Contemporary Issues in Behavioral Finance

Simon Grima, Ercan Özen, Hakan Boz, Jonathan Spiteri, Eleftherios Thalassinos, Ercan Ozen, Hakan Boz, Eleftherios Thalassinos

• Publisher: Emerald Publishing Limited
• Year: 2019
• ISBN:
  9781787698833
• Topic: Business
• Subtopic: Finanza
• Index: Business

This special edition of Contemporary Studies in Economic and Financial Analysis offers seventeen chapters from invited participants in the International Applied Social Science Congress, held in Turkey between the 19th and 21st April 2018. The chapters included tackle a range of issues, including risk and control in consumer behavior; augmented reality applications in brand trust; foreign exchange rates; and brand reputation influence, among many more. Covering concepts such as retirement planning, the stock market, and herd behavior, Contemporary Issues in Behavioral Finance is a fundamental text for any researcher or student of behavioral finance, with a cast of expert contributors and editors.

CHAPTER 1

RISK AND CONTROL IN CONSUMER BEHAVIOR: A DISCUSSION

Erdoğan Koç, Çağatan Taşkın and Hakan Boz

ABSTRACT

Consumers are faced with many new products. In almost every product category it is seen that there are more alternatives than provided in previous years. This situation may cause consumers to feel uncomfortable/uncertain, especially about new products. Therefore, since they perceive this uncertainty, customers want to be in control. Control is one of the ways to help customers to decide on perceived risky situations.

The main purpose of the study is to explain the effects of the risk and control drive on consumer behavior and determine how businesses reduce the risk that consumers feel.

It is critical for enterprises to increase their brand awareness in order to reduce consumers’ risk perceptions and increase their controls (cognitive, behavioral, and decision) during purchasing decisions. Also, it will be useful for them to focus on activities increasing brand loyalty. They can especially carry out marketing activities allowing consumers to try new products or providing money back guarantees. Moreover, in order to reduce the risk perception and increase control by the customers, making the promotional contents of the product understandable and simple without hidden factors will contribute in a positive way.

Keywords: Risk; cognitive control; behavioral control; decisional control; consumer’s buying behavior; neuromarketing

1. INTRODUCTION

The ability to feel and escape from bad situations is vital for the survival of all living organisms. Human beings live and gain experiences from life. They learn what to use with care or avoid according to their life experiences. They also have the choice to change things in life in order to reduce or eliminate risk. Every innovation or advancement in life results from some kind of risk being taken. Thus, it is important for policymakers to balance the benefits and the risks. From the beginning of humankind, risk has been an ever-present issue within the lives of people. An extensive body of literature exists regarding risk within fields such as marketing, consumer behavior, recreation/leisure, tourism, economics, psychology, decision sciences, management, insurance, public policy, and finance. Each of these fields takes a different approach to the study of risk and examines different aspects (Carroll, 2009, pp. 34–35).

2. DEFINITION OF THE RISK CONCEPT

The concept of risk is mostly seen as the alteration of outcomes, their possibilities, and their subjective values. Risk can be defined as the situation where a decisionmaker has an a priori knowledge of both the consequences of alternatives and their probabilities of occurrence. Risk can be viewed as an expectation of loss. This perspective is different from the traditional one that treats the risk concept as “probability times the pay-off” that has origins to the disciplines of mathematics and economics. It is a psychological-driven focus for risk. Thus, the concept of risk can be defined as an expectation of loss which is subjectively determined; the greater the probability of this loss, the greater the risk thought to exist for an individual (Mitchell, 1999, pp. 167–168).

The usage of risk concept is increasing in various disciplines and the definition of risk may differ from one discipline to another. However, the most general assumption shared is the distinction between reality and possibility. The concept of risk is related to the possibility that the future can be changed by human activities. The risk concept is related to the term “expectations” that refers to knowledge and experiences of the past. They can be developed in a formalized, more or less conscious way, referring to statistical techniques, or in a less formalized manner, referring to everyday knowledge and personal experiences (Zinn, 2008, pp. 3–4).

2.1. The Risk Concept in Consumer Behavior

The concept of risk or perceived risk was originally proposed by Bauer (1960) in consumer behavior research. Formally, perceived risk is defined as “a combination of uncertainty plus seriousness of outcome involved.” The perceived risks are regarded as “the expectation of losses associated with purchases and acts as an inhibitor to purchase behaviour” (Bauer, 1960).

The main problem with consumer behavior is the choice under uncertainty. Because the result of a choice cannot be known until the usage of the product or services, the consumer is facing various risks. The risk perception is considered as a major aspect of consumer behavior since risk is usually thought to be difficult and painful because it may cause stress which must be handled by consumers. Consumers’ self-esteem would affect the amount of perceived risk and the way of dealing with risks in a particular choice situation and the way chosen to handle risks (Taylor, 1974, p. 54).

After Bauer’s (1960) proposition, the concept of perceived risk was used to explain consumers’ behavior. Consumers may worry about their buying decisions because they may not be sure about their purchase decisions whether they will satisfy them or not. That’s why, the concept of perceived risk is a function of uncertainty and is consumer uncertainty about the loss or gain in a consumer buying transaction (Forsythe & Shi, 2003, p. 869). The concept of perceived risk occurs in consumer buying decisions because consumers’ actions may face negative results (Littler & Melanthiou, 2006, p. 433).

In other disciplines, the concept of risk is related to choice situations involving both potentially positive and potentially negative outcomes; however, the focus has primarily been on potentially negative outcomes only in consumer behavior. This is an important difference between risks, as understood in marketing, versus how it is understood in other disciplines (Stone & Gr⊘nhaug, 1993, p. 40).

Research on perceived risk has grown since Bauer’s (1960) advocacy of risk-taking behavior as a possible measure of consumer attitude toward a purchase. Perceived risk is considered to be a situational and personal construct. Research on perceived risk has laid emphasis on two components: the likelihood of a loss and the subjective feeling of unfavorable results. However, there is a lack of a universally agreed definition (Pires, Stanton, & Eckford, 2004, p. 119).

If individuals perceive risk, this means that they are expecting some kinds of loss. In particular, psychology research includes a relation between risk concept and gambling behavior. The perceived risk is measured by various models in the literature. The perceived risk theory was introduced in 1960 from the perspective of consumer behavior. According to Bauer, consumers’ behavior involved risk because their purchasing actions “will produce consequences which he cannot anticipate with anything approximating certainty, and some of them which at least are likely to be unpleasant.” Since 1960, many consumer types of research confirmed that perceived risk is one of the important factors in consumer behavior (Bauer, 1960).

As noted above, risk is one of the significant factors influencing consumer behavior and is perceived “in terms of the probability of an outcome and the importance of cost associated with the outcome.” Perceived risk can be seen in all purchase decisions especially if the outcome is uncertain. Under these conditions, consumers may postpone or cancel their purchase and this means that they perceive the existence of risk (Pappas, 2017, pp. 197–198).

Perceived risk is closely related to the potential negative outcome of one’s decision. If the consumer believes that he or she cannot control the purchase outcomes or the consequences of a wrong decision would be important and serious, a risk may appear (Mohseni, Jayashree, Rezaei, Kasim, & Okumus, 2018, p. 625). Consumer behavior is influenced by many factors one of which is the level of uncertainty and anxiety consumers feel regarding the purchase decision. This can be identified as perceived risk (Lacey, Bruwer, & Li, 2009, p. 99). According to Yeung and Morris (2006), risk perception can be defined as the individual judgment of the likelihood that a consequent loss could occur and the seriousness of its likely consequences (Yeung & Morris, 2006, p. 295). It is known that people try to avoid or minimize their losses as much as possible when they are about to make decisions on risky situations (Sung & Jo, 2018, p. 1009).

2.2. Perceived Risk as a Multi-dimensional Concept

A risk is a multi-dimensional concept that has two components such as certainty and consequences. In addition, it can be classified into five categories: functional risk, physical risk, financial risk, social risk, and psychological risk (Yüksel & Yüksel, 2007, p. 704). However, according to Mohtar and Abbas (2015), the most common categories of perceived risk include financial risk, performance risk, physical risk, psychological risk, social risk, and convenience risk (p. 5). The definitions of each component are given below:

• Financial risk: This risk is defined as the financial loss to a customer. It includes the possibility that the product may need to be repaired, replaced, or the purchase price refunded (Sweeney et al., 1999, p. 81).
• Performance risk: This risk refers to the perception that a product or service may not perform as needed or expected (Brosdahl & Almousa, 2013, p. 5). In other words, it can be defined as the risk associated with an inadequate and/or unsatisfactory performance of the product (Rijsdijk & Hultink, 2003, p. 207).
• Physical risk: This risk is related to the possibility of the risk that the purchased product physically harms the consumer (Chu & Li, 2008, p. 214).
• Psychological risk: This risk can be defined as anxiety and/or uncomfortable feelings arising from anticipated post-behavioral emotions such as worry and tension (McLeay, Yoganathan, Osburg, & Pandit, 2018, p. 521).
• Social risk: This risk can be defined as the potential loss of esteem, respect, and/or friendship offered to the consumer by other individuals (Laroche, McDougall, Bergeron, & Yang, 2004, p. 376).
• Convenience risk: This risk addresses a loss of time and effort associated with achieving satisfaction with a purchase (Murray & Schlacter, 1990, p. 54).
• Overall risk: The chance of the purchase of a product or service ending up with a general dissatisfaction of someone (Pires et al., 2004, p. 120).

According to Featherman and Pavlou (2003), perceived risk has been classified into two main categories – (a) performance and (b) psychosocial. The category of performance includes three types: (i) economic, (ii) temporal, (iii) effort; and the category of psychosocial includes two types – (i) psychological and (ii) social. In addition, perceived risk has six dimensions: (1) performance, (2) financial, (3) opportunity/time, (4) safety, (5) social, and (6) psychological loss (Featherman & Pavlou, 2003, p. 454).

Perceived risk may occur in a purchasing situation. It may depend on many factors. It may depend on external fa...