TAILIEUCHUNG - Modeling the Psychology of Consumer and Firm Behavior with Behavioral Economics ∗

In under-sampling, instead of using all observations of the majority class to train the model, only a random subset of the majority class is used in addition to the minority class. Training samples of the majority class are randomly eliminated until the ratio of the majority and minority classes reach a preset value, usually close to 1. A disadvantage of under-sampling is that it reduces the data available for training. In over-sampling, training samples of the minority class is over-sampled at random until the relative size of the minority and majority classes is more balanced. Note that over-sampling may. | Modeling the Psychology of Consumer and Firm Behavior with Behavioral Economics Teck H. Ho University of California Berkeley Berkeley CA 94720 Email hoteck@ Noah Lim University of Houston Houston TX 77204 Email noahlim@ Colin F. Camerer California Institute of Technology Pasadena CA 91125 Email camerer@ Direct correspondence to the first author. This research is partially supported by NSF Grant SBR 9730187. We thank Wilfred Amaldoss Botond Koszegi George Loewenstein John Lynch Robert Meyer Drazen Prelec and Matt Rabin for their helpful comments. We are especially grateful to the late journal editor Dick Wittink for inviting and encouraging us to undertake this review. Dick was a great supporter of inter-disciplinary research. We hope this review can honor his influence and enthusiasm by spurring research that spans both marketing and behavioral economics. ABSTRACT Marketing is an applied science that tries to explain and influence how firms and consumers actually behave in markets. Marketing models are usually applications of economic theories. These theories are general and produce precise predictions but they rely on strong assumptions of rationality of consumers and firms. Theories based on rationality limits could prove similarly general and precise while grounding theories in psychological plausibility and explaining facts which are puzzles for the standard approach. Behavioral economics explores the implications of limits of rationality. The goal is to make economic theories more plausible while maintaining formal power and accurate prediction of field data. This review focuses selectively on six types of models used in behavioral economics that can be applied to marketing. Three of the models generalize consumer preference to allow 1 sensitivity to reference points and loss-aversion 2 social preferences toward outcomes of others and 3 preference for instant gratification quasi-hyperbolic discounting . The three models .

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