Latest / Behavioral Economics with Fexingo: Decision Making, Bias, and How People Really Spend / How The Decoy Effect Warps Your Spending Habits
Transcript
- Lucas: So I was standing in line at this local theater last Friday, trying to decide on concessions, and it hit me again how much of my life is spent fighting against a very specific type of psychological trap. You know the one where the options are laid out in front of you, but one of them is actually there just to make another one look better. Luna: Oh, the classic three-tier pricing model. It’s everywhere now, isn’t it? Software subscriptions, coffee shops, even gym memberships. Lucas: Exactly. And the most famous example, the one that gets taught in every behavioral economics class, is the Economist magazine subscription. Back in the late nineties, they ran an experiment where they offered three choices: online only for fifty-nine dollars, print only for one hundred twenty-five dollars, or both for one hundred twenty-five dollars. Think about that math for a second. The print-only option was priced exactly the same as the bundle that included both print and online access. Luna: Right, so the print-only version is a total loser. It’s inferior on every single metric because it costs the same but gives you less. Why would anyone ever pick that? Lucas: That’s the genius of it. No one picked the print-only option. But its sole purpose wasn’t to sell prints; it was to serve as the decoy. By placing it next to the bundle, it made the bundle look like an absolute steal. Before the decoy was introduced, only ten percent of customers chose the bundle. After the decoy appeared, eighty-four percent did. The presence of a clearly irrational choice forced your brain to compare the two rational ones, and the bundle won by default. Luna: It feels manipulative because it is. We aren't comparing the bundle to nothing; we're comparing it to something that was never really meant to be chosen. It changes the reference point. Lucas: Precisely. In economics, we assume people have stable preferences and will always choose the option that maximizes their utility. But the decoy effect shows that our preferences are constructed on the fly, based entirely on what else is on the table. If you change the menu, you change the winner, even if the top two options haven't moved at all. Luna: So how do we protect ourselves from this when we're just trying to buy a pair of headphones or sign up for a streaming service? Lucas: The first step is recognizing the asymmetry. Look for that dominant inferior option—the one that costs the same or more but offers less value. Once you spot the decoy, you can mentally remove it from the equation. Ask yourself: if those other two options were the only ones available, which one would I still prefer? If the answer hasn't changed, then the decoy didn't add value; it just added pressure. Luna: But does it always work that cleanly? Sometimes the middle option genuinely has some features the cheap one doesn't. Is it always a trick? Lucas: Not always, but often enough to warrant suspicion. Let's look at the movie theater popcorn example again. You have a small for five dollars, a large for eight dollars, and a medium for seven dollars and fifty cents. The medium is the decoy. It costs almost as much as the large but gives you significantly less product. The theater knows you'll feel stupid paying eight dollars for a large when you could pay seven dollars and fifty cents for a medium... wait, no, that's backwards. They want you to pay eight dollars for the large because it feels like such a good deal compared to the medium. The medium exists solely to make the large look reasonable. Luna: Right, so the medium is priced just below the large to create a sense of urgency or regret if you don't upgrade. It triggers loss aversion. You feel like you're losing money by not taking the larger size. Lucas: Spot on. And this goes way beyond consumer goods. It’s huge in B2B sales and enterprise software. You’ll see SaaS companies offer a Basic plan, a Pro plan, and an Enterprise plan. Often, the Pro plan is positioned specifically to catch the mid-market users who don't need all the bells and whistles of Enterprise but want more than Basic. The Enterprise plan might be priced high enough that nobody buys it, but it makes the Pro plan look like the sensible, standard choice. Luna: I’ve seen that with project management tools. The highest tier is basically a vanity number for big corporations, but it pushes everyone else toward the mid-tier annual subscription. It locks them in. Lucas: And that’s where the financial impact really accumulates. We’re talking about billions in additional revenue for companies leveraging this daily. But for us as individuals, it means we’re constantly being nudged toward higher price points. The decoy effect doesn’t just shift your choice from Option A to Option B; it often shifts you from a low-cost option to a premium one you wouldn’t have considered otherwise. Luna: So it’s not just about picking the best option among equals; it’s about being steered upward in price. That’s a subtle but massive difference in how we budget. Lucas: Exactly. If you go shopping for a laptop, and you see a base model, a mid-range model with slightly better specs, and a top-tier model with a marginally faster processor but double the price of the mid-range, that top-tier model is likely the decoy. Its job is to make the mid-range model seem like a bargain. Without it, you might have walked away from the mid-range model entirely, deeming it too expensive for what it offered. With it, the mid-range model looks perfectly priced. Luna: It’s fascinating how much power structure has over substance. The product itself hasn't changed, but the context around it completely alters our perception of its value. Lucas: And here’s the tricky part: businesses are getting smarter about it. They’re using dynamic pricing and personalized offers to create individualized decoys. If an algorithm knows you’re price-sensitive, it might show you a slightly inflated original price next to the current discount, creating a temporary decoy situation where the discounted price feels like a win. It’s not just static menus anymore; it’s adaptive psychology. Luna: That makes it harder to defend against because the landscape shifts every time you log in. How do you maintain a consistent internal reference point when the external one is moving? Lucas: You have to build your own internal anchor. Before you even look at the options, decide what you’re willing to spend based on your needs, not on the comparison. Write down your budget. Stick to it. When you see that decoy, remind yourself that it’s a structural artifact, not a reflection of market value. It’s designed to trigger an emotional response—usually fear of missing out or regret—and you have to consciously reject that emotion. Luna: So essentially, we need to become anti-consumption architects in our own minds. We have to actively dismantle the choices presented to us before we evaluate them. Lucas: Yes. And it requires discipline. Because once you start looking for the decoy, you realize it’s everywhere. From credit card rewards tiers to insurance deductibles, the principle is the same. Create a bad option to highlight a good one. Recognizing the pattern doesn’t stop companies from doing it, but it stops them from winning easily. Luna: Do you think consumers are catching on? Or are we just too tired after a long day to do the mental math? Lucas: I think we’re catching on slowly. There’s a growing backlash against complex pricing structures. Some countries are even regulating how prices must be displayed to prevent deceptive practices. But until the regulation catches up to the psychology, we’re left with the burden of vigilance. It’s exhausting, honestly. Sometimes I just want to buy the small popcorn and be done with it. Luna: Sometimes the small popcorn is the right decision, regardless of the math. Value isn't just about unit price; it's about satisfaction. If the large makes you uncomfortable because it’s too much food, the decoy doesn’t matter. Lucas: That’s a crucial point. Utility is subjective. If the large size causes physical discomfort or waste, its utility drops to zero or negative. The decoy relies on you valuing quantity over quality or convenience. If you don’t, the whole structure collapses. So knowing your own true preferences is the ultimate defense. Luna: It really comes back to self-awareness. Understanding what you actually need versus what you’re being sold. Lucas: Absolutely. The market will always try to exploit gaps in our knowledge. Our job is to close those gaps with awareness and intentionality. Luna: Before we wrap up, I want to mention something important about how we keep this conversation going. If walking through the economy with us has made something click, consider supporting the show directly. A handful of listeners chip in monthly through buy me a coffee dot com slash fexingo — that's F. E. X. I. N. G. O. — and that’s literally what funds making this many of these episodes ad-free. Lucas: Yeah, it keeps the lights on and allows us to dig into these deeper topics without needing corporate sponsors who might want us to soften the edges. It’s just regular folks supporting independent journalism. Luna: If that resonates with you, check out the link in the show notes. It helps us continue exploring these economic quirks together. Lucas: Back to the decoy effect, though—I’m curious if you’ve noticed any recent examples where the strategy failed because consumers called it out too quickly? Luna: There was that airline ticket booking site last year where they tried to hide fees behind a confusing upsell menu, and the backlash was immediate. People felt tricked, and the brand took a hit. Maybe trust is becoming a currency that outweighs short-term gains from these tricks. Lucas: That’s possible. Trust is fragile. Once people realize they’re being manipulated, the backlash can be severe. But until then, the decoy effect remains one of the most powerful tools in the behavioral economist’s toolkit. Stay sharp, stay skeptical, and keep your internal anchors strong.