Decoy effect: Why it matters in business?

Imagine you are in a cinema hall and want to buy yourself popcorn. You see a small pack for 3$ and a large for 6$. But then, you see a medium pack for 5$. You are most likely to go for the large pack priced at $6 since it offers more value for $1 than the decoy option of $5.

However, in comparison to the small pack, the $5 medium pack offers more value. The decoy(medium) is slightly inferior to the target(large) and superior to the competitor(small). By doing so, you are spending more on the popcorn just because you think you are getting more value. However, in reality, you are spending more than you want to, without knowing. This is the decoy effect at work!

Index:

What is the Decoy effect?

The decoy effect describes a situation when a person is stuck between two options; the addition of a third option, even if less attractive in comparison to the other two, can influence the person’s perception of the two original options. This is the decoy effect, and the third less attractive option is the decoy.

The thing with the decoy is, that it is always “asymmetrically dominated,” i.e., they are likely to be highly inferior to one option however partially inferior to the other option. For this particular attribute of the decoy, the decoy effect is often known as the “asymmetric dominance effect.”

Simply put, the decoy effect is a phenomenon where a customer will likely have a pre-determined change in his or her preferences between two options when they are presented with a third option that is asymmetrically dominated. As a result, the third option or the decoy will look bad as far as value is concerned and a previously disregarded option will suddenly seem much more appealing and have better value.

Decoy effect
Decoy effect

Why does the Decoy effect happen?

Before understanding the reasons behind the decoy effect and its effectiveness, we need to understand the logic behind asymmetric domination. In a decoy situation, a person has three choices available to them.

  1. The target choice; a choice that businesses and marketers would like a person to make.
  2. A competitor choice; an option that is competing with the target choice.
  3. A decoy; an option introduced to shift your preferences towards the target option.

The crux is, the decoy is asymmetrically dominated between the original options in terms of various properties. Therefore, the decoy will be slightly inferior to the target option but marginally better than the competitor option. So let us now understand how the decoys work:

  • They impact subconsciously:

The decoy effect is essentially a behavioural nudge or an intervention that shifts an individual’s preference towards a specific choice. It does not manipulate behaviour by using reward or punishment effects. Instead, it is a very subtle shift leveraging our behaviour to push us in a specific direction.

However, it must be highlighted that it does not affect our free will as we feel that we are making a choice independently. However, the fact that we have been guided in this direction remains invisible to us.

  • Readymade Justification for making a choice:

Decoys provide a justification for the choice we make. As humans, when we make decisions, our goal, more often than not, is not to make the correct choice but to justify the outcome of a choice we have already made.

In a study that looked at the decoy effect, researchers found that decoys provide an easy justification for people while choosing the target option. People are likely to emphasize the pros of selecting the target option and the cons of the competitor, as it will make us feel satisfied with our choice.

  • Decoys make a choice feel less overwhelming:

We, humans, suffer from the “paradox of choice.” The paradox of choice suggests that humans find it difficult to make a decision when we have more options to choose from. Even though broad choices are attributed to making a choice simple, however; in reality, it overwhelms us.

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As a result, we are too afraid and overwhelmed at the thought of making a wrong choice. Thus decoys help us by acting as an agent that de-stresses the decision-making process by offering a readymade explanation to our target choice. 

  • Loss aversion:

Loss aversion has a significant impact on us, and decoys function by manipulating our reference point of what loss and gain are. We, humans, are more fearful of losing something than anticipating a win.

Loss aversion describes a situation where people are unhappy about potentially losing a particular thing rather than gaining an equivalent sum. Since loss and gain are relative and not set in stone, what qualifies as a loss or gain is subjective. 

What are its effects? How does it impact business?

The decoy effect can have many implications for an upcoming or established business. Let us see what:

  • Making bad financial choices: 

You are likely to be lured by manufacturers and marketers to buy products and services by offering you various options. Therefore if you fall victim to the decoy effect, you are likely to overspend in order to get more value.

However, in reality, that value with all options remains more or less the same. Therefore with the decoy in effect, you may overspend and disrupt your finances.

  • Making uninformed choices: 

The decoy is likely to nudge us towards the target option, which, more often than not, is not the most appropriate option. Additionally, since decoys work subconsciously, we are making bad decisions without understanding the same. Thus with decoys, we are making uninformed decisions without understanding the needs of our system and requirements.

How can we avoid it?

The crucial aspect of the decoy effect is that simply being aware of its existence is not enough to overcome it. The reason is, it does not make us feel irrational. However, there are ways to overcome it:

  • Understand your preferences:  When you are going to make a decision between multiple options, it is advisable to understand your requirements before dealing with the choices.
  • Invest in what you need: Even though an option may seem to offer you more value, there is no need to be lured by it. Stick to the basics. Buy what you need.
  • Get expert opinions: Stay away from going by your gut feeling. It is better to get the opinion of an expert or unbiased third party rather than following your hunch.

A final word:

The decoy effect describes how our preferences change with the addition of a third, unattractive option. A behavioural nudge, a decoy, affects us subconsciously and may alter how we think and make decisions.

However, to avoid the decoy effect, we must focus on our needs and have a clear head before making decisions. Let us not be tricked by clever tactics as the decoy effect can have severe consequences.

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Related Articles:

What is Decoy effect?

The decoy effect describes a situation when a person is stuck between two options; the addition of a third option, even if less attractive in comparison to the other two, can influence the person’s perception of the two original options.

Whats the example of Decoy effect?

Suppose you are in a cinema hall and want to buy yourself popcorn. You see a small pack for 3$ and a large for 6$. But then, you see a medium pack for 5$. You are most likely to go for the large pack priced at $6 since it offers more value for $1 than the decoy option of $5.

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