Latest / Behavioral Economics with Fexingo: Decision Making, Bias, and How People Really Spend / The Compromise Effect Why We Pick the Middle Option
Transcript
- Lucas: So if you've ever stood in a store staring at three different tiers of a product — basic, mid-range, premium — and walked out with the mid-range one, there's a name for that. It's not just you being sensible. It's the compromise effect. Luna: I feel seen. Because I do that all the time with everything from coffee makers to hotel rooms. The middle one just feels… safer. Lucas: Right. And safer is exactly the right word. The compromise effect was formally documented by Itamar Simonson and Amos Tversky in a 1992 paper. They ran a now-famous experiment with microwave ovens. They gave people a choice between two models: an Emerson priced at about a hundred and ten dollars, and a Panasonic at about a hundred and eighty dollars. People split almost evenly — around fifty-fifty. Luna: Okay, so classic trade-off. Lower price versus higher quality. Lucas: Exactly. Then they added a third option: another Panasonic model, priced even higher, at about two hundred dollars. Now, logically, that third option shouldn't have changed the relative appeal of the first two. But it did. Suddenly, the original Panasonic — the middle one now — jumped from fifty percent selection to over seventy percent. The cheap Emerson lost share. People flocked to the middle. Luna: Wow. So the mere presence of a more expensive option made the mid-tier look like the smart compromise. Lucas: Exactly. And that's the core mechanism: extremeness aversion. We shy away from extremes. The cheapest option feels low quality; the most expensive feels like a rip-off. The middle is the Goldilocks zone. And marketers exploit this constantly. Luna: Yeah, and it's worth mentioning — this show stays ad-free because a handful of listeners chip in monthly over at buy me a coffee dot com slash fexingo. Just a small group keeping the lights on. If that's something you've been meaning to do, that's the spot. Lucas: Appreciate that. So the compromise effect isn't just about microwaves. Think about any subscription tier you've seen: Basic at nine ninety-nine, Standard at fifteen forty-nine, Premium at twenty-two ninety-nine. Which one do most people pick? Standard. It's rarely the cheapest option that sells best. Luna: Right. And companies know this. They design the tiers so the middle one has just enough features to feel like the best value. The top tier exists mainly to make the middle look reasonable. Lucas: Precisely. A classic example is the Economist subscription pricing that Dan Ariely made famous. They offered a digital-only subscription for fifty-nine dollars, a print-only for a hundred and twenty-five, and a print plus digital for a hundred and twenty-five. The print-only option, at the same price as the bundle, makes the bundle look like a no-brainer. So almost nobody bought print-only — but its presence dramatically boosted sales of the bundle. Luna: That's the decoy effect we covered a few episodes back, right? But the compromise effect is broader. It doesn't need a decoy that's dominated. Just having three options where one is extreme pushes people to the middle. Lucas: Yes. And it works in other domains. Wine lists, for example. Restaurants often list a cheap bottle, a mid-priced bottle, and a very expensive bottle. The mid-priced bottle becomes the safe choice. The expensive one anchors the price upward, making the middle seem reasonable. Luna: So how do you avoid falling for it? I mean, knowing about it helps, but when you're actually in the moment, it's hard. Lucas: One tactic is to ask yourself: if the extreme options weren't there, which one would I pick? Then compare. Another is to set your own budget first, before you see the prices. That way you anchor on what you're willing to spend, not on the menu. Luna: That's solid. Also, sometimes the cheapest option is genuinely fine. We underestimate how often basic meets our needs, because we're afraid of regret. Lucas: Regret aversion plays into this too. If you buy the cheapest and it's bad, you feel cheap. If you buy the most expensive and it's no better, you feel foolish. The middle cushions that regret. Luna: Which is irrational, but very human. Lucas: Exactly. And the effect has real market consequences. One study found that when a store added a luxury version of a product, sales of the mid-range version increased by twenty percent. Not just in percentage — in absolute unit sales. The cheap version lost sales. Luna: So the luxury version pulls the market upward. That's why car manufacturers always have a top of the line trim that almost nobody buys. Its job is to make the mid-tier look like the smart buy. Lucas: Right. The VW Phaeton, back in the 2000s, was a super-luxurious VW that cost over seventy thousand dollars. It barely sold. But it lifted the brand's image and made the Passat look like a reasonable step down. Luna: That explains why movie theaters have small, medium, and large popcorn. The large is huge. The small is tiny. The medium feels like the right call — even if the large is a better value per ounce. Lucas: And note: the compromise effect is strongest when you're uncertain about what you want. If you have a clear preference — say you're a coffee snob who only wants the best espresso machine — you won't be swayed. But when you're shopping for something you buy rarely, like a microwave or a hotel room, you default to middle. Luna: That's a good point. The effect is about ambiguity. When you don't have a strong stance, the middle offers a social cover. You can justify it later: 'I didn't buy the cheapest, I'm not cheap, and I didn't waste money.' Lucas: There's also a cross-cultural dimension. One study compared American and Japanese consumers. Americans were more likely to choose the middle option; Japanese consumers were more likely to choose the most expensive, because of social signaling and gift-giving norms. Luna: Interesting. So it's not a universal law. It depends on context and culture. Lucas: Right. The compromise effect is robust, but not inevitable. If you're shopping for a gift, the social norm might push you toward the premium. If you're on a tight budget, you might stick to the cheapest. The effect is strongest when the buyer is spending on themselves and is uncertain. Luna: So what's the takeaway for the listener? Beyond just being aware. Lucas: I'd say: before you look at any options, write down your budget and your must-have features. That's your anchor. Then, when you see the tiers, compare only to that anchor, not to the extremes. And if you catch yourself thinking 'the middle is the safe bet,' ask yourself safe from what? The regret of being wrong. But sometimes being wrong by picking the cheapest is a cheap lesson. Luna: Or the most expensive could be genuinely better — but you'll never know if you always default to middle. Lucas: Exactly. The middle is a heuristic, not a rule. And heuristics are shortcuts. They work most of the time, but they can be exploited. Knowing the compromise effect is a way to take back control. Luna: All right, next time I'm at the store, I'm going to at least look at the cheap option with fresh eyes. Lucas: And maybe the expensive one too. You might be surprised. I'm Lucas. Luna: I'm Luna. Thanks for listening.