Latest / Behavioral Economics with Fexingo: Decision Making, Bias, and How People Really Spend / The Decoy Effect Behind Your Coffee Order
Transcript
- Lucas: Luna, you ever notice how a medium coffee feels like the 'safe' pick, but then a large is only sixty cents more, and suddenly you're doing mental gymnastics to justify the upgrade? Luna: Oh, all the time. And I always end up with the large, feeling like I 'won' somehow. But it's not a win, is it? It's a setup. Lucas: Exactly. What you're describing is the decoy effect. It's a pricing strategy where you add a third option that's intentionally unattractive, and it makes one of the other two look much better. The classic example is from the economist Dan Ariely, who wrote about a subscription offer from The Economist. There was a web-only subscription for fifty-nine dollars, a print-only subscription for a hundred and twenty-five dollars, and a print plus web subscription for, you guessed it, a hundred and twenty-five dollars. Luna: Right, the print-only is the decoy. It's priced the same as the combo, but it's clearly worse. So you look at that and think, 'Well, if I'm paying a hundred and twenty-five anyway, I might as well get the web access too.' Lucas: And that's the genius of it. When Ariely tested this with his students, the presence of that decoy print-only option pushed a huge chunk of them to choose the hundred-and-twenty-five-dollar combo. Without the decoy, most went for the cheap web-only. The decoy doesn't just shift preferences; it shifts your perception of value. Luna: It's like the coffee shop menu. You have a small, a medium, and a large. The medium is the one you'd probably pick, but then you see the large is only a bit more, and it feels like a bargain. But is the medium actually the decoy? Lucas: Sometimes, yeah. Or the large is the decoy, depending on what they want to sell. If they want to move the medium, they'd price the large so that it's just a little more, making the medium look like the smart middle ground. But if they want to upsell you, the large becomes the target, and the medium serves as the decoy that makes the large look like a steal. Luna: So it's all about steering you toward a choice that's slightly more profitable for them, without you feeling pushed. You feel like you made a smart decision, but really, you just fell for the architecture of the menu. Lucas: And the term for this in the research is 'asymmetric dominance.' It means one option is clearly dominated by another in a way that's not obvious at first glance. The decoy is dominated by the target option—it's worse in some dimension but not in a way that makes it seem inferior. That's why it works. Luna: So the decoy is never meant to be chosen. It's just there to make the other option look better. That's so sneaky, but also kind of brilliant from a business perspective. Lucas: And it's everywhere. Think of subscription tiers, gym memberships, even car models. They'll have a base model, a mid-tier, and a fully-loaded version. The fully-loaded one might be priced just a few thousand more than the mid-tier, making the mid-tier look reasonable, or the mid-tier might be the decoy that makes the top-tier look like a good value. Luna: I remember reading about a study with microwave ovens. They had a cheap one, a mid-priced one, and a really expensive one. The expensive one was the decoy, and it made the mid-priced one seem like the 'sensible' choice. But without the expensive one, people were more likely to go for the cheap one. Lucas: Exactly. And that's the key insight: the decoy doesn't just add an option; it changes the entire decision context. It gives you a reference point that you wouldn't have had otherwise. And our brains are wired to use reference points, especially when we're uncertain about what something is worth. Luna: So it's like we're all just looking for a shortcut to feel good about our choices. And the decoy gives us that shortcut, even if it's leading us astray. Lucas: And that's why it's such a powerful tool in marketing. It's not about giving you more choice; it's about guiding you to a specific choice while making you feel in control. That's the paradox of choice architecture. Luna: I'm curious, are there any situations where the decoy effect doesn't work? Or can it backfire? Lucas: It can backfire if the decoy is too obviously terrible. If it's an option that nobody would ever choose, and it's not even close, then it just seems like a joke. It doesn't create that comparison. The decoy has to be close enough to the target that it feels like a reasonable alternative, but clearly worse in some dimension. Luna: So it's a delicate balance. You want the decoy to be just bad enough to push people, but not so bad that it's laughable. Lucas: Right. And that's why it's so effective when it's done well. It's invisible. You don't notice the decoy because you're too busy feeling smart about your choice. But the moment you learn about it, you start seeing it everywhere. Luna: I've definitely started noticing it in my own spending. Last week, I was looking at a software subscription, and there were three tiers. The basic was ten dollars a month, the pro was twenty, and there was this 'premium' for twenty-five. The premium didn't add much, but it made the pro look like a better deal. I went with pro, and I'm sure that was the point. Lucas: That's a textbook decoy. And it's so common in software because the marginal cost of serving more features is low, so they can price tiers to nudge you to the middle or the top. It's all about maximizing revenue. Luna: But now that I've learned about this, I'm trying to be more deliberate. I'll ask myself, 'Do I actually need the pro features, or am I just being influenced by the decoy?' Lucas: That's the first step. But it's hard, because the decoy effect is so deeply wired. It's not just about being aware; it's about actively resisting the instinct to compare. One trick is to ignore the options that are clearly not for you and focus only on the ones that fit your actual needs. Luna: So, set your own anchor before you look at the menu. Decide what features you need, what price you're willing to pay, and then see which option matches that. Lucas: Exactly. And that's a great note to end on, but before we go, I want to mention something that's been on my mind. We've been doing this show for a while, and we've never really talked about how it stays ad-free. That's a big deal for us because we don't want to be influenced by sponsors when we're talking about behavioral economics. And that's only possible because some listeners choose to support us directly. Luna: Yeah, it's really important to us that our analyses stay independent. If you've gotten something out of these episodes, and you want to help keep it that way, there's a link in the show notes. It's buy me a coffee dot com slash fexingo. Lucas: And no pressure at all. But even a small contribution helps us keep the lights on and the research budget. We appreciate every single listener, whether you support us or not. Luna: Alright, back to the decoy. So we've talked about how to spot it, but I'm wondering if there's a way to use it to your advantage as a consumer. Like, can I use my knowledge to get a better deal? Lucas: You can, but it's not always straightforward. In some cases, you can exploit the decoy by choosing the option that's being subsidized by the decoy. For example, if you know that the large coffee is the target, and the medium is the decoy, you might actually go for the large if you were going to drink it anyway. But you have to be careful not to fall for the trap of buying something you don't need just because it looks like a deal. Luna: So the key is to know what you want before you even see the menu. If you don't, the decoy will decide for you. Lucas: And that's the real lesson here. The decoy effect isn't just a pricing trick; it's a reflection of how our brains make decisions under uncertainty. We rely on comparisons and reference points to make sense of the world. And marketers know that. By understanding that, you can start making more intentional choices. Luna: I think that's a great takeaway. Next time I'm at a coffee shop, I'll try to remember that the medium isn't the 'safe' choice—it's whatever I actually want. Lucas: And that, in a nutshell, is the decoy effect. It's a small but powerful force in your daily decisions. Thanks for listening, and we'll see you next time.