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«Warranty of misinforming as an option in product utiliza- tion process. Informing Science: the International Journal of an Emerging Transdiscipline, ...»

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Options - Risk Asymmetry: Positive vs. Negative Misinforming So far, in our earlier studies, we focused on the negative aspects of misinforming (Christozov et al., 2014). Here, in this paper, we elaborate on the possible positive aspects of misinforming. Due to misinforming, it is possible that the client buys a product with much richer set of functionalities and/or properties with usage opportunities that go well beyond the initial set of problems intended to be solved with the product. This positive aspect of the information asymmetry reveals itself during the learning process in the utilization phase of product adoption. One can buy a product to address a set of particular needs, but it may turn out (during product adoption) that the product is suitable for solving a set of client’s additional advanced tasks. The client was not aware of these additional, advanced tasks at the time of the product purchasing, or the client was

78 Christozov, Chukova, & Mateev

not aware that these type of problems can be solved by using the device – overall, the benefit from product’s full utilization may dramatically exceed (theoretically/potentially unlimited) the expectations of the product initial utilization, which were the motivation for the positive purchase decision.

Option, as a tool to mitigate the market risks, has the following important property – it is risk asymmetric - a fixed loss, which is the price to purchase the option and (theoretically/potentially) with unlimited gain. The potential gain, in case of misinforming, requires learning by trying and experimenting. Also, it requires an expertise to recognize that a problem can be

solved with the particular device, or if the problem cannot be solved with the available device what type of device is needed to target the problem successfully. Taleb (2014) elaborates:

“...all we need is the ability to accept that what we have on our hands is better than what we had before—in other words, to recognize the existence of the option (or “exercise the option” as people say in the business, that is, take advantage of a valuable alternative that is superior to what precedes it, with a certain gain from switching from one into the other, the only part of the process where rationality is required). And from the history of technology, this ability to use the option given to us by antifragility is not guaranteed: things can be looking at us for a long time.” (p. 190) “Trial and error has one overriding value people fail to understand: it is not really random, rather, thanks to optionality, it requires some rationality. One needs to be intelligent in recognizing the favorable outcome and knowing what to discard.” (p. 192) “Trial and error is freedom.” (p. 246) The warranty of misinforming provides a risk free trial and error period and encourages exploring and discovering product’s capabilities.

The smart devices market is an environment, where the positive aspect of the risk of misinforming can be easily observed. For example, one is buying a new smart phone, due to say battery failure of the old one, expecting to use it only to make calls and send/receive text messages, but ends up with a device having much broader list of functionalities (Figure 1) useful to support everyday activities.

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Related Works We have made an extensive search in a number of databases, such as SCOPUS, EBSCOhost (which by itself includes more than 40 databases), and Emerald, using different combinations of keywords, like “warranty” and “options (or “securities”, or “finance options”) aiming to provide an overview of literature related to our problem. Our repeated searches led consistently to empty outcome listings. Based on these results and to the best of our knowledge the concept presented here offers a novel interpretation of the warranty of misinforming. On the other hand, the database search led us to several studies on the relationship between warranty and information asymmetry, which we found useful in our work and which we provide below.

In Dewally and Ederington (2006), the authors consider signaling strategies that sellers of higherquality products or securities employ to differentiate their products. They study four of these strategies: (1) development of a reputation for quality, (2) third-party certification, (3) warranties, and (4) information disclosure. Using data from the online auction market for classic comic books they show that for this market the information asymmetry is substantial and the listed signaling strategies are common, i.e., warranty could be used as a mitigation tool for information asymmetry.

Nazari and Arab (2014) consider information asymmetry between buyers and manufacturers and the role of external signals, such as price, brand, advertising, packaging, country of origin, previous experience, price discounts, hardware features and warranty, on the quality perception and purchase intention of consumers. They use laptop as a case study and show that warranty has a significant effect on clients’ quality perception as well as purchase intention.

Wankhade and Dabade (2006), focused on the information asymmetry in business processes and its effect on the market dynamics. They show that the advertising, word-of-mouth, rebate, warranty and guarantee, mitigate the effect of information asymmetry on quality perception.

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A product D (device) is described by a set of properties, = {{, }, = 1,2 …., }, where eveProduct ry property is described by a pair - the name of the property, and - numerical descriptor/value. For example, the property screen size is presented as {“screen size”, 5 inches}.

Client A client C is described by a set of needs (problems/tasks), s/he intends to solve/accomplish by using a product of a particular type. This set of needs motivates the client to buy the product D, The purchase of the product D has been motivated by the initial set of needs 0 - a set of

which provides the best option in satisfying her/his needs:

• problems/tasks the client faces and wants a device/product, which will allow her/him to

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and to send/receive SMS: (1) the property “screen size” is relevant, and (2) the minimal level of acceptance - the minimal value of the property “screen size” - is 2 inches.) they became after a trial period of length . The set : is an extended set of probAfter the purchase of the product, a trial period starts and the set of needs evolves, so that •

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ed and (2) potentially solvable with a product of the given type. The set is not neceslems/tasks, identified by the client during the trial period, that are (1) recognized as needsarily solvable with the purchased product, because the values of its properties do not satisfy the quality requirements (minimal acceptance levels) of the new needs. For example:

the purchased smart phone allows for navigation via GPS, but to make practical use of it, the property - screen size - must be at least 5 in, whereas the purchased product has a screen size of 2 in.

Consider the set of applications = ��, , �, = 1,2, … �, which includes additional Applications software tools (not provided by the producer at the time of purchasing), developed by different vendors, that are available on-line by producer’s store and can be installed on the product to en

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ties = {, ≥ }. For applications, quality means the level of usability expressed by the property value. (For example: On a smart phone with a 2-inch screen one can run navigation software, but its practical use while driving is very low – say 10%. For the same smart phone, but with 5 inches screen, the usability could be much higher – say 90%.) Process

The process would follow two phases, namely that of purchasing then learning, as shown in FigPhase – purchasing: The purchasing decision is made according to 0. We make the folure 2 (illustration of the process of learning), and elaborated as follows:

lowing assumptions:

• (A1) the price of the product resembles the product quality level, which represents

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which would require properties at a higher quality than currently available, and adjust his/her purchasing criteria (e.g., to gain full benefit from the navigation application, the size of a smart phone screen must be at least 5 inches).

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Utility his/her utility with respect to the product D.

The benefit the client C will obtain by using the product D to satisfy her/his needs is the value of

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� () 0. The purchase decision is based on selecting a product, with aswhere = 0 sumed minimal propertied that satisfies the initial needs and to ensure expected utility (illustrated in Figure 3 showing the relationship between utility and gained benefit). Recall, that we assume that product price corresponds to the product’s properties. The optional (possible) utility at time t,

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To illustrate the idea (Figure 3), let us consider the following two cases: (1) purchasing the product without misinforming warranty (the blue line) and (2) purchasing the product with an additional misinforming warranty (the red line). In both cases the client purchases the product to gain some utility, represented by the horizontal line “Utility”. The client may expect that the product � does not satisfy the needs ( 0 ), the client will be incurring losses related to the product purwill bring him/her some additional benefits (see the “Expected utility”). In case (1), if the product chase. Even if the product satisfies the initial expectations, it does not have the potential to provide higher utility than initially expected, because the client purchase decision is based on cost minimization. In case (2) the client pays extra for the warranty and is granted a risk free trial-anderror period to investigate and discover the potential of the product. This may provide very beneficial (theoretical/unlimited gain) either by discovering the product’s own potential or by identifying applications that may increase dramatically the utility of the product. Also, the opportunity to replace the product during the warranty period allows the client to acquire a product with proper


82 Christozov, Chukova, & Mateev

ties that fits better his/her extended needs. Moreover, during the warranty period the client has the opportunity to adjust his/her understanding of what can be done with this type of products and what product properties are most valuable in aiming to fully utilize the product. In both cases, the client de-facto is purchasing an option, which may allow him/her to benefit beyond the initial expectations, but in the second case the client has the right to adjust his/her decision after a given trial/warranty period.

Figure 3. Illustration of the relationship between utility and gained benefit Investing in warranty of misinforming at the time of the product purchase will provide the client with a risk free option to explore the full potential of the product including some of its extended properties and functionalities added by appropriate applications.

The risk free option to obtain and explore a higher quality product, due to the added applications, allows the client to determine her/his utility and fully benefit from the product. Theoretically this benefit/gain may be infinitely large.

Discussion In this discussion we address some open issues of the following three aspects of warranty of misinforming as an option. (1) Utility – the objectives of a customer obtaining a product, especially a smart device, always includes receiving some benefit. In principle, the actual benefit received is becoming visible only after obtaining and experimenting with the product. Warranty of misinforming, represented as a slogan “if you are not fully satisfied – money back”, originally addresses the case when obtained product doesn’t bring the expected utility. (2) Gain curves – acquiring the potential utility a product is able to provide may follow different processes of learning, including discovering of initially unknown product’s properties, how these properties may bring value, and what are the particular requirements, such as physical parameters, bring maximal value.

(3) Continuous learning and obtaining maximum value of a given product is essential. Learning includes enriching the understanding of both what the product can do for the client, but also, and equally important, what utility the client may gain by using the product.

83Warranty of Misinforming

Nominal Utility

The examination and exploration of the product may lead to two possible outcomes:

1. The product satisfies only the initial needs and does not show any potential for solving any additional problems during the period covered by warranty of misinforming. Under

this scenario, the client has two options:

only for the initial needs 0 - initially “optimized” case;

to use the warranty and to replace the product with a cheaper one, which is suitable • to keep the product, paying the margin between “optimal” product and the • purchased one. The rationale of the second outcome is based on the following arguments: the limited trial time may not be long enough to identify fully the potential utility; the cost of the time and efforts to learn how to use the product is taken into account; and in addition, there is always a possibility that the product could turn out to be suitable for solving some extra problems that are not currently identified but could appear in the future.

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