The Decoy Effect

 

How adding a new option might change our perception of the existing options

What is the Decoy Effect about?

“[…] when we are choosing between two alternatives, the addition of a third, less attractive option (the decoy) can influence our perception of the original two choices.” (The Decision Lab)

It is also called the “asymmetric dominance effect.” Here is why: the decoy is an option that’s clearly worse than the target option (so it is dominated by the target), while it’s not completely dominated by the competitor 

“[…] when we are choosing between two alternatives, the addition of a third, less attractive option (the decoy) can influence our perception of the original two choices.” (The Decision Lab)

It is also called the “asymmetric dominance effect.” Here is why: the decoy is an option that’s clearly worse than the target option (so it is dominated by the target), while it’s not completely dominated by the competitor option.

The Story of The Economist

Originally, they introduced 2 subscription plans:

• 1 year online-only $59
• 1 year online + print $125

Most subscribers chose the first option, so they added a third plan, the decoy: 1 year print-only for $125. Now the other $125 option (online + print) was a no-brainer: the decoy successfully made the target option more attractive. As result, sales increased by 43%.

Dan Ariely, author of the fantastic book, Predictably Irrational, repeated this pricing strategy as an experiment at MIT: he showed these subscription options to 100 MIT students:

• 16 student chose the online-only
• 0 (zero) student chose the print-only
• 84 student picked the online+print

Then, he removed the decoy option, the results clearly showed that it influenced decision making a lot:

• 68 students chose the online-only
• 32 chose the online+print

Everything is relative

Here are some quotes from Ariely’s book, Predictably Irrational:

“Let me start with a fundamental observation: most people don’t know what they want unless they see it in context.”

“[…] humans rarely choose things in absolute terms. We don’t have an internal value meter that tells us how much things are worth. Rather, we focus on the relative advantage of one thing over another, and estimate value accordingly”

Ariely uses the Ebbinghaus illusion of relative size perception to demonstrate that everything is context-dependent: there are two circles of identical size, but the one on the left (see my sketch) appears to be bigger, since it is surrounded by smaller circles, while the one on the right seems to be smaller, since there are much bigger circles next to it.

Key takeaways

Decoys are about asymmetric differences based on comparative values, e.g. price and quality (see the original paper by Huber, Payne & Puto from 1982: Adding asymmetrically dominated alternatives: Violations of regularity and the similarity hypothesis).

A decoy:

• influences decision making
• works subconsciously
• adds a new reference point (see: Loss Aversion)

Recommended reading & useful links

Huber, J., Payne, J. W., Puto, C. (1982). Adding asymmetrically dominated alternatives: Violations of regularity and the similarity hypothesis. In: Journal of Consumer Research, 9(1), , 90–98

Predictably Irrational

Huber, J., Payne, J. W., Puto, C. (1982). Adding asymmetrically dominated alternatives: Violations of regularity and the similarity hypothesis. In: Journal of Consumer Research, 9(1), , 90–98

Predictably Irrational, Revised and Expanded Edition: The Hidden Forces That Shape Our Decisions by Dan Ariely

https://tinyurl.com/mrxjdfvs