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

Abstract

ABSTRACTConcerns of potential online consumers over privacy and security of their financial and other personal information is an impediment to the growth of ecommerce. These concerns are often addressed through the use of assurance structures placed on a website. Prior research has found that the effect of assurance structures is most pronounced when the vendor is unknown to the consumer and they have no prior interactions from which to judge the trustworthiness of the vendor. Another important factor to decision making under uncertainty in any context is the perceived problem domain of the decision maker. Behavioral Decision Theory helps to explain the behavior of individuals in decisions under uncertainty in terms of the perceived problem domain. Prospect Theory (Kahneman and Tversky, 1979) was used in this study to attempt to explain variance in the behavior of individuals under conditions of uncertainty in the ecommerce context.A major proposition in this study was that since consumers are risk-averse in the gain domain; the risk relieving properties of assurance structures may moderate their decisions and induce more trust and purchase intentions and behavior. However, in the perceived loss domain, where risk- seeking behavior is common, little to no effect was expected since the reduction of risk is not a driving factor of the purchase decision. This study was a 2 x 2 fully crossed factorial design. Two factors, problem domain and the presence of assurance structures were manipulated with a dependent variable of purchase behavior. Subjects for this study were solicited from undergraduate students enrolled in accounting and management classes at a large Midwestern university. A total of 400 subjects participated in the study with 337 usable responses. The data provided the first evidence of framing effects in the ecommerce environment. The study also demonstrates that assurance structures moderate choice shifts attributed to the framing effect in the ecommerce environment.INTRODUCTIONAccording 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. …

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