Using the Decoy Effect to Your Advantage

First, let’s talk about what the decoy effect is:

The decoy effect is the phenomenon whereby consumers will tend to have a specific change in preference between two options when also presented with a third option that is asymmetrically dominated. An option is asymmetrically dominated when it is inferior in all respects to one option; but, in comparison to the other option, it is inferior in some respects and superior in others.

If that’s gibberish to you, you’re not alone. One way to explain the decoy effect is with an example.

Let’s say you’re buying a car. Car A has a 100,000 mile full warranty and costs $20,000. Car B has a 70,000 mile warranty and costs $15,000.

In that case, it’s easy to make a decision. You might pay more for the longer warranty, or you can save money and have a shorter warranty.

Then, we look at Car C. Car C has a 85,000 mile full warranty but costs $22,500.

When you compare Car C to Car B, it’s not too different than the other comparison. Car C has a longer warranty, but it costs more. However, if you compare Car C to Car A, it makes Car A really look like a winner because not only does it have a longer warranty, it’s also cheaper than Car C.

So, let’s say you’re a manufacturer and you think you can make a lot more money selling Car A than you can selling Car B. You know some people are still going to want to buy Car B because it’s the cheapest, but you want to steer as many people to Car A as you can. So, you introduce a “decoy” onto the market – Car C. The entire point of Car C is to make the offer of Car A look as good as possible.

Nothing about Car A has changed a bit, but by putting Car C on the market, Car A appears to be a better deal than before because of how well it compares to Car C. Car B? It’s still the cheapest, but Car A appears to be a bargain now, too.

What if the company wanted to sell more of Car B? They’d put a model on the market that costs a little more than Car B but less than Car A, but they’ll give this new model a worse warranty than either one. That way, A still has the best warranty but it also has the highest price, while B now has the second best warranty and the lowest price.

That’s the decoy effect – it’s how marketers take advantage of comparison shoppers. They sell multiple products with features and prices that will steer you to the one they really want to sell you.

All you have to do is stroll through a grocery store to see this happen again and again with different sizes of products and different prices. “I can get 24 cookies for $3 or 48 cookies for $5… but look over there, that bag of cookies has 36 cookies for $5.50. This 48 cookie bag is a real bargain!”

There is an easy way to defeat the decoy effect, thankfully.

First, focus on shopping per unit. In other words, convert everything to how much it costs per unit. If you’re buying a bag of cookies, convert everything to the cost per cookie. If you’re buying a car, figure out the dollar cost of the fuel efficiency and of each mile that you can expect to own the car.

Unfortunately, basing things entirely on price per unit still leaves you susceptible to the decoy effect. That’s why you also need to figure out, in advance, how many units you actually need. In other words, if you’re buying a bag of cookies, how many cookies will you actually consume before the cookies go bad?

Using these two figures together – the cost per unit and the maximum number of units you need – you can assess correctly which item is the best buy for you. There can be lots of decoys on the market, but if you’re focused on maximizing the cost per unit up to the number of units you actually need, decoys won’t matter. You’ll always get the best bargain to suit your needs.

Trent Hamm
Trent Hamm
Founder of The Simple Dollar

Trent Hamm founded The Simple Dollar in 2006 after developing innovative financial strategies to get out of debt. Since then, he’s written three books (published by Simon & Schuster and Financial Times Press), contributed to Business Insider, US News & World Report, Yahoo Finance, and Lifehacker, and been featured in The New York Times, TIME, Forbes, The Guardian, and elsewhere.

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