How does the decoy effect affect economic choices and consumer decision-making?

The decoy effect, also known as the asymmetric dominance effect, is a cognitive bias that influences economic choices and consumer decision-making. It occurs when the introduction of a third option, known as the decoy, influences individuals to change their preference between two other options.

In economic choices, the decoy effect can impact the perceived value and attractiveness of different alternatives. When presented with two options, individuals tend to evaluate them based on their inherent attributes and make a decision. However, when a decoy option is introduced, which is strategically designed to be less attractive than one of the original options, it can alter the decision-making process.

The decoy effect works by creating a relative comparison between the options. The decoy is intentionally designed to be inferior to one of the original options, making that option appear more favorable in comparison. This manipulation can lead individuals to perceive the other original option as more attractive than they initially would have.

Consumer decision-making is particularly influenced by the decoy effect. Companies often use this bias to influence consumer choices and increase sales. By introducing a decoy product or pricing option, companies can steer consumers towards a specific choice that benefits their business.

For example, imagine a consumer is deciding between two smartphones: A and B. Smartphone A has better features but is more expensive than B. In this scenario, the consumer might be inclined to choose B due to its lower price. However, if a decoy option C is introduced, which is similar to B but with fewer features and a slightly higher price, it can make option B appear more attractive in comparison. As a result, the consumer may perceive B as the best choice, even though it might not have been their initial preference.

The decoy effect can also impact economic choices beyond consumer decision-making. It can influence negotiations, pricing strategies, and even political decision-making. Understanding this bias is crucial for economists, marketers, and policymakers as it can be leveraged to shape and manipulate choices in various economic contexts.