Victor Preston Foundation

  Consumers expend mental effort to make purchase decisions. Comparing a large number of products can result in “decision fatigue”. For example, a couple planning a vacation could be overwhelmed when selecting from multiple destinations and activities. Behavioral economics has found that when decisions are perceived as complex, people often rely on mental shortcuts (Thaler, 1985;1999). Predetermined packages, in which destinations and activities are selected by the offering company, simplify decision making. These packages are referred to as “bundles”. Customers often do not calculate the actual savings from the bundle vs. purchase of the individual items in the bundle. However, bundles can increase perceived value through the convenience of the predetermined package and reduction of “decision fatigue” (Thaler, 1985). Bundling can also be used to attract new customer segments (Nagle, Hogan & Zale. 2011). Example: A 100-room ski lodge in the Pacific Northwest offers rooms du...

  B ehavioral economics has found companies often rely on heuristics and fall prey to cognitive biases when making pricing decisions. Companies may anchor on competitors’ prices, assuming that “market price” is fixed and must be matched or beaten (Kahneman & Tversky, 1974). The herding bias may also negatively impact performance. The herding bias presents as the tendency to mimic competitors’ pricing actions despite a lack of evidence that this mimicry i mproves profit ( Kienzler, 2018) . These biase s can lead companies to believe price discounting is the best tactic when value-based pricing is more likely to produce higher profit . P rice reductions can trigger negativ e price–quality inferences in consumers when the price reductions are uncommon in the industry, price reductions have not previously been offered, or the consumer has only basic industry knowledge . C ustomers may assume a lower price signals lower quality, reducing willingness to pay in the future. Re...

  Fostering a culture of asking questions before prescribing solutions can create a competitive advantage. Research shows that decision-makers frequently jump to conclusions based on incomplete data. Prompting individuals to explore alternative explanations significantly increases accuracy (Milkman, Chugh, & Bazerman, 2009). Asking questions before offering an opinion is an evidence-supported technique for improving business decision quality. When leaders ask clarifying questions prior to making recommendations, they collect more diagnostic information and reduce confirmation bias (Nickerson, 1998). In team settings, leaders asking questions prior to providing opinions also improves the quality of decisions by reducing conformity pressures, anchoring bias, and groupthink. When leaders withhold initial recommendations, team members are more likely to share dissenting perspectives or unique knowledge. Theoretically, teams generate more accurate judgments when leaders speak last,...

  Benjamin Graham’s The Intelligent Investor is a foundational text on value investing, emphasizing the importance of rational decision-making, long-term thinking, and risk management in building wealth through the stock and bond market s . Benjamin Graham’s disti nguishes between the D efensive I nvestor and the E nte rprising I nvestor . The D efensive I nvestor seeks to achieve satisfactory returns with minimal effort. Th e Defensive I nvestor is not interested in poring over balance sheets or actively managing a portfolio. For the Defensive Investor , Graham recommends a simple, disciplined approach—such as allocating funds between high-grade bonds and a diversified portfolio of reliable, established stocks. For the D efensive I nvestor , the goal is stability and protection from major losses, not out-performance. Graham advises periodic re-balancing and refraining from market timing. In contrast, the E nterprising I nvestor is willing to put in substantial time, r...

  Liquidity ratios measure the ability of a company to use its short-term assets to meet its short-term liabilities (1,2). Short-term assets, also called current assets, include cash, cash equivalents, accounts receivable, and inventory. Short-term liabilities, also called current liabilities, are the payments due within the upcoming 12 months. Short-term liabilities include accounts payable to suppliers, interest on loans, and the portion of the loan balance due. For the purposes of this article, we will lump the different types of short-term liabilities together under “current liabilities”. This is done to focus on the impact of the subcategories of current assets. The most commonly used liquidity ratios are the Current Ratio , Quick Ratio , and Cash Ratio . The Current Ratio is calculated by dividing current assets by current liabilities. Current Ratio = (Cash + Cash Equivalents + Accounts Receivable + Inventory) / Current Liabilities The Current Ratio greater than 1 indic...

  Mental accounting is a behavioral economics concept that people separate their money into discrete buckets based on subjective criteria. These buckets are often based on the source of the money or the intended use of the money (1). Recent work has found the effects of mental accounting are influenced by individual personality traits and cognitive factors (2), such as the perception of scarcity (3). Mental accounting provides a theory as to why people treat sources of income differently. For example, people treat tax refunds differently than their paycheck. The differential treatment occurs despite the fact that a tax refund and a paycheck are both simply sources of income (4). Through mental accounting people often place a tax refund in the “found money” bucket. They then use the tax refund for frivolous expenditures rather than saving for their future. This may occur because a tax refund is an unexpected and infrequent event (i.e. “found money”). Compare this with the e...