Definition
Decoy Effect
The decoy effect is a pricing trick where adding a third, deliberately inferior option nudges people toward a more expensive choice they might otherwise have skipped.
Faced with two products, many people pick the cheaper; introduce a third 'decoy' that is clearly worse than the premium option but priced close to it, and suddenly the premium option looks like great value. Subscription tiers, insurance plans and credit-card variants are often structured this way to steer you to the higher-margin choice.
Recognising the decoy effect helps you ignore the planted comparison and evaluate each option on its own merits and against your actual needs. Ask whether you would choose the costlier option if the decoy were not on the menu; often the answer reveals you are being steered.
Related terms
- Anchoring BiasAnchoring bias is the tendency to lean too heavily on the first piece of information you see — the 'anchor' — when making a financial decision, even when that number is irrelevant.
- Framing EffectThe framing effect is the way the same financial information leads to different decisions depending on how it is presented or 'framed'.
- Behavioral FinanceBehavioral finance is the field that studies how psychology and cognitive biases affect the financial decisions of investors and markets, departing from the assumption of perfectly rational actors.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.