Latest / Behavioral Economics with Fexingo: Decision Making, Bias, and How People Really Spend / Why You Pay More for Less the Decoy Effect
Transcript
- Lucas: So picture this: you're at the movie theater. You go to buy popcorn. The small is $4, the medium is $6.50, and the large is $7. Luna: I've seen that before. That large is almost the same price as the medium. It makes the large look like a steal. Lucas: Exactly. And that's not an accident. That medium is what behavioral economists call a decoy. It's not there to be bought. It's there to make the large look like the smart choice. Luna: So the medium is the trap. We think we're being rational by upgrading for just fifty cents more, but we're spending more than we would have if only small and large existed. Lucas: Right. And this is the decoy effect, also called the asymmetric dominance effect. It happens when you have three options: one is clearly inferior to another in some way, so it 'dominates' it. That inferior option isn't meant to sell — it's meant to push you toward the higher-priced option. Luna: Who first studied this? I know Dan Ariely has a famous example with The Economist. Lucas: Yeah, that's the classic. It was actually from a 1992 study by Amos Tversky and Itamar Simonson, but Ariely popularized it in his book 'Predictably Irrational'. The setup was an ad for The Economist subscriptions. They offered three options: an online-only subscription for $59, a print-only subscription for $125, and a print plus online subscription for $125. Luna: Wait — print-only and print plus online are the same price? That's weird. Lucas: Exactly. The print-only option is the decoy. It's clearly worse than the print plus online because it's the same price but you get less. So when people see that, they think, 'Why would anyone buy print-only? I'll take the bundle.' And in the study, when they removed the print-only option, most people chose the cheaper online-only subscription. The decoy flipped the preference. Luna: So the decoy doesn't just nudge you to a more expensive option — it can actually reverse your initial preference. That's powerful. Lucas: It is. And it's everywhere. Think about subscription boxes. A company might offer a basic plan for $10 a month, a premium for $25, and a deluxe for $26. That premium plan is the decoy. Or think about SaaS pricing — you often see a 'Pro' tier that's only slightly cheaper than 'Enterprise' but with way fewer features. That's not a mistake. Luna: I've noticed that on The New York Times website. They have a basic digital for $4 a week, then a 'Premium' for $6 a week, and then 'All Access' for $8 a week. The premium seems like a middle option, but it's actually a decoy for the all-access? Lucas: Possibly. The key is whether the premium option is designed to be dominated by the all-access. If the all-access has everything premium has plus more, and the price difference is small, then yes — premium is a decoy. The real target is the all-access. Luna: But does the decoy effect work on everyone? I feel like once you know about it, you can resist it. Lucas: That's the million-dollar question. There's research showing that even when you're aware of the decoy, it still exerts a subtle influence. The effect is partly unconscious. You might consciously say 'I know they're tricking me,' but the comparison is still happening in your brain. The decoy changes the context. Luna: So it's like an optical illusion for your wallet. You see it, but you can't unsee the comparison. Lucas: Exactly. And companies have gotten very sophisticated with it. Take Apple's iPhone pricing. In 2018, they introduced the iPhone XR at $749, the iPhone XS at $999, and the iPhone XS Max at $1,099. The XS at $999 was the decoy — it had a smaller screen than the XS Max but the same internal specs. For just a hundred dollars more, you got the bigger screen. The XR might have been the best value, but the XS made the Max look like a no-brainer. Luna: I remember that. I actually bought the XS Max. And I thought I was being smart. Now I feel played. Lucas: Well, you got a good phone. But the decoy effect isn't just about pricing. It can apply to any attribute. For example, when choosing a restaurant, you might see three options: one with mediocre ratings and a high price, one with good ratings and a medium price, and one with great ratings and a high price. The mediocre high-price option is the decoy that makes the great high-price option look reasonable. Luna: So it's not always about price. It's about creating a comparison where one option is clearly worse on something important, making the target look better. Lucas: Right. The decoy must be asymmetrically dominated. That means it's worse than the target on one dimension, but not necessarily worse on all dimensions. In the popcorn example, the medium is worse on value per ounce but similar in price to the large. That asymmetry pushes you toward the large. Luna: What about real-world consequences? Can the decoy effect be harmful? Lucas: It can. In healthcare, patients choosing between treatment plans might be steered toward a more expensive or invasive option because of a decoy. In insurance, people might pick a higher-premium plan because a decoy makes it look like a bargain. There's a famous study on 401 plan choices where the decoy led people to pick riskier investments. Luna: So it's not just a marketing gimmick. It can affect important life decisions. Lucas: Exactly. And the scary part is that it's hard to guard against. The best defense is to focus on your own needs and preferences first. Before looking at options, decide what you want. Then compare each option to that ideal, not to the other options. But that takes discipline. Luna: So how do you spot a decoy? Is there a telltale sign? Lucas: Look for an option that seems deliberately unattractive. If one option is priced almost the same as another but clearly offers less, that's a decoy. Or if one option has a weird combination of features that doesn't appeal to you, it might be there to make another look better. Also, if the middle option seems overpriced relative to the top tier, that's another clue. Luna: So the medium popcorn is overpriced compared to the large. That's the red flag. Lucas: Exactly. And once you start noticing, you see decoys everywhere. Netflix's tiered pricing used to have a 'Standard with ads' at $6.99, 'Standard' at $15.49, and 'Premium' at $19.99. The Standard at $15.49 had no ads but same resolution as the ad-tier. The Premium added 4K and more screens. That Standard tier was a decoy — it made Premium look like a small upgrade for a big improvement. Luna: I always wondered why the Standard tier seemed so expensive. Now I know. Lucas: Another classic example is from the wine list. Restaurants often include a very expensive bottle that they don't expect to sell. That bottle makes the second-most-expensive bottle look reasonable. And people buy it. Luna: So the decoy doesn't have to be bought to work. It just has to be seen. Lucas: Exactly. That's why it's so effective. The cost of the decoy is just the opportunity cost of listing it. It doesn't even have to be in stock. Some online retailers list a 'sold out' premium option just to anchor the price of the other options. Luna: That feels a bit unethical. Is it legal? Lucas: It's generally legal because it's not false advertising — the decoy is real, just not intended to sell. But regulators have started looking at dark patterns like this. The FTC has held workshops on digital manipulation, and there's been talk about regulating 'choice architecture' that harms consumers. But so far, decoys are still widely used. Luna: So what can a consumer do? We can't just avoid all choices. Lucas: One strategy is to ignore the middle option. Literally cross it out. Make your decision between the cheapest and the most expensive. That eliminates the decoy's power. Another is to ask: 'What would I choose if only the cheapest and the most expensive existed?' That's the clean comparison. Luna: I like that. It's like a mental shortcut to break the decoy's spell. Lucas: Or you can go even simpler: know your maximum price before you look. If you decide 'I'm not spending more than $5 on popcorn,' then no decoy can push you to the large. The decoy works on relative comparisons. If you have an absolute anchor, you're immune. Luna: But aren't we all susceptible to relative comparisons, even when we know better? I mean, I know about the decoy effect, and I still fell for the iPhone XS Max. Lucas: That's the thing — awareness helps, but it's not a silver bullet. The decoy effect operates at a visceral level. It's not a purely cognitive bias. It's built into how our brains process comparisons. So even experts fall for it. I've seen behavioral economists admit to buying the large popcorn. Luna: That's oddly comforting. So the best we can do is be mindful and use those mental tricks. Lucas: Exactly. And remember: the decoy effect is just one of many tools in the behavioral economics toolkit. Next time, we might talk about anchoring or loss aversion. But for now, I'd say: next time you see three options, pause. Ask yourself which one is the decoy. And then decide if you really want to play their game. Luna: Or just buy the small popcorn and skip the trick entirely. Lucas: There you go. Sometimes the cheapest option is the rational one — if you can resist the decoy.