Latest / Behavioral Economics with Fexingo: Decision Making, Bias, and How People Really Spend / The Decoy Effect How a Third Option Tricks Your Brain
Transcript
- Lucas: You walk into a movie theater. You see small popcorn for $4, medium for $7.50, and large for $8. Luna: I'm grabbing the large. It's basically the same price as medium — feels like a steal. Lucas: Exactly. And that's the trap. That medium option isn't there to be sold. It's there to make the large look irresistible. This is the decoy effect in action. Luna: So the medium is a decoy — not a real option. Lucas: Right. In behavioral economics, it's called asymmetric dominance. You have two options: A and B. Add a third option, C, that's clearly worse than B but not directly comparable to A. Suddenly B becomes the dominant choice. Luna: And we think we're being smart. Lucas: We do. The classic example comes from a 1992 study by Amos Tversky and Itamar Simonson. They offered people a choice between a cheap pen and a nice suit. By itself, about 50% chose the pen. But then they added an inferior pen — a broken one. The share choosing the original pen jumped to nearly 80%. Luna: Because now the original pen looked like the safe, rational bet. Lucas: Exactly. The broken pen makes the working pen seem like a no-brainer. That's the decoy. And companies use it everywhere. Luna: Let's talk about The Economist. Dan Ariely made this famous. Lucas: Yeah, in his book Predictably Irrational. He found an ad from The Economist with three subscription options: web-only for $59, print-only for $125, and print plus web for $125. The print-only option is a decoy. It's identical in price to print plus web but strictly worse — you don't get the web access. Luna: So no one would ever pick print-only. It's there just to make the combo look generous. Lucas: And it works. Ariely tested it with 100 MIT students. When the decoy was present, 84% chose print plus web. Then he removed the decoy — only two options: web-only for $59 and print plus web for $125. Now only 32% chose the combo. The decoy flipped the majority. Luna: That's a 52-point swing from a single useless option. Lucas: Right. And this isn't niche. It's in your grocery store, your software pricing, your retirement plan. Luna: Software pricing is a great example. You see Basic for $10, Pro for $20, and Enterprise for $50. But then there's a Plus for $19 that has fewer features than Pro. That's a decoy. Lucas: Exactly. It nudges you toward Pro because Plus looks weak next to it. The decoy doesn't have to be a real product — it just has to exist on the menu. Luna: And it works even in high-stakes decisions. There's research on healthcare choices. When patients choose between two cancer treatments, adding a third option that's clearly inferior for one dimension — say, worse side effects — can shift preferences dramatically. Lucas: That's a bit unsettling. You'd hope doctors would design choice sets to minimize bias, not exploit it. Luna: But choice architecture is everywhere. You can't avoid having a menu design. The question is whether it's intentional. Lucas: And sometimes the decoy isn't a product at all. It's a price anchor. Think about wine lists. A restaurant will list a $200 bottle, then a $150 bottle, then a $60 bottle. The $200 one isn't meant to sell — it makes the $150 look reasonable. Luna: And the $60 looks cheap. You feel virtuous. Lucas: Right. And you probably spend more than you planned. The decoy raises your ceiling. Luna: There's also the dating app angle. Some apps have a free tier, a premium tier at $20, and a super-premium at $50 with almost the same features. The super-premium makes the $20 look like a bargain. Lucas: Exactly. And the decoy effect isn't just about price. It can be about features, quality, or even time. A subscription might have monthly at $15, yearly at $120, and a two-year at $200. The yearly seems smart — but they really want you on two-year. Luna: So how do we defend against it? Lucas: The first step is awareness. When you see three options, ask: is one of them clearly worse? If so, it's probably a decoy. Compare only the options you'd actually consider. Ignore the filler. Luna: And check your preferences before you see the menu. If you know what you want, the decoy loses power. Lucas: Right. That's the rational approach. But the decoy exploits a lazy part of our brain. We compare relative differences, not absolute values. The decoy changes the context, not the content. Luna: And it's not inherently evil. Choice architects can use decoys to steer people toward healthier options — like making a salad the dominant choice by adding an unappealing wrap. Lucas: That's a good point. The tool is neutral. It's about intent. And knowing how it works gives you power as a consumer. Luna: Speaking of consumer power — we should mention that this show is ad-free and listener-supported. If walking through the economy with us has made something click, you can throw a couple of dollars our way at buy me a coffee dot com slash fexingo. Lucas: Yeah. It keeps the lights on and the decoys out of our episodes. And we really appreciate it. Luna: So back to the decoy — there's a great example from the 401 world. Some plans offer three funds: a conservative bond fund, a moderate balanced fund, and a high-risk growth fund. The moderate one is often the default, but if they add a fourth fund that's even riskier, the growth fund suddenly looks safer. Lucas: That's a dangerous decoy. It could push people into more risk than they'd choose on their own. And retirement choices are sticky — people rarely change them. Luna: So the decoy effect is persistent. It works across cultures, across ages, across product categories. Lucas: And it's robust. Researchers have replicated it in hundreds of studies. The effect size is moderate but reliable. It's not a fluke. Luna: Is there a limit? When does the decoy stop working? Lucas: When the options are too complex or the decoy is too transparent. If you see a $1,000 phone and a $999 phone with worse specs, you might get suspicious. Also, if you're an expert in the domain — like a sommelier on the wine list — the decoy has less power because you have internal reference points. Luna: So the more you know, the less you're swayed. But most of us are not experts most of the time. Lucas: Exactly. And that's why it's so pervasive. Marketers know we're busy, distracted, and comparative. The decoy is a shortcut that feels like a calculation. Luna: Let's end with a practical takeaway. Next time you're choosing between three options, mentally remove the one that seems obviously worse. Then see if your preference changes. Lucas: That's a great rule of thumb. Because the decoy works best when you don't know it's there. Once you see it, you're free. Luna: And you might save yourself a few dollars on popcorn. Lucas: Or a few thousand on a subscription. Either way, it's worth the mental effort.