The Decoy Effect and Choice Architecture
How Decoys Shape Decisions
The decoy effect occurs when adding a third option changes preference between two original options—even though the new option itself is rarely chosen. The decoy is 'asymmetrically dominated'—clearly inferior to one option but not clearly inferior to the other. Its presence makes the dominating option look better.
Classic example: Suppose you're choosing between a $500 basic product and a $1,200 premium product. The decision is difficult—each has merits. Now add a decoy: a $1,100 option with fewer features than the $1,200 premium. Few people choose the $1,100 option—it's obviously worse than the $1,200. But its presence makes the $1,200 option look like a better deal. Sales of the $1,200 premium increase significantly.
Case Study: The Economist Subscription Study Dan Ariely's famous experiment used The Economist's subscription options. Original offerings: Web-only subscription for $59, or Print+Web for $125. Most chose web-only. Then a decoy was added: Print-only for $125—the same price as Print+Web but with less value. Nobody chose print-only; it was obviously inferior to Print+Web at the same price. But its presence dramatically shifted preferences. Now most people chose Print+Web ($125) rather than Web-only ($59). The dominated option made the premium option's value obvious by comparison. The Economist reportedly used this approach intentionally.
Designing Effective Choice Architecture
Choice architecture is the intentional design of how options are presented. Beyond decoys, several principles guide effective design:
Good-Better-Best Structures
Three-tier pricing is popular because it works. The 'good' option establishes a low anchor and captures price-sensitive customers. The 'best' option establishes a high anchor and captures premium seekers. The 'better' option—where you want most customers—benefits from contrast with both extremes.
Design tips for good-better-best
- Make the middle option obviously the best value—not just in price, but in price-to-feature ratio
- Ensure the premium option includes genuinely premium features, not just a higher price
- Price the basic option high enough to be profitable if chosen; some customers will pick it
Limiting Options
Too many choices paralyze customers. The famous 'jam study' found that displays with 24 jam varieties attracted more lookers but displays with 6 varieties generated more purchases. Decision difficulty increases with options, and customers who can't decide often don't buy at all. Generally, 3-5 options is optimal.
Default Settings
Defaults are powerful—people tend to stick with whatever is pre-selected. If your pricing page pre-selects the annual plan, more customers choose annual. If it pre-selects monthly, more choose monthly. Use defaults ethically—select the option that genuinely serves most customers well, not just the option that extracts the most revenue.
Key Takeaways
- Decoys are inferior options that make other options look better by comparison
- Good-better-best structures guide most customers to the middle option
- Too many choices paralyze—3-5 options typically works best
- Defaults powerfully influence selection; use them ethically