Framing as a Marketing Tactic for Equipment Leasing

Transcription

1 Framing as a Marketing Tactic for Equipment Leasing By Darrell Parker and Martha Spears When marketing a lease, pay attention to how the lease-buy decision is framed for both management and financial decision-makers. A survey of college finance students employed the framing of wins versus losses for various scenarios.this article illustrates the framing phenomenon and shows how marketing tactics should address the pitfalls of framing. Mr. Jones, an apparently risk-averse manager, considers an equipment lease, which, of course, provides certain financial terms for acquiring the needed equipment. Because the lease can reduce the risk associated with equipment purchase at a competitive price, the decision to lease seems obvious. Yet, inexplicably, Mr. Jones decides not to lease. Perhaps the marketing of the lease framed the lease-buy decision in a manner that triggered a preference reversal. Preference reversal occurs when an individual makes decisions that reflect contradictory risk preferences. Under some circumstances Mr. Jones acts in a risk-averse manner, whereas in others he acts like a risk lover. There is more at stake here than the personal biases of Mr. Jones. In fact, the occurrence of preference reversal indicates that personal bias can be overcome. When the context or presentation of a decision creates a climate that influences the decision, we say that framing has occurred. In general, the issue of framing arises when decision-makers evaluate an uncertain proposition not just on the underlying outcomes but also on the context in which those outcomes are presented. 1 The lease-buy decision is used to illustrate the application of the concept of framing as a marketing tactic for the equipment leasing industry. Financial decisions such as those behind the lease-buy decision use present value and expected utility analysis. Risk aversion helps to account for different attitudes toward risk. Hence, the risk-averse business owner is more likely to choose the certainty of a lease contract over the uncertain future values of ownership. However, decision-makers are observed to react differently

2 to the same proposition depending upon the manner in which it is presented or framed. Preference reversal due to framing has significant implications for marketing a complex sale such as an equipment lease. An individual in equipment lease sales who is familiar with the product analysis is not as sensitive to the marketing context and may not be aware that customers are subject to preference reversals of this type. As a consequence, a marketing strategy may fail to recognize the potential to adversely frame the product choice. A further complexity occurs when different decision-makers within the client organization have different profiles with respect to framing business decisions. The marketing materials should explicitly address framing for the manager, even if it is not necessary for the financial officer. It is our purpose to explore the importance of framing for uncertainty within the context of marketing equipment leases to both financial and managerial decision-makers. This approach permits us to answer specific questions: Are managers considering equipment leases subject to preference reversal and the framing phenomenon? If so, to what extent may framing differ between these two groups? How can the marketing presentation use framing to decrease the likelihood that this type of preference reversal will occur and save the sale? FRAMING WINS VERSUS LOSSES Compare a sure outcome of receiving $1,500 with a gamble where you have an even chance of getting either $1,000 or $2,000. A risk-averse individual chooses the certain $1,500. A risk lover takes the chance on gaining $2,000 and chooses the gamble. An individual who is indifferent between these choices is risk neutral. However, individuals change the risk preference they reveal depending on how the choice is phrased. If they perceive the $1,500 as a gain from the $1,000, they are more likely to choose the certain $1,500. If they see the $1,500 as a loss of $500 from the $2,000 reference point, they are more likely to choose the gamble. This has been repeatedly illustrated through the use of the following two scenarios: 2 Scenario 1. In addition to whatever you own, you have been given 1,000. You are now asked to choose between a 1 /2: 1 /2 chance of a gain of 1,000 or 0 or a sure gain of 500. Scenario 2: In addition to whatever you own, you have been given 2,000. You are now asked to choose between a 1 /2: 1 /2 chance of a loss of 1,000 or 0 or a sure loss of % Figure 1 GAIN Preference reversal due to framing has significant implications for marketing a complex sale such as an equipment lease. An important determinant of the way managers like Mr. Jones frame a decision is the choice of a reference point. Many people exhibit preference reversal when an outcome is phrased in terms of savings versus loss. Research indicates that Mr. Jones is more likely to choose the certain outcome if phrased in terms of savings. He is more likely to choose the uncertain outcome, or gamble, if phrased in terms of expense. Through preference reversal, the decision-maker may actually act like a risk lover and choose the uncertain option when risk-averse present value analysis argues for the certain decision. 69% Figure 2 LOSS 84% 31% J O U R N A L O F E Q U I P M E N T L E A S E F I N A N C I N G F A L L V O L. 1 7 / N O

3 The important issue here is that for as many as half of all decision-makers the choice is determined by factors other than the expected value of each option or their private bias. Each of these scenarios presents a choice between the same certain outcome and the same expected values. If the certain choice is selected, then you have a profit of 1,500. If the uncertain choice is selected, then you have an equal chance to have gained 1,000 or 2,000. As shown in figure 1, when faced with the first question 84 percent chose the sure gain. When faced with the second question (figure 2) 69 percent chose the gamble. Fifty-three percent of the population changes its mind based on the wording of the decision. The important issue here is that for as many as half of all decision-makers the choice is determined by factors other than the expected value of each option or their private bias. The reference point will influence whether an uncertain choice is perceived as deciding to gamble (with a chance to win) or deciding to take the certain choice and prevent loss (this is the same as buying insurance). MARKETING THE LEASE-BUY DECISION Marketing within the leasing industry contains numerous factors that may enhance the likelihood 28% Figure 3 LIFE that your customers will frame the decision. Consider the following five factors for the leasebuy decision. 1. Equipment ownership is inherently an uncertain decision that entails elements of risk, while the terms of an equipment lease provide contractual certainty. 2. The lease-buy decision involves tools of financial analysis that are not universally understood. 3. The lease-buy decision represents a complex sale that may involve the agreement of multiple decision-makers. The more decision-makers the greater the likelihood that someone will adversely frame the choice. 4. The decision-maker may choose a reference point that considers the lease either in terms of savings or in terms of cost. 5. As a significant financial transaction, the lease-buy decision may trigger emotional reactions to perceived risks. Of course, the marketing of leasing products will contain many examples that are subject to framing. The lease-buy decision is used here to illustrate the nature of the framing phenomenon within the leasing industry. It is important to recognize that framing extends to nonmonetary decisions as well. NONMONETARY DECISIONS 84% Figure 4 DEATH 72% 16% Experimental studies have documented these phenomena for questions involving insurance, gambling, and medical decisions. Framing is also observed for a nonmonetary set of choices that present uncertainty in a life-or-death scenario. 3 Imagine that the United States is preparing for the outbreak of an unusual Asian disease, which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. Assume that the exact scientific estimates of the consequences of the programs are as follows: If Program A is adopted, 200 people will be saved. 2 2 J O U R N A L O F E Q U I P M E N T L E A S E F I N A N C I N G F A L L V O L. 1 7 / N O. 2

4 If Program B is adopted, there is a one-third probability that 600 people will be saved and a two-thirds probability that no people will be saved. Versus If Program C is adopted, 400 people will die. If Program D is adopted, there is a one-third probability that nobody will die and a twothirds probability that 600 people will die. If presented with saving lives through choices A and B (figure 3), 72 percent chose the certain outcome: A; however, when phrased in terms of deaths 84 percent were willing to gamble on Program D (figure 4). Within a business the equipment leasing decision may also involve issues of saving jobs or saving the company. Even though they do not reflect direct monetary analysis, these questions are also subject to framing effects, particularly by managers. MANAGERIAL FRAMING questions listed above and the following scenario, in which the decision involves the potential loss of 12,000 jobs. 4 The manufacturing division of a U.S. company is having problems competing in the global marketplace. The company must decide how to reorganize this division of 12,000 U.S. workers. Two strategies have been proposed. By contracting operations overseas 4,000 jobs will be saved. With an internal reorganization of U.S. operations there is a one-third probability that all 12,000 jobs will be saved and a two-thirds probability that no jobs will be saved. Versus Operations can be moved out of the United States, eliminating 8,000 jobs. With an internal reorganization of U.S. operations there is a one-third probability that nobody will lose his job and a two-thirds probability that all 12,000 will be unemployed. The influence of the value orientation of top management raises the likelihood of framing that faced financial managers. The influence of the value orientation of top management raises the likelihood of framing that faced financial managers. To understand the differences between framing effects for individuals trained in finance and management, consider the results when framing and risk aversion were tested on several student populations. Specifically, a survey instrument was developed to present issues of differences in framing of uncertain decisions among individuals with backgrounds in finance and management. Those students studying finance were more risk averse, while those choosing a management track were more likely to frame issues dealing with business. If one is marketing a complex financial instrument such as a lease, the CFO may exhibit the risk aversion that welcomes the lease, but the CEO may, through preference reversal, actually appear to be a risk lover and choose to buy. The marketing presentation of the decision determines the outcome. 41% Figure 5 JOBS SAVED Figure 6 JOBS LOST 59% 46% To investigate this question, we developed a survey instrument including the two classic framing 54% J O U R N A L O F E Q U I P M E N T L E A S E F I N A N C I N G F A L L V O L. 1 7 / N O

5 Finance students were not as likely to exhibit preference reversal as the management students were. However, the finance students were significantly more risk averse than the general population when faced with questions of a financial nature. Consistent with the methodology traditionally employed for this type of study, the respondents were divided into groups and administered one version of each question. The survey was administered to 186 students in eight sections of four courses taught within the Winthrop University College of Business. Freshman survey courses (Introduction to Business and Introduction to Political Economy) contained 110 students. The balance of respondents came from upper-level courses in Organizational Behavior (taken primarily by management majors), and Money and Banking (taken primarily by finance majors). Student surveys have traditionally been used in the framing literature with the results successfully replicated for other populations. One reason student populations are interesting is they can reveal whether people with a certain attitude select into a particular field of study. However, care must always be exercised in attempting to generalize the results from a studentbased study. Demographic information was also gathered including age, gender, major, work experience, and class standing. Our results document preference reversal and framing differences between management and financial decision-makers. The results provide statistically significant evidence of framing. First, consider the nonmonetary choices. When phrased in terms of deaths, 70 percent of respondents were willing to gamble on the uncertain program. However, when phrased in terms of saving lives only 44 percent chose the gamble and 56 percent preferred saving some lives with certainty. This difference was significant at the 99 percent confidence level. Similarly, when stated in terms of saving jobs (figure 5), only 41 percent favored the uncertain choice. When restated in terms of job loss (figure 6), a statistically significant 54 percent were willing to gamble. The framing results were dramatic when demographic factors were included. The intensity of framing was significantly impacted by advanced management study. This result was most dramatic for the life-and-death choices. Here management students were significantly more likely to exhibit preference reversal. Although 70 percent favored a gamble when faced with avoiding death, only 21 percent of upper-level management students still chose the gamble when stated in terms of lives saved. These students have been repeatedly exposed to ethical debates as part of their management studies. However, our results suggest that individuals with management training are more susceptible to the framing of an issue rather than less. Interestingly, the group that most significantly framed the issue of job layoffs was upper-level students. Juniors and seniors were more sensitive to framing for layoffs. This is perhaps related to their proximity to facing the job market. Some expectations theorists argue that respondents are less likely to be confused by framing on issues that are important. This result indicates that those closest to a job search are more easily influenced by whether a choice is framed as saving or losing jobs. The importance of a decision provides no insurance against framing. Finance students were not as likely to exhibit preference reversal as the management students were. However, the finance students were significantly more risk averse than the general population when faced with questions of a financial nature. Applied to the lease-buy decision, this implies that individuals with a background in financial training are more receptive to the certainty of a lease. TACTICS Marketing tactics that directly address framing include whether a decision is described as a gamble or as insurance. When faced with losses, framing is more likely to lead to the choice of a gamble. Insurance marketing is more effective when posed in terms of savings relative to the loss, rather than as an insurance expense. Another example of marketing terminology is in the presentation of discounts and surcharges. Many gas stations provide a discount for cash customers. This is equivalent to having a surcharge for credit customers. The framing effects 2 4 J O U R N A L O F E Q U I P M E N T L E A S E F I N A N C I N G F A L L V O L. 1 7 / N O. 2

6 of offering a discount are more effective than a surcharge. Marketing tactics that can address the pitfalls of framing effects should include the following concerns: Involve all decision-makers early in the presentation. Utilize financial decision-makers as internal advocates for leasing. Avoid becoming so engrossed in the financial analysis that the framing of the decision is neglected. Integrate the marketing of the financial product with the rest of the management process. Endnotes 1 Machina, Mark, Choice Under Uncertainty, Economic Perspectives, Summer 1987, vol. 1, no. 1, These questions were first posed in Kahneman, Daniel, and Amos Tversky, Prospect Theory: An Analysis of Decision Under Risk, Econometrica 47 (March 1979): Tversky, Amos, and Daniel Kahneman, Rational Choice and the Framing of Decisions, Journal of Business, October 1986, part 2, vol. 4, Spears, Martha and Daniel Parker, Uncertainty and Framing in IR and HR: Issues for Teaching and Learning. Presented at the 19th annual Southern Industrial Relations and Human Resource Conference, Nashville, Tenn., Oct , Avoid language that creates resistance to the leasing decision. Don t let the equipment leasing decision become overshadowed by conflicting intuitive analyses. Remain aware of the language and terms used to describe the decision. CONCLUSION This paper has demonstrated that equipment leasing decisions are potentially subject to the phenomenon known as framing. Within an organization managerial decision-makers are more susceptible to framing than financial decision- makers. Individuals with a financial background are more likely to be risk averse and open to equipment leasing. The challenges of framing can be managed through the use of marketing tactics. The authors biographies may be found on page 38 and 39. J O U R N A L O F E Q U I P M E N T L E A S E F I N A N C I N G F A L L V O L. 1 7 / N O