Latest / Behavioral Economics with Fexingo: Decision Making, Bias, and How People Really Spend / Why Your Brain Defaults to the Cheapest Option
Transcript
- Lucas: Luna, when you walk into a store and see three options — small, medium, and large — which one do you usually grab? Luna: Honestly? The medium. It feels like the safe choice. Lucas: Exactly. And you're not alone. That's a well-documented behavioral pattern called extremeness aversion. When we're faced with a range, we shy away from the extremes and hug the middle. Luna: But here's the thing — what happens when you take away that middle option? Suddenly you're comparing just small and large. Lucas: And that's where it gets interesting. In a classic 2012 study, researchers offered people a choice between two microwave ovens: one for $109.99 and one for $179.99. About half picked the cheaper one, half the pricier one. Luna: Pretty straightforward, right? Lucas: Right. But then they added a third option — a middle-priced microwave at $139.99. Suddenly, the majority shifted to that middle one. The cheapest option's share dropped from 50 percent to about 20 percent. Luna: So the decoy — that middle option — actually made people avoid the cheapest, even though it was still available and identical to before. Lucas: Exactly. The middle option acted as an anchor. It made the cheap one seem too basic and the expensive one too extravagant. But here's the twist: in the two-option scenario, participants didn't have that reference point. They just picked what felt right. Luna: So if you're a retailer, you'd want to offer three tiers — deliberately set the middle one to nudge people toward it. Lucas: That's textbook decoy pricing. Movie theaters do it with popcorn sizes. Software companies do it with subscription plans. The goal is to make the middle option look like the smart compromise. Luna: But what about when the cheapest option actually is the best value? Like generics versus brand-name drugs. Lucas: That's a great point. In those cases, the bias works against us. We default to the middle or the expensive one because we assume price signals quality. But the data often shows generics are chemically identical. Luna: So our brain is wired to avoid extremes, even when the extreme — the cheap option — is perfectly fine. Lucas: And it gets worse when you add a premium option. Take the classic wine experiment from 2015. Researchers had people taste a $10 wine and a $45 wine — but they didn't tell them the prices. Participants rated them similarly. Luna: Then they told them the prices, and suddenly the $45 wine tasted better. Lucas: Exactly. The price tag itself changed the experience. But here's the kicker: when they added a third wine at $90, the $45 one suddenly looked like the smart choice. It became the default. Luna: So the decoy doesn't just push you toward one option — it redefines what 'reasonable' means. Lucas: Right. And that's why you'll see restaurants list a $100 bottle of wine next to a $50 one and a $30 one. The $50 one becomes the crowd pleaser, even if the $30 one is perfectly good. Luna: I've definitely fallen for that. I remember buying a mid-range laptop because the cheap one felt too bare-bones and the expensive one felt overkill. Turned out the cheap one would've done everything I needed. Lucas: That's the trap. Extremeness aversion can lead us to overpay for features we don't need. And it's especially dangerous in high-stakes decisions like healthcare plans or retirement funds. Luna: How so? Lucas: When you're choosing a health insurance plan, you often see three or four tiers. The cheapest might have a high deductible but low premiums. The priciest has low deductibles but high premiums. Most people pick the middle — the 'gold' plan — without calculating whether they'd actually come out ahead with the bronze. Luna: Because the middle feels safe. It's the Goldilocks option. Lucas: And that feeling is powerful. Researchers found that when people are presented with a choice set, they spend disproportionately more time comparing the middle options against each other and less time comparing them against the extremes. The extremes serve as anchors. Luna: So the cheapest option gets dismissed as 'too cheap' — even if it's objectively the best financial move. Lucas: Right. And there's a practical takeaway here. If you're a consumer, you can train yourself to ask: 'Would I buy this if the middle option didn't exist?' If the answer is yes, you might be overpaying. Luna: That's a good mental shortcut. But it's hard to do in the moment, especially when you're tired or rushed. Lucas: Absolutely. That's why retailers love presenting three options. It's a cognitive shortcut that makes us feel smart while spending more. Luna: Before we move on — Lucas, I want to mention something. This kind of deep dive into how we really spend is exactly why listeners tell me they value this show. And it's also why a handful of them chip in monthly through buy me a coffee dot com slash fexingo. Lucas: Yeah, that's a good point. We keep the show ad-free, and that's only possible because of that support. So if walking through the economy with us has made something click, that's the place. Luna: Anyway, back to the decoy effect. There's another layer — the 'asymmetric dominance' effect, where one option is clearly dominated by another. Lucas: Right. That's when you have a product that's worse in every way than another option — same price but fewer features, for example. Its only job is to make the other option look better. Luna: Like a subscription plan that offers less for the same price as the next tier up. Lucas: Exactly. The Economist famously did this. They offered a web-only subscription for $59, a print-only for $125, and a print plus web for $125. The print-only option was a decoy — nobody in their right mind would pick it over the combo. But it made the combo look like a steal. Luna: And it worked. When they removed the decoy in a test, sales of the $59 option went up. Lucas: So the decoy didn't just steer people — it actually changed the perceived value of the other options. That's the power of context. Luna: So what's the antidote? If we know we're susceptible, can we override it? Lucas: Partially. Awareness helps, but it's not a silver bullet. In one study, even after researchers explained the decoy effect to participants, they still fell for it — just slightly less. Luna: So our bias is stubborn. Lucas: Very. But you can build habits. One trick is to always articulate why you're choosing something. If you can't say a concrete reason beyond 'it feels right,' you might be falling for a decoy. Luna: Another trick: force yourself to consider the cheapest option first, seriously. Ask what you'd lose by picking it. Lucas: That's smart. And for businesses, understanding this bias can be used ethically — like designing menus that steer people toward healthier options by making them the 'middle' choice. Luna: It's about choice architecture. You can nudge without tricking. Lucas: Exactly. And that's the line we try to draw on this show — not just describing the biases, but giving you tools to navigate them. Luna: All right, next episode we'll tackle another classic: why we overvalue what we own, even if it's junk. Lucas: The endowment effect. That's a good one. See you then.