Latest / Behavioral Economics with Fexingo: Decision Making, Bias, and How People Really Spend / The Decoy Effect That Tricks Your Brain into Spending More
Transcript
- Lucas: So you’re at the newsstand, and you see three subscription offers for The Economist magazine. Web-only for fifty-nine dollars. Print-only for one hundred and twenty-five dollars. And print plus web for the same one hundred and twenty-five dollars. Which one do you pick? Luna: Well, the print-only and the print plus web are the same price, so obviously you’d take the bundle. That’s a no-brainer. But wait — why would anyone ever choose print-only? It’s a decoy, isn’t it? Lucas: Exactly. That print-only option is what behavioral economists call a decoy. It exists not to be chosen, but to make the print plus web look like a steal. And this isn’t just theoretical — this was a real experiment by Dan Ariely, one of the most famous demonstrations of the decoy effect. Luna: And before we dive deeper, I want to mention something. This show is completely ad-free — we don’t run commercials, we don’t sell your attention. If you’ve gotten value from episodes like this, and you want to support that choice, you can find us at buy me a coffee dot com slash fexingo. That’s it — no pressure, just a way to keep this independent. Lucas: Yeah, listener support is what keeps us ad-free, and we really appreciate it. So back to the decoy. In Ariely’s study, when people were shown only the web-only for fifty-nine and the print plus web for one hundred and twenty-five, about two-thirds chose the web-only. But when they added that third decoy option — the print-only for one hundred and twenty-five — suddenly about two-thirds chose the print plus web. Luna: That’s a huge swing. So the decoy changed the entire preference pattern just by existing, without anyone buying it. Lucas: Right. The technical term is asymmetric dominance. The decoy is dominated by the target option — in this case, the print plus web is better in every way than the print-only — but it’s not dominated by the competitor, the web-only. So our brain uses the decoy as a reference point, and the target suddenly looks much more valuable. Luna: I see this all the time in movie theaters. Small popcorn for four dollars, large for seven, and a medium for six-fifty. The medium is the decoy — it’s only fifty cents less than the large, so the large seems like a bargain. Lucas: That’s the classic example. Retailers love decoys because they steer us toward higher-margin options without us feeling tricked. You see it in coffee shop sizes, software tiers, even subscription plans for streaming services. The middle option is often a decoy to push you to the premium. Luna: But is it always unethical? I mean, sometimes decoys actually help us make better decisions, like if the decoy highlights the best value. Lucas: It can be used for good or for manipulation. Choice architects in public policy sometimes use decoys to nudge people toward healthier or more sustainable choices. For example, in a school cafeteria, placing a healthy option next to a slightly less healthy but similar-priced decoy can increase selection of the healthy one. Luna: That’s the same mechanism but with a positive intent. So the decoy effect isn’t inherently bad — it’s a tool. Lucas: Exactly. The key is awareness. Once you know the decoy is there, you can ask yourself: Would I actually choose this option if the decoy didn’t exist? If the answer is no, then you’re being influenced by something irrelevant. Luna: So how do we spot a decoy in the wild? Any red flags? Lucas: Look for an option that’s almost identical in price to a clearly better one, but worse in every way. Also, if you see three choices and one seems obviously inferior, that’s the decoy. Often it’s the middle one, but not always. In the Economist example, the decoy was the second option. Luna: Another sign is when the prices are very close together. Like medium and large are nine-ninety-nine and ten-forty-nine. That’s suspicious. Lucas: Right. The decoy effect works because we’re bad at absolute value. We compare things relative to each other. So if you can, mentally compare each option to the cheapest one, or to a no-purchase option. That can break the spell. Luna: But it’s hard. I mean, even knowing about it, I still feel the pull when I see a good deal next to a worse one. Lucas: That’s because the effect is automatic. It’s System 1 thinking, as Kahneman would say. It’s fast and intuitive. To override it, you need to slow down and deliberately compare, maybe even write down the prices. Luna: So next time I’m buying popcorn, I’ll just skip the medium and decide between small and large based on how hungry I am. Lucas: That’s exactly the right move. And for subscription services, ask yourself: what features do I actually need? Not what looks like a good deal relative to a decoy. Luna: One more thing — do decoys work in online shopping? I feel like sites use them all the time. Lucas: Absolutely. Think of software pricing: Basic at ten dollars a month, Pro at twenty, and Enterprise at twenty-five. The Enterprise might have one extra feature you don’t need, making Pro look like the sweet spot. But Pro might be the decoy for Enterprise, or Basic might be the decoy for Pro. It depends on the margins. Luna: So the decoy can be any option that isn’t meant to sell. Lucas: Exactly. And companies test these relentlessly. A/B testing shows which decoy layout maximizes profit. It’s a science. Luna: I wonder if there’s a way to use decoys for personal budgeting. Like set up a decoy expense to make the real savings target look more attractive? Lucas: That’s actually a clever idea. If you want to save five hundred dollars a month, you could frame a decoy goal of four hundred and fifty with fewer benefits, then the five hundred feels like a no-brainer. But you have to be honest with yourself. Luna: Self-deception might be tricky. But it’s an interesting application. Lucas: Let’s come back to the core takeaway. The decoy effect shows that our choices are not just about our preferences — they’re about the context. The same person, same budget, same needs, can make completely different decisions depending on what else is on the menu. Luna: That’s a bit unsettling. It means our rationality is fragile. Lucas: It does. But once you know the trick, you can guard against it. And sometimes, if the decoy is pointing you toward something better, it’s fine to follow it. The problem is when the decoy is designed to exploit you. Luna: So the next time you see three options, pause. Identify the decoy. Then choose based on what you actually value. Lucas: And if you want to share this episode with a friend who always falls for the upsell, feel free. That’s it for this week. I’m Lucas. Luna: And I’m Luna. Thanks for listening.