Latest / Behavioral Economics with Fexingo: Decision Making, Bias, and How People Really Spend / The Decoy Effect And Smart Shopping
Transcript
- Lucas: There is a specific moment in almost every adult’s life when they realize they have been tricked by a sandwich shop. You walk in wanting a medium burger, but then you see the large one for just three dollars more, and suddenly the medium looks like a terrible deal. It feels like a bargain, right? But really, you were never going to buy the small one. Luna: Exactly. It’s that little extra cost that makes the bigger option feel justified, even if you only wanted the medium. The third option changes how we see the first two. Lucas: That is the classic setup for what behavioral economists call the decoy effect, or asymmetric dominance. The key here is that the decoy isn’t actually good. It’s designed to be slightly worse than the target item you want to sell, but better than the cheap alternative. It’s there to make the target look like a no-brainer. Luna: So it’s not about comparing price to quality directly. It’s about forcing a comparison where one option clearly wins on paper, even if it’s not the best value overall. Lucas: Right. Let’s take a concrete example because this happens everywhere now. Think about software subscriptions. You have a basic plan for ten dollars a month, and a premium plan for twenty dollars. Then they introduce a pro plan for nineteen dollars and ninety-nine cents. Suddenly, the premium plan looks incredibly valuable because you get almost everything in the pro plan for a dollar less. But did you actually need those pro features? Luna: I’ve fallen for that exact trap with streaming services. I didn’t need the higher tier, but the pricing structure made the mid-tier feel like the rational choice. Lucas: It feels rational because the math works out. You are getting more for slightly less money. But the real question is whether you needed the product in the first place, or if you just wanted to avoid the feeling of buying the inferior option. This is why I think we need to talk about listener support today. If walking through the economy with us has made something click about how these biases work, consider supporting the show directly. Your contributions help keep these deep dives ad-free and allow us to keep testing these theories against real-world data. You can find us at buy me a coffee dot com slash fexingo. It really helps sustain the research behind these episodes. Luna: Yeah, and honestly, supporting independent podcasts is a great way to opt out of algorithmic feeds anyway. You get direct access to the thinkers. Lucas: Back to the sandwich shop though, because that’s where most people first encounter this. The small is five dollars, the large is nine dollars. Then they add a medium for eight dollars. That medium is the decoy. It costs almost as much as the large, but gives you significantly less food. It makes the large look like a steal. Luna: But the medium was probably the size I actually wanted. Now I’m full and overcharged for something I didn’t really need. Lucas: Precisely. You traded utility for a perceived gain. The decoy creates an illusion of superiority. When you remove the decoy, the choice becomes binary again. Do you want the small for five dollars, or the large for nine? Without the middle option, you might just stick to the small. The presence of the third option shifts your reference point entirely. Luna: It’s interesting how this applies to investments too. I see funds with different fee structures that do the same thing. They add a high-fee class that makes the standard class look reasonable. Lucas: That is a huge one in asset management. You often see a low-cost index fund, a moderately priced actively managed fund, and then a high-fee alternative fund. The moderately priced one is often the decoy. It’s not the cheapest, but it’s not the most expensive either. It sits right in the comfort zone, making it look like the safe, sensible middle ground. But usually, the cheapest option is the best for long-term wealth building. Luna: So the goal is to ignore the middle option entirely and just look at the extremes? Lucas: Not necessarily ignore it, but recognize its purpose. The middle option exists to reduce decision fatigue. It gives you a path of least resistance. But if you understand that the middle is a construct, you can step back and ask what you actually need. Do you need active management? Or do you just want market returns at the lowest cost? Luna: That requires a lot more discipline. Most people just want to pick the option that feels safest without doing the homework. Lucas: Absolutely. And this brings up another layer. The decoy effect relies on our inability to process multiple attributes simultaneously. When you have two options, you compare them on price and quality easily. When you add a third, your brain starts looking for dominant features. The decoy dominates the cheap option on quality, making the cheap option look weak. It doesn’t dominate the expensive option, so the expensive option stays in play. Luna: So it’s a strategic weakness in human cognition. We look for dominance rather than total value. Lucas: Exactly. We are pattern-seeking machines. If one thing beats another on a specific metric, we assume it wins overall. The decoy exploits that heuristic. It’s not a complex mathematical trap. It’s a simple visual cue that triggers a shortcut in your thinking. Luna: I wonder if this explains why luxury brands always have that ultra-expensive flagship model. It’s not selling many units, but it makes the other items look affordable. Lucas: Spot on. That is a form of price anchoring, which works hand-in-hand with the decoy effect. The ultra-expensive item sets a high anchor. Once you see that, the fifty-thousand-dollar watch seems reasonable. Without the hundred thousand dollar version, the fifty-thousand-dollar watch might look outrageous. The decoy redefines what reasonable means. Luna: So it’s not just about pushing you to buy more. It’s about changing your baseline for what is normal. Lucas: Right. And that is dangerous because it shifts your expectations permanently. If you get used to seeing these structures, you start accepting them as standard. You stop questioning the price to value ratio because you are too busy comparing the options presented to you. Luna: It’s like being trapped in a maze where every turn looks like progress, but you’re just moving toward the exit the designer wants. Lucas: A perfect analogy. And the hardest part is that the decoy is rarely illegal. It’s just clever design. Companies are incentivized to maximize revenue, and this is one of the most effective ways to do it without raising prices across the board. Luna: So how do we break out of the maze? Is it just about saying no to all middle options? Lucas: Not no to all, but pause before choosing. Ask yourself if the middle option would still appeal to you if the third option wasn’t there. Would you still want the medium sandwich if the large wasn’t an option? If the answer is no, then the decoy worked. You bought into a preference that wasn’t originally yours. Luna: That’s a simple test. Just remove the distraction mentally and see what you actually want. Lucas: Yes. And apply that to everything. Subscriptions, insurance plans, car trims. Whenever you see three tiers, assume the middle one is engineered to look good. Look at the bottom and the top. Which one actually serves your needs? Usually, the bottom one is sufficient. The top one is aspirational. The middle is the trap. Luna: It’s scary how effective this is. I walked past a cereal aisle yesterday and felt my brain automatically scan for the mid-range box. Lucas: That’s the conditioning working. Retailers spend billions on shelf placement and packaging to trigger these responses. They know you are tired. They know you are rushed. They know you will pick the option that requires the least cognitive effort. The decoy is the path of least resistance. Luna: So fighting it requires conscious energy. It’s an active process, not a passive one. Lucas: Exactly. Awareness is the first step. Once you see the decoy, you can’t unsee it. You start noticing it everywhere. Menu layouts, subscription boxes, even political polling options. The principle is universal. It’s about manipulating relative value to drive a specific outcome. Luna: It makes you wonder how many of our daily purchases are truly ours versus how many are designed. Lucas: That’s a healthy amount of skepticism. Not cynicism, just awareness. You don’t have to reject every marketing tactic. But understanding the mechanics gives you back some agency. You can choose to engage with the options on your own terms, rather than reacting to their cues. Luna: I think that’s the real takeaway. It’s not about saving money strictly. It’s about owning your decisions. Lucas: Precisely. When you understand the game, you stop playing it blindly. You might still buy the large sandwich, but you’ll do it because you’re hungry for it, not because the medium looked bad by comparison. Luna: And that changes the whole experience. You eat the sandwich knowing you chose it, not fell for it. Lucas: That’s a much better way to end the day. Simple, intentional, and free of invisible taxes. Thanks for tuning in.