The Decoy Effect

You're making dinner plans with a group of friends. The group is divided between two choices of similar price -- that is, the cost of the meals aren't at issue -- and are at an impasse. Some prefer the 3-star restaurant about five minutes away with a reputation for quick service. Others are willing to spend more time to travel to the more deliberate, fancy 5-star restaurant a fifteen minute drive from whomever's house you're at. The group is split -- until someone points out an a third restaurant, 4-stars, a thirty minute trip away. 

The third option isn't much of one. For the group that prefers the closer, 3-star restaurant, the distance to the 4-star joint is absurd. For those preferring the 5-star restaurant, the lower-quality one (which is also further away) is similarly a lesser option. The introduction of this choice shouldn't matter at all.

But according to researchers, it does, at least when introduced concurrently with the other two choices.

In 2007, the Washington Post covered a situation on which the above is based, postulated by a marketing professor from Duke University named Joel Huber. Professor Huber assembled two groups of people to test the effect of this seemingly irrelevant choice. The first of Huber's groups were, like the example above, given two choices -- the nearby 3-star restaurant and the further 5-star restaurant, and they split based on preference. Some, as above, wished a quicker fix to their hunger while others wanted a higher quality dining experience. 

The members of the second group were given three choices, including the 4-star eatery much further away. What Huber found was that this logically irrelevant option was anything but. As the Post reported, "people now gravitated toward the five-star choice, since it was better and closer than the third candidate. (The three-star restaurant was closer, but not as good as the new candidate.)" And in a different test, when the second group was given a a two-star restaurant which was closer than the 5-star one but farther than the 3-star option, "many people now chose the three-star restaurant, because it beat the new option on convenience and quality. (The five-star restaurant outdid this third candidate on only one measure, quality.)" Basically: the obviously-lesser option made one of the "real" choices seem suddenly better.

Huber and others have called this phenomenon the "Decoy Effect." It has applications to politics, as discussed in this NPR interview with the author of above-linked Post article, but also in marketing. One corporate blog (for a company focused on website usability) published a post about the research done by another Duke professor, Dan Ariely. Professor Ariely, an economics instructor, noticed that the Economist magazine was offering a digital subscription for $59 and a print one for $125 -- and a print-plus-digital combo deal for $125 as well. Ariely surmised that no one would buy the print-only version (well, duh), and surveyed 100 people to see what they'd purchase. Sixteen went with the digital option while the remaining 84 went with the combo deal. Seems reasonable.

So why did the Economist offer the print-only option? It was most likely a decoy, designed to shift purchasers to the higher-priced combo option. When Ariely repeated his survey (with 100 different fictional purchasers) but omitted the print-only option, he found that that $125 print-plus-digital offer wasn't nearly as popular -- only 32 purchasers chose that one, and 68 went with the cheaper $59 deal. If those numbers reflected real-life purchasing habits, the Economist would have netted an extra $34.32 in revenue per subscriber -- just by including an obviously terrible option to the menu.

If that seems sketchy, though, don't worry. The Economist has changed its pricing model.

http://nowiknow.com/the-decoy-effect/