The Decoy Effect

Traditional economic theory assumes that people evaluate each option on its own merits. If a customer prefers product A to product B, adding a third option should not change that preference. In practice, however, researchers have found that the presence of a carefully chosen third option can shift people's choices in a predictable direction. This phenomenon is known as the decoy effect.

Consider a movie theater that sells a small popcorn for $3 and a large one for $7. Many customers choose the small size, since the large one seems expensive. Now suppose the theater adds a medium size for $6.50. Few people buy the medium, but its presence makes the large popcorn look like a bargain: for just 50 cents more, customers get much more popcorn. As a result, sales of the large size increase. The medium option works as a decoy. It is not meant to be chosen; its purpose is to make another option more attractive by comparison.

Businesses use decoys in pricing everything from magazine subscriptions to software plans. Critics argue that the technique takes advantage of the fact that people judge value in relative rather than absolute terms. Supporters respond that decoys simply make differences between options easier to see. Either way, the effect underscores how strongly our decisions depend on context.