The Decoy Effect

Hi everyone, welcome back to my blog! As always, I’m thrilled to dive into another topic that shows just how interesting our brains can be when we're making decisions. Today, I'm talking about the decoy effect - a subtle yet powerful cognitive bias businesses use to influence our choices.

So, what is the decoy effect? It’s a phenomenon where a third, less appealing option (the decoy) makes one of the other two options look more attractive. It's often used in pricing strategies to nudge consumers toward a specific choice, usually the one that benefits the seller the most.

Let’s break it down with an example. Imagine you’re at the cinema, deciding between two popcorn sizes:

• Small: $3

• Large: $7

If these were the only options, many may choose the small size because it seems more reasonable. But what happens if the cinema introduces a third option?

• Small: $3

• Medium: $6.50

• Large: $7

Suddenly, the large popcorn doesn’t seem so expensive compared to the medium. It looks like a great deal. This is the decoy effect in action. The medium option is the decoy, designed to make the large option appear more attractive by comparison.

This tactic isn’t limited to popcorn. It’s used everywhere, from subscription services to restaurants and even in the tech industry. Take Apple, for example. When launching a new iPhone, they often introduce three models: a base model, a premium model, and a super-premium model. The mid-tier option is strategically priced to make it seem like the best value for money, encouraging consumers to choose it over the cheaper or more expensive options.

Another fascinating application of the decoy effect is in the world of dining. Have you ever looked at a restaurant menu and noticed an extremely expensive dish that seems out of place? Often, that item is a decoy. It’s not meant to be ordered frequently but is there to make other, still expensive options seem more reasonable in comparison. For example, a $50 steak might make a $30 chicken dish look like a bargain.

But why does the decoy effect work? It’s all about relativity. Our brains find it easier to make decisions when we can compare options directly. The decoy provides a point of reference that skews our perception, making one option stand out as the “right” choice. It’s a psychological shortcut that saves us the effort of evaluating each option independently. This tendency to rely on relative comparisons is deeply ingrained and often overrides logical reasoning.

While the decoy effect can benefit businesses, it can also lead consumers to spend more than they initially intended. For instance, you might sign up for a streaming service’s premium plan because the basic plan seems too limited and the mid-tier plan seems overpriced in comparison. Before you know it, you’re paying for features you don’t even use. Similarly, when purchasing a car, customers might be swayed into buying a model with unnecessary add-ons because a higher-tier version makes it seem like a bargain.

The decoy effect isn’t only negative - it can also be used to encourage better decision-making. For example, policymakers could design tax incentives to promote eco-friendly behaviours. Imagine an electricity company offering three pricing plans: one for regular usage, one for high usage, and one for renewable energy use. By structuring these options carefully, they could nudge consumers toward choosing the green option.

So, how can you avoid falling for the decoy effect? The key is to focus on your own needs and priorities rather than the options presented to you. Ask yourself: Do I need the additional features of the premium plan, or am I being swayed by the way the options are framed? Taking a moment to evaluate your choices independently can help you make more rational decisions.

Additionally, try to recognise when a decoy might be influencing your decision. Once you spot it, you can reassess the value of each option without the bias created by the decoy. Sometimes, stepping back and asking, “Would I have made the same choice if this third option weren’t available?” can provide clarity.

That’s it for this week’s entry! The decoy effect is a perfect example of how behavioural economics can influence our choices in ways we might not even realise. Have you ever noticed a decoy option in your own shopping experiences? Let me know in the comments below. See you next time!