target group: base rate fallacy

For the last post, I talked about three biases—sunk cost, anchoring effect and Barnum effect— that keep you from being a smart shopper. For today’s post, I will do a deep dive on one particular psychological concept that people frequently make mistakes on, called base rate fallacy. As a northwestern senior majoring in Psychology and Integrated Marketing Communication and minoring in Statistics, I came across the concept of base rate fallacy in a psychology class, “Decision Making,” and thought that this concept would be applicable and helpful to the field of marketing, especially when determining a target market. Throughout the article, I will first explain the concept of base rate fallacy, and then will demonstrate how it touches the area of marketing.

Base rate fallacy is a common cognitive error that most people make by ignoring the base rate and focuses solely on certain characteristics. In order to facilitate the best understanding of the concept, I will give you a short quiz. Pay attention to the description of John, and guess what his occupation is:

John is a muscular African-American who is 6.5 feet tall. He drives red Mustang and is popular among girls.  Is he a NFL football player or a nurse?

You would probably have guessed him to be a football player, because most of the descriptions of him match with the common stereotypes of how football players are like; tall, sports car, muscular, etc… However, if you rationally think about it, you realize that you’ve ignored the basic base rate; the number of nurse is much more than the number of NFL football player, and thus it is more probable for John to be a nurse! People frequently commit this base rate fallacy because people tend to focus more on external features of and characteristics of a group, rather than a size or hard number.

 As a student who studies both psychology and marketing, I think it is especially important for a marketer to be aware of base rate fallacy. When deciding which group of people to target, marketers have to consider target group’s own interests and characteristics. However, it is very probable for some marketers to commit base rate fallacy, because their attention on target group’s interests and features might blind them from looking at a big picture, such as the size of a target group.

For example, let’s say you are planning on one marketing campaign. Two target groups have been identified. Group A fits perfectly with the nature of the campaign; campaign’s features corresponds with the group’s interests and passion. However, the size of the group A is quite small, only 1,000 people. Group B has characteristics that fit relatively well to the campaign, but not as perfectly as Group A. Group B is consisted of 10,000 people. In this situation, marketers should be careful not to choose Group A by the mere excitement that the campaign fits perfectly with the target group’s interests, because in a long term, targeting group B is more profitable choice, considering ROI and the number of people being reached through the campaign.

Therefore I suggest that it is important for marketers to always have a broad perspective. Identifying target group’s interests and characteristics is important, but a marketer should not solely focus on just one aspect, but should consider various aspects of the whole process to execute a successful marketing campaign.

Jake Kim, Undergraduate Northwestern IMC, @JakeKim4

3 Simple Steps to Save Your Money and Become a Rational Shopper

           Shopping is one of the major parts that consist of our lives. Especially for housewives, grocery shopping is one of their daily chores. Moms need to go to a grocery shop--Trader Joe's, Safeway, Walmart, etc...-- almost everyday, and even to big retailers--Target, Home Depot, Bestbuy-- occasionally to buy household neccessities. However, these frequent shopping trips don't always leads to satisfactory shopping. Recall how many times you regretted after impulsive or unnecessary purchases.

Is there a way to avoid those regrets? Yes, by becoming a rational shopper! Then how do we become one? As a Northwestern student majoring in psychology, I've taken several courses on cognitive psychology and decision making, and below I listed three main cognitive biases that I learned to be keeping us from making rational choices. Understanding these three biases is the first step to become a rational shopper.
1. Sunk cost bias
2. Anchoring effect
3. Barnum effect

            Sunk cost is the cost that has already been paid and is not refundable, and thus should not be considered when making decisions. However, we tend to “honor” the sunk cost and therefore it usually plays a huge role in making decisions. “I’ve already spent money on stocking up five razor blades for Gillette, so I will stick with it in order not to waste those five razor blades that I already bought, although I found a much cheaper razor that I like better.” is a common rationale of shoppers who fell into the trap of suck cost bias.

            Anchoring effect is a human tendency to focus too heavily on limited piece of information. We are often “anchored” by initially given information, even if it is only small portion of entire information. Big retailers such as Costco or Sam’s Club utilize this concept to design their product shelving. They place their value products, which are produced from their own factories and therefore cheaper than brand products, right next to brand products, which are placed closer to the entrance so shoppers get to see the price of brand products first. Therefore shoppers who first see the price of brand products are likely to be anchored by that high price and perceive the next price of value item to be much cheaper.

Barnum effect is a human tendency to regard very general characterizations or arguments to be accurate and tailored specifically for him/herself, although those characterizations are vague enough to be applicable to everyone. Informercial or home shopping programs that sell vitamins are typical example of Barnum effect. If you take a close look at their description of vitamin products, you will notice that all the benefits of the vitamin are very vague—alleviating fatigue, boosting up concentration, etc—that they are applicable to everyone. However, still we tend to think that this vitamin just fits our needs and buy it.

            Are there any solutions for these biases? For many of human cognitive biases, simple but strong prescription is to take at least few seconds to think “why” you want to make certain decision, before blindly putting stuffs into your cart. So next time when you go for a shopping and saw a deal or product that you think is really good, why don’t you take a few seconds to contemplate over why you think it is a good deal, and reason your logics step by step? 


Jake Kim, Undergraduate Northwestern IMC, @JakeKim4