The Money Psychology: What Is The Decoy Effect?

By Rachel Lane, Contributor Fea Money Financial Literacy School, Photo Credit Unsplash

If you’ve ever had to decide between purchasing three items – maybe it’s different options for a newspaper or different sizes of olive oil – and opted for the middle-priced item, you have experienced the decoy effect!

As human beings, we like frames of reference and safe options in the middle, so when an organization adds a third item to two related items, it can make a consumer more likely to purchase the middle-priced item. This benefits the company, as the middle-priced item is more significant than the cheapest item, and the consumer feels like he or she has chosen the safest, most cost-effective option. 

The good thing is that you don’t have to succumb to this marketing technique, known as the decoy effect, if you are aware of the unnecessary third option that companies often have!

What Is It?

The decoy effect, also known as the attraction effect or the asymmetric dominance effect, is very straightforward. When given two options, a consumer acts in a certain way but acts differently when given a third option.

For example, many coffee companies have three different sizes: small, medium, and large. Why? Consumers often choose the middle option because it’s not the most expensive, nor the least expensive. If a consumer had a choice between just small and large, he or she would probably choose the small option because it was the more reasonable option.

How Does It Affect Me?

Quite simply, the decoy effect can impact anyone. And it can cause you to spend more than you intend to by giving you a third asymmetrically dominated option. In other words, just by having a third option, you may decide to choose a more expensive item because it seems like the best deal among the three options, as pricing is often based on a frame of reference.

You can especially notice the decoy effect in magazine or newspaper subscriptions. For example, an online subscription to a magazine may cost less than a print subscription, which could cost as much as twice the amount of the online alternative. Given these two options, you would probably select the online subscription, as it is the cheaper of the two. 

However, some companies may include a third option to subscribe to both online and print for slightly more than the print subscription amount. In this case, the third option might seem to be the best one, helping you save more than if you were to purchase the online and print subscriptions separately. Thus, by adding a third choice, companies encourage consumers to choose a more expensive item that they might not necessarily need.   

Ironically, the people who might be the most affected by this decoy effect are those who like to save money and are smart spenders since they are trying to choose the most cost-effective options.

What Can I Do About It?

As with any marketing technique, it’s important to be aware. Make sure you have a clear idea of what exactly it is that you want or need. This way, you’ll be less susceptible to the decoy effect.

1. Focus on the Item You Wish to Purchase 

One of the best ways to combat the decoy effect is to focus on the item you wish to purchase. What do you want? How much does it cost per unit? Try to compare the price of the item to other items of similar value.

2. Focus on the Amount of the Item That You Need

It’s important to remember how much of an item you need. Make sure that if you want to choose the middle option—the option that  marketing often steers you toward—that you’re going to consume all of it, whether it’s food, a beverage, or a magazine subscription.

For example, some fast-food restaurants offer beverages for a fixed price, regardless of whether you get the smallest size or the largest size. It might seem like a great idea to get the largest size of a drink, but are you really going to drink it all? If not, consider getting a small-sized drink instead.

3. Try to Give Yourself Two Options

One of the easiest ways to make sure you don’t fall victim to the decoy effect is to get rid of the third option. Go back to two options: the small and the large or the online and the print. Which one would you pick then? Likely the small or cheaper one unless you actually want or need the large or more expensive option.

Marketers are trying to get you to choose a specific item, but you can take control of marketing attempts by circumventing the marketing technique. Just being aware of how your purchasing decisions may be externally influenced can help you make the best financial decisions for yourself.

Next time you go to the grocery store, see if you can notice whether different items you purchase have three options. They all demonstrate the decoy effect. So, make sure that you carefully consider the three options whether you’re in the store or receive a subscription card to a magazine. 

It’s likely that one option is just there to make you spend more money, but if you stay aware of the decoy effect and the unnecessary third option, you won’t have to!

Have you joined Fea Money Financial Literacy School Yet?

Keeping an eye on your spending can be challenging, especially as life gets hectic.

Fea Money Financial Literacy School offers you the ability to digitally start achieving your goals, at your pace, with world-class courses from our experts.

Courses available in German, French, English and Spanish

Click here to gain access to our world class courses from our experts