WHAT IS THE DECOY EFFECT?

What is the Decoy Effect? (Previously Published on ING's eZonomics)

Assume you’ve just taken up photography and are in the market for a basic camera. You walk into a local store and are presented with two options: a low-resolution £69 camera, and a high-resolution £175 camera with Wi-Fi capabilities. You decide to buy the £69 camera. Yet as you head towards checkout, you find a £300 camera with a little higher resolution than the £175 camera and similar Wi-Fi capabilities. Research by psychologists and behavioral scientists indicates you are now more likely to abandon the £69 camera and instead purchase the £175 camera, because of a concept called the decoy effect.

The decoy effect occurs based on introducing what researchers call an ‘asymmetrically dominated option’ to a set of choices. An asymmetrically dominated option is essentially a bad deal. For example, in this instance, the £300 camera seems like a worse bargain than the £175 camera, because they have similar capabilities. Coming across the £300 camera therefore makes £175 camera seem like a great deal, and also makes it seem much more attractive than the basic £69 camera you were about to purchase.

Research suggests the decoy effect occurs because we tend to decide what items are worth by comparing them to each other. For example, when luxury store Williams-Sonoma introduced a $275 bread maker, sales were almost non-existent. However, when a marketing firm suggested they introduce a slightly better bread maker at almost double the price ($415), sales significantly increased. Customers, by comparing both models, suddenly had a way to determine which model represented better value and could then choose that model.

The decoy effect therefore works by altering the reference point we use to make our decisions. Indeed, in his book Predictably Irrational, behavioral economist Dan Ariely describes an experiment based on subscription offers for TheEconomist. Potential subscribers could either choose a $59 digital subscription, a $125 print subscription, or a combined print and digital also worth $125. When Ariely asked MIT students to choose between all three options, most chose the combined offer, yet when he asked them to choose between either the combined offer or the digital subscription, most reversed their decision and instead chose the digital subscription.

Another reason why the decoy effect occurs is because research shows our brain craves simplicity and tends to make decisions by simplifying. This means we’ll generally avoid using harder dimensions to make choices. In the example above, both the £175 and the £300 cameras have Wi-Fi capabilities and good resolution, so we can easily use those aspects as the bases for our comparison, and immediately eliminate the £69 camera which doesn’t share those aspects.

The decoy effect isn’t just limited to consumer goods. Preliminary research also shows that using decoy rewards can actually boost the average amount donated to crowdfunding campaigns. The decoy effect has also been found to influence hiring decisions. When students in an experiment were asked to choose between job candidates based on their assessment scores and the extent to which the candidates were deemed promotable, the presence of a decoy changed their preferred candidate. They were more likely to choose a candidate with a high promotability score but average assessment scores when there was no decoy. However, they reversed their decision and chose a candidate who had high assessment scores but low promotability when a decoy candidate (who also had a high assessment score and much lower promotability) was present. Even though participants never chose the decoy candidate, the presence of a decoy still heavily influenced their decisions between the candidates.

The decoy effect therefore has strong ramifications on how we evaluate choices and make decisions. While this is not always a bad thing, one way to keep an eye out for the decoy effect when making purchasing decisions is to first decide how much you’d like to spend, before you start evaluating the options, that way you are potentially less likely to be biased as you make your decision. For example, if you decide your photography skills are best suited to a basic camera before going to shop for cameras, you’re more likely to stick with your original decision and purchase the £69 camera instead of being tempted by the much more expensive option, regardless of how good a deal it seems.