The Decoy Effect

Topics: Decision theory, Cognition, Cognitive bias Pages: 5 (1154 words) Published: October 9, 2011
The Decoy Effect – Roberto Cicala

“A cognitive bias is the human tendency to draw incorrect conclusions in certain circumstances based on cognitive factors rather than evidence.” Introduced in 1972 by Amos Tversky and Daniel Kahneman, the concept of “cognitive bias” describes the distorting patterns that occur normally in the processes of social interaction and that induce people to make irrational decisions and/or unreasoning judgments. Cognitive biases are not occasional errors but systematic deviations. Even the most balanced and intelligent people are subject to cognitive biases. An analysis of few minutes of the thoughts and speeches of a person would be enough to demonstrate that many cognitive biases have influenced them. There are hundreds of cognitive biases that, somehow, drive decisions and judgments inherent all aspects of life (economy, social, politics, etc.). This paper will focus on one specific cognitive bias that influences the consumer making decision process: the “decoy effect”. An analysis on how a given demand curve would look different if consumers were fully rational will conclude the report. The main cognitive biases influencing the choices of the Shopper Although traditional economic theories “assume” rational behavior, it is now widely recognized that consumers don’t behave rationally. The choice of a given product is most of time motivated by the invisible hand of unconscious cognitive biases. In fact, in most cases, the consumer will decide to buy a good without having conducted an accurate cost benefits analysis. This leading him to buy something he wouldn’t have bought if behaving rationally.

The list of biases is very long and there is often overlap between two or more of them. Consumers’ purchasing decisions are generally influenced by more than one bias only.

The “Decoy effect”

The “Decoy effect”, also known as the “Asymmetric dominance effect”, is the phenomenon whereby consumers will tend to have a change in their preferences between two options when also presented with a third option which is asymmetrically dominated. The general idea is that when consumers are presented with two options that are rather different, it is quite difficult for them to make a choice between them. If a third alternative that is similar to one of the options but less attractive is added, then the choice of the consumers will be different. The addition of an inferior option that no one would select does influence consumer choices.

In a rational environment, the third alternative would only have the effect to reduce or maintain constant the number of choices for the 2 other items. In no circumstances, the number of choices of one of the 2 other items should increase. However, in the real world, the third alternative has the involuntary effect to make one of the 2 initial items look better in the mind of the consumers.

The following example is often used to explain the concept of “decoy effect”: If you had to choose between a weekend in Rome with all expenses paid and a weekend in Paris with all expenses paid, the decision is difficult because the options are different in so many ways (food, culture, atmosphere). But what would happen if we added a decoy option? What if we added a weekend in Rome with almost all expenses paid? This would be the same as the other trip to Rome but without the espresso in the morning. The idea is that Rome without the espresso would make Rome with espresso look better in comparison to Rome without the espresso and also overall and relative to Paris. This is why adding Rome without the espresso can get a larger market share for Rome. This phenomenon is based on the human tendency to relativize. Whether it is in love, social life or consumer goods, humans view things relative to the things around it. This below and well known visual demonstration (Fig.1) depicts the illusion of relativity. Although the circles in the middle are the same size, when...
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