CHAPTER 1 INTRODUCTION
1.1 B ACKGROUND AND M OTIVATION
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CHAPTER 1 INTRODUCTION
1.1 Background and Motivation
The service business environment nowadays faces challenges as the new service’s quantity keep rising. In Service Profit Chain, if service providers want to let customer satisfy, they should provide attractive value service designed and delivered to meet targeted customers’ needs (James L. Heskett, 1994). There are some critical missions that business should overcome in advance. First, let human (potential users or target market) know the new service can increase utility value which they really concern. Second, it is imperative to find a more effective way to assist human who have to decide whether to accept the new service or not. For those conditions, in the service provider’s view and they should find out the way to persuade target users of new service to accept and act to user the new service. The critical thing is let their target users know that the new service can bring them more benefits than the old ones or the old manners. If service businesses want to let their users know their product’s advantages, they should let their user trust they can gain more utility value in using the new service.
Termed prospect theory, it has been extraordinarily influential. It is based on the method that human evaluate gains and losses from their current status. In an experiment, human adapt to the reduced light in a movie theater when entering it, then finding it not particularly dark after a few seconds, then readapt to the much brighter light outside when leaving the theater, and then finding it not to be unusually bright after a few seconds (Dawes, 2001, p.195). In the above example, in the former, the reference point is brightness of the movie theater before changing brightness. Thus, in the further, the reference point is the brightness of outside. In addition, the utility of above example is the feeling of brightness. But since choice might vary owing to
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outer environmental noise interference when considering gain or loss, it consequently cannot reveal the underlying preferences. From the above mentioned example we inference that human‘s current reference point is influenced by external environment.
From the anchoring effect, the information of external environment would influence customer expectation (current reference point). In the following case (Figure 1.1), it presents the surrounding information will affect our perception.
Figure 1.1 Classical simultaneous lightness contrast (Source: Logvinenko, 2002)
The classical simultaneous lightness contrast illusion can be observed in Figure 1.1. Although both of small grey squares are same lightness, the square in right hand side is darker than left hand side. The researcher take few experiments and observed that the anchoring effect have critical influence in lightness perception in humans (Logvinenko, 2002).
According to the last example, the influence of external environment includes the brightness of outside, weather and person who control light. As the same as other activities, human will be influenced by external environment when they position their expected outcome utility of activities. For example, when a new service is promoted, a ranking list of related services from some marketing research usually influences consumer expectation (reference point). In general, this list is usually dynamic. It
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causes consumers not to apply those information to evaluate benefit of new service, and even leads consumers to position an unsuitable expectation. Therefore, in this paper we propose a way which provides individual with an appropriate reference point of an uncertainty decision to let human can accurately evaluate the utility value.
The individual reference point can overcome above problem. It can prevent human from having over-expectation or under-expectation utility value (e.g., monetary, time) about the acceptance of a new service). This method can assist service provides to effectively delivery their service to potential user.
In the consumer’s view, human make decision whether to receive it or not when they receive the new service’s information, it will trigger a cycle of Transtheoretical (stages of Change) Model (Prochaska, J., Johnson, S., & Lee, P., 1998). The transtheoretical model (figure 1.1) proposes changing behavior as a process of six stages. Six stages include Precontemplation, Contemplation, Preparation, Action, Maintenance and Termination.
Figure 1.2 Stage of Change (Source: Prochaska, 1998)
On the way from the second step to the third step of behavioral change cycle, it
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called contemplation step to preparation step. Before human decide to have a plan to use new service and intend to take action in the immediate future, they must be aware of the pros of changing but also can identify the cons. In Neoclassical Economics, Expectancy Theory (Vroom, 1964) is applied to compute the utility value of the event’s outcome (the benefit that new service brings). This theory uses the pure value (for example, wealth, time and other things) of outcome to be the utility value.
Expectancy Theory has a critical problem that the pure value cannot stand for human’s psychological utility value of view. For example, the meaning of gaining four-hundred dollars to a billionaire is different from a beggar. That is, the same pure outcome will represent highly heterogeneous meanings to different individual persons.
In order to modify this shortcoming of Expectancy Theory, researches propose Moral Expectation (Daniel Bernoulli, 1738). This method transform event’s outcome to psychological value as utility value in the decision. In behavioral finance view, we find utility value evaluating from this method can not fit in every individual person, because the same utility value is represented as different mental utility values for each of users. The behavioral finance’s scholars improve this drawback to develop Prospect Theory. The theory evaluates the utility value of uncertainty event via individual reference point which can distinguish individual persons by their loss aversion (Kahneman Daniel, and Amos Tversky, 1979).
In “Thinking, Fast and Slow” (Kahneman, 2011), it mentioned an experiment about reference point. There are three bowl of water, from left to right, iced water, room-temperature water and warm water respectively. Put left and right hand into the iced water and warm water respectively, then put both of them to the room-temperature water. The left hand feels warm, on the contrary, the right hand feels cold.
It is the same to evaluate the utility value about an outcome. In the situation of
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making decision of uncertainty event, the common reference point is status quo. But human also can regard anticipated outcome to be the reference point, which is usually influenced by psychological factor, factor of environment, society and other things that decision makers concerns (Kahneman, 2011).Therefore, we develop a way to interact with human a few times and then compute the appropriate reference point (in this paper, called new reference point) to the user (decision maker) who is considering whether to accept the new service. After above, we apply new reference point to compute the utility value, and represent the positive utility value (gain) to user. Let user know accepting new service is really good to him/her, making user willing to accept new service.
Totally based on individual factors and both concern factors of environment, this method can bring highly effectiveness to decision maker in making a decision on uncertainty situation about the adoption of a new service.
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From decision maker’s evaluating outcome format we know that decision’s utility value is highly related to two parts: (1) loss aversion and (2) probability sensitive. The exiting knowledge further shown when decision maker evaluate the uncertainty event’s outcome utility value not based on the outcomes of decision, stead of it involving the gap between decision maker’s expected utility value on outcome and the outcome’s real utility value (Kahneman, 1979).
When human make a decision on an uncertainty event or consider whether accept a new service, they must compare the cons, pros and utility value between the current situation and situation after changing (Scholl, 2002). Until make sure to accept the new service will better than another option, they tend to act to accept and use the new service.
In this research, we aim at the issues about effective evaluating method of computing mental utility value development which are illustrated as below:
(a) Whether providing a high-quality new service expected to eliminate the gap 5 analogy and can change the human’s behavior (willingness to accept new service) and increase their utility value?
In Cumulative Prospect Theory, human have a reference point which is influenced by human expectation, environment and society and so on (Albert Bandura, 1977). It is used synonymously with the term current reference point to mean the reference point is generated by decision maker’s intuition. Then take current reference point as the balance point to compute the gain and loss from the decision. But, current reference point usually is not appropriate enough to represent the decision maker’s status quo. When human face an uncertainty event, fast thinking (system 1) (Daniel Kahneman, 2011) usually lead human jump to conclusion and affect their decision.
There exists a thinking bias to make human can’t accurately evaluate utility value. For