Academic journal article Academy of Accounting and Financial Studies Journal

Prospect Theory and Risky Choice in the Ecommerce Setting: Evidence of a Framing Effect

Academic journal article Academy of Accounting and Financial Studies Journal

Prospect Theory and Risky Choice in the Ecommerce Setting: Evidence of a Framing Effect

Article excerpt

INTRODUCTION

According to Forrester Research, Inc., online retail sales will grow to $370 billion by 2017. (Forte, 2017) The major impediments to the growth of ecommerce are the concerns of the consumer that impede the development of trust. Odom et al. (2002) identified seven specific concerns of the consumer: security of the transaction, privacy of information, legitimacy of seller, quality of the product/service, documentation adequacy, price fairness and customer service availability. (Odom et al., 2002) The online retailers must address these concerns in order to increase their market share in this time of explosive growth of the business-to-consumer (B2C) ecommerce. Established "brick and mortar" retailers that extend to the online environment can rely partly on their prior experience and reputation to help expand to online retail sales.

Studies have shown that trust in an online retailer is enhanced by brand equity. (Ambler, 1997; Grewal, Munger, Iyer and Levy, 2003) The new or unknown vendor must find other ways to address the concerns of the consumers on their websites and foster trust with the potential online consumer. McKnight et al. (1998) defined trust between unknown parties as initial trust. Perceptions of the structural characteristics of the Internet, such as attempts to communicate and ensure safety and security, can influence trusting beliefs and trusting intentions. (McKnight et al., 2002) In this study, assurance structures will refer to statements, promises, guarantees, logos, symbols and any other structural components of a website intended by the vendor to reduce perceptions of risk in transacting on their website. The model of initial trust formation outlined in McKnight et al. (2002) drew from the institutional-based trust theory of Shapiro. (Shapiro, 1987)

In institutional-based trust theory, structural assurance provided a means by which unfamiliar actors were able to participate in cooperative exchanges without the benefit of prior experience. The study of assurance structures is particularly important in the framework of unfamiliar vendors in that consumers do not have experience with the vendor in which to formulate prospects of outcomes from the transaction.

Prospect Theory (PT) (Kahneman and Tversky, 1979) addresses how the decision maker formulates the perceived problem domain. This theory has been tested in a variety of contexts and the findings have been robust in support of framing effects. (Chang, 2002; Kessler, Ford and Bailey, 1996; Kuhberger, 1995; Kuhberger, Schulte-Mechklenbeck and Perner, 1999; Lim, 1995; Olsen, 1997; Quiggin, 1993; Rose et al., Spring 2004; Tversky and Kahneman, 1986; Van Schie and Van Der Pligt, 1995)

Given the perceived risky nature of ecommerce transactions, the testing of this theory of risky choice, or choice under uncertainty, would increase understanding of purchasing behavior in ecommerce. No evidence exists pertaining to the interactive effects on purchase behavior, if any, of framing effects and the presence of assurance structures in an ecommerce purchase decision. According to Behavioral Decision Theory (BDT), when the problem domain is perceived to be a gain domain, the consumer should be more risk-averse and less likely to make a purchase. (Kahneman and Tversky, 1979) The presence of assurance structures on the website could reduce perceived risk and the risk adverse tendencies of consumers may be moderated such that the choice shifts attributed to framing are reduced or eliminated. However, when the problem is framed as a loss, BDT would predict that consumers would be risk seeking so assurance should be less effective.

Retailers on the web can influence frames by the use of certain words and marketing techniques. When a website markets a product with a limited availability or implies that not buying this product will produce some type of harm, injury or loss to the potential consumer, they are employing a negative message. …

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