Latest / Behavioral Economics with Fexingo: Decision Making, Bias, and How People Really Spend / The Decoy Effect In Your Daily Spending
Transcript
- Lucas: Let's talk about the time I bought a large popcorn at the cinema that cost me twelve dollars, even though the medium was only eight. It wasn't because I suddenly developed a massive appetite for buttered grain. It was because the small was six, and the math made the large look like a steal compared to the medium. Luna: Right, the medium was just there to make the large seem rational. It's the classic decoy effect, isn't it? Lucas: Exactly. And it happens everywhere now, not just in theaters. Think about software subscriptions or even your morning coffee. You walk into a shop, and suddenly there are three sizes where one is clearly designed to push you toward the most expensive option. Luna: So the decoy isn't meant to be sold. It's meant to change how we view the other two choices. Lucas: That is the core of it. A few years ago, researchers at Harvard Business School did a study on magazine subscriptions that really crystallized this for me. They had three options: an online-only subscription for fifty-nine dollars, a print-only for one hundred twenty-five dollars, and a combo of both for one hundred twenty-five dollars. Luna: Wait, the combo was the same price as the print-only? That seems like a no-brainer for the combo. Lucas: It absolutely was. But here is the twist. When they offered all three, ninety percent of people chose the combo plan. The print-only option existed solely to make the combo look incredibly valuable by comparison. It was a terrible deal on its own, but it made the third option irresistible. Luna: So if they removed the print-only option, would people have chosen the combo anyway? Lucas: Actually, no. When the decoy was removed, leaving only the online for fifty-nine and the print for one hundred twenty-five, most people stuck with the cheaper online option. The decoy didn't sell itself; it sold the premium tier. Luna: That is wild. So the presence of a bad option makes the good option look better by contrast. Lucas: Precisely. It shifts our focus from absolute value to relative advantage. We stop asking 'do I need this?' and start asking 'which of these looks like the better deal?' Luna: I feel like I fall for this every time I look at car insurance quotes. They always show you the basic, the mid-tier, and the premium. Lucas: You definitely do. And notice how the mid-tier usually has slightly more coverage than the basic, but costs significantly less than the premium. It feels like the sweet spot. But often, the basic coverage is all you actually need. Luna: Or maybe I don't need the extra features I think I want. It's hard to tell what's real value versus just noise. Lucas: That is the challenge. Businesses know that consumers are bad at evaluating multi-attribute choices. When you have price, features, brand, and warranty all mixing together, it gets messy. So they simplify it by adding a decoy that tilts the balance. Luna: Can you give me another example that isn't subscriptions or cars? Something daily? Lucas: Think about buying a laptop. You see a base model with eight gigabytes of memory for seven hundred dollars. Then a mid-range with sixteen gigabytes for nine hundred. Then a high-end with thirty-two gigabytes for eleven hundred. The mid-range feels like the smart buy. But do you really need thirty-two gigabytes? Or do you need sixteen? Luna: Probably not. I usually just take the mid-range because it feels safe. But if the high-end wasn't there, I might have just taken the base model and saved money. Lucas: Exactly. The high-end acts as a decoy to make the mid-range look reasonable. Without it, the jump from seven hundred to nine hundred might feel too steep. But next to eleven hundred, two hundred seems trivial. Luna: It changes the reference point. Suddenly two hundred dollars doesn't feel like a lot. Lucas: It does. And this is where it gets tricky for personal finance. If you are budgeting, you might be optimizing for the wrong thing. You are trying to find the best deal among the options presented, rather than assessing your actual needs. Luna: So the trick is to ignore the decoy? Just look at what I need and find the cheapest way to get it? Lucas: That is part of it. But you also have to realize that sometimes the decoy is there for a reason. Maybe the company knows most people will go for the middle. It's a prediction of behavior, not just manipulation. Luna: So they are banking on us being lazy with our decision making. Lucas: They are banking on us using heuristics. Mental shortcuts. Comparing two similar things is easier than evaluating one thing against a complex set of criteria. The decoy makes the choice feel simpler. Luna: It feels like we are being guided down a path we didn't map out ourselves. Lucas: We are. And it works so well because it exploits our desire to avoid regret. If we pick the cheapest option and it breaks, we feel stupid. If we pick the most expensive, we feel ripped off. The middle feels like the compromise that protects us from regret. Luna: So the decoy creates a false sense of security. It makes the middle feel like the rational choice. Lucas: Right. But rationality should be based on utility, not position. Does the middle offer the best utility for your specific situation? Or does it just offer the best feeling of having made a smart choice? Luna: I guess I've been focusing too much on the feeling of the deal rather than the actual use case. Lucas: That is the trap. And once you see it, you can't unsee it. You start looking for the decoys in every aisle, every website, every menu. Luna: Do you think companies are doing this consciously, or is it just trial and error? Lucas: Consciously, and backed by data. They A-B test different configurations. They see which layout drives the highest average order value. It's not magic; it's analytics. Luna: So it's engineered. Which means we can engineer our way out of it by changing our process. Lucas: We can. One simple tactic is to define your constraints before you look at the options. Tell yourself, 'I am only willing to spend eight hundred dollars.' Then ignore anything above that. It removes the decoy's power. Luna: Set a hard limit first. That takes the emotional pressure off the moment of choice. Lucas: It does. And another trick is to evaluate each option independently. Don't compare them side-by-side immediately. Ask, 'Would I buy this if it were the only thing in the store?' If the answer is no, then the decoy probably didn't work on you. Luna: Independent evaluation. That sounds tedious, but it might save me hundreds of dollars a year. Lucas: It is tedious. But so is overpaying for features you don't use. Behavioral economics isn't just about understanding why we fail; it's about building systems that help us succeed. Luna: So the goal isn't to eliminate the bias, but to design around it. Lucas: Exactly. You can't trust your brain in the heat of the moment. You have to trust your process. Luna: I'm going to try that with my next software renewal. I'm going to ask myself if I'd pay full price for just the features I use. Lucas: And if the answer is no, you cancel. Simple as that. Luna: It feels counterintuitive when everything is designed to make you stay. But logic wins eventually. Lucas: It does. And recognizing the game is half the battle. Once you see the strings, you can cut them. Luna: Thanks for helping me see the strings, Lucas. I think I'm ready to face the next menu. Lucas: Anytime. Just remember, the biggest lie in marketing is that the middle option is always the winner. Luna: Unless it's the only one you actually need. Lucas: Precisely.