Is the decoy effect hurting your budget?

Imagine you’re at a restaurant. Three options for a combo meal are small, medium, and large. The large combo is slightly more expensive than the medium, so it is the best value. You’ve likely fallen victim to the decoy effect if you opt for the large combo rather than the medium. 

What is the decoy effect? 

The decoy effect is a psychological phenomenon whereby people are more likely to choose one option over another if a third, less appealing option is also available. In the case of the combo meal, the decoy option is the medium combo. It encourages you to spend more money than otherwise. 

How marketers use the approach to trick you 

Marketers are always looking for ways to trick you into spending more money. One of the most common techniques they’re using is the decoy effect. The decoy product is designed to make the expensive option seem like a better deal by comparison.  

Of course, financially speaking, the best deal is the one closest to what you want for the lowest price. You’re not saving money if you’re paying extra for a product or feature you didn’t want to begin with. But marketers know people will pay more for those “extra” options.  

Overcoming the decoy effect 

You can make better purchasing decisions by being aware of the decoy effect. Marketers commonly use this approach to create the illusion of a good deal. Of course, spending more money than you need is never a good choice for your wallet.  

Here are a few ways to avoid this common marketing gimmick: 

1. Notice when there are three options from which to choose. Usually, one of those is a decoy. 

2. When presented with multiple options, try to identify which is the decoy. Sometimes, it might be better than the cheapest or most expensive option.  

3. Always take the time to evaluate all of your options before making a decision.  

4. Enter each transaction with a general idea of what you’re willing to spend. That way, it’s less likely that you’ll opt for spending more money at the point of purchase. 

5. Think about which characteristics are most important to you in advance. Having a concrete idea of what you want makes it easier to make informed choices. 

Final thoughts on the decoy effect

As with many cognitive biases, being aware of the decoy effect can help you become a more rational consumer. It’s critical to be mindful of the tricks and gimmicks that marketers employ to try to tempt you into spending more money—and the decoy effect is one of the oldest tricks in the book.  

You make thousands of financial decisions over the course of a single year, and your financial health is a reflection of those decisions. Therefore, avoiding cognitive biases and marketing tricks like the decoy effect can significantly impact your financial wellness in the long run.