Latest / Behavioral Economics with Fexingo: Decision Making, Bias, and How People Really Spend / The Decoy Effect How a Third Option Changes Your Choice
Transcript
- Lucas: Let me pitch you a subscription offer. The Economist, back in the early 2000s, ran a now-famous pricing test. They offered three tiers: web-only access for fifty-nine dollars, print-only access for one hundred and twenty-five dollars, and a print plus web bundle for the same one hundred and twenty-five dollars. Luna: Wait — the print-only and the bundle were priced identically? That seems like a typo. Lucas: Exactly the reaction they wanted. That identical price on the inferior option — print-only, which is strictly worse than the bundle — is what we now call the decoy effect. In behavioral economics, it's also known as asymmetric dominance. Luna: So the decoy makes the bundle look like a steal. You'd never pick print-only, but its presence makes the bundle feel like you're getting something for free. Lucas: Right. Dan Ariely documented this in his book Predictably Irrational. When they ran the test, the split was: sixteen percent chose web-only, zero percent chose print-only, and eighty-four percent chose the bundle. Then they removed the decoy — just web-only for fifty-nine and print plus web for one hundred and twenty-five — and the split flipped to sixty-eight percent for web-only, thirty-two percent for the bundle. Luna: That's a dramatic swing. The decoy basically doubled the bundle's market share from thirty-two to eighty-four percent. Lucas: And it's not just an academic curiosity. You see this every time you buy movie theater popcorn. Small for four dollars, medium for six-fifty, and large for seven dollars. The medium is the decoy — it's priced so close to the large that your brain says, 'for fifty cents more, I get the big one.' Luna: And suddenly you're walking out with a tub that serves three people. I've fallen for that one many times. Lucas: Airlines do it, too. When you're booking a seat, you might see Basic Economy for two hundred, Main Cabin for two-fifty, and a premium economy for three hundred. Main Cabin is the decoy — it's close to premium but not much better, so you're nudged up to premium. But if you'd only seen Basic and Main, you'd probably stick with Basic. Luna: So the decoy isn't meant to be chosen. It exists solely to change the relative appeal of the other options. Lucas: Exactly. And it works because humans are terrible at evaluating absolute value. We compare things relative to each other. The decoy creates a context where one option dominates another on price and features, so your brain shortcuts to 'that's the smart choice.' Luna: I've heard this called 'the even better option effect' in some marketing circles. It's a staple of menu design. Lucas: And it's not just price. You see it in health plans, subscription software tiers, even dating app premium upgrades. The key is that the decoy must be dominated — worse on at least one dimension and not better on any other. In the Economist case, print-only cost the same as the bundle but gave you less. That's a pure decoy. Luna: What about when the decoy is dominated on one dimension but better on another? Like a more expensive option with more features that you don't actually need? Lucas: That's a different nudge — sometimes called a 'premium decoy' or a 'lure.' But the true asymmetric dominance requires strict domination. The classic example is from a study by Huber, Payne, and Puto in the 1980s. They showed people two options: a cheap low-quality pen, and a more expensive higher-quality pen. Then they added a third pen that was slightly higher-priced than the expensive one but lower quality. That third pen drove people to the expensive one. Luna: So the decoy doesn't even have to be priced the same as the target. It just has to make the target look unbeatable on comparison. Lucas: Right. And it works even when people are explicitly told about it. In one study, participants who knew about the decoy effect still fell for it. The bias operates below conscious awareness. Luna: That's a little unsettling. It suggests our rational mind can't fully override the automatic comparison engine. Lucas: Exactly. But awareness helps, if you know the trick. When I see three options, I ask: 'Would I still pick this if the middle option didn't exist?' If the answer is no, I'm probably being decoyed. Luna: That's a good mental rule. I'm going to start using that. Lucas: And if today's episode gave you a useful mental model, we'd love it if you considered supporting the show. It's ad-free because of listeners who chip in at buy me a coffee dot com slash fexingo. That keeps the economics coming without any sponsorship noise. Luna: Yeah, it really does make a difference. And we appreciate every contribution, big or small. Lucas: So back to the decoy — one more real-world example. Think about subscription software like Adobe Creative Cloud. They offer a photography plan for ten bucks a month, a single-app plan for twenty, and an all-apps plan for fifty. The single-app plan at twenty is the decoy — it's close to the all-apps but way more expensive per app. It makes the all-apps feel like a better deal, even if you only need one app. Luna: That's a clever structure. The decoy doesn't even have to be the middle-priced option. It just has to be positioned to highlight the value of the seller's preferred choice. Lucas: Precisely. And the decoy can also appear in non-price contexts, like when a job candidate is compared to a clearly weaker candidate to make them look better. The same psychology applies. Luna: So next time you're choosing between three options, pause. Ask yourself: is one of these a decoy? Your wallet will thank you. Lucas: That's the takeaway. Know the decoy, and you'll make choices that are more aligned with your true preferences, not just relative comparisons. Luna: Thanks for listening, and we'll see you next time.