Picture this: You’re lining up at the cinema’s concession stand to purchase popcorn for your movie and you see the following options before you.

Which would you choose?

How about now?

Chances are, you spent at least a short while contemplating whether you should purchase a small or large popcorn when those were your only options. However, when the pricing chart updates with more choices, you are convinced that you’re getting a better deal if you upsize the order and purchase the Large or X-Large popcorn. Sounds familiar right?

That mini ”which one do I choose” moment you just experienced has happened to you many times before. In fact, it even happened to me just a few weeks ago! You don’t really need a whole Large or XL popcorn, but you end up buying it anyway, because it’s a much better deal than the small or medium – a whole lot more for only a few extra dollars.

This phenomenon is referred to as the Decoy or Asymmetrical Dominance Effect and is a common tool used by sales and marketing experts to manipulate you into spending or consuming far more than you would by giving you the impression that you’re getting a ‘better deal’.

The Decoy Effect describes how, when we are choosing between two alternatives, the addition of a third, less attractive option (the decoy – the option added to nudge you towards the target) can influence our perception of the original two choices. 

Decoys are “asymmetrically dominated”: they are completely inferior to one option (the target – the choice the company wants you to make) but only partially inferior to the other (the competitor – the option competing with the target).

In simple words, when there are only two options, we tend to make decisions according to our personal preferences but when we are offered another strategic decoy option, we will be more likely to choose the more expensive of the two original options – focusing on what feels like the more advantageous option.

This can be seen in consumer markets, politics, dating apps and even in financial markets! A study was conducted by Brittany Paris of the University of New Hampshire on how the decoy effect can influence investor decisions.

A first group of investors was offered two stocks:

Stock A: long-term growth of 20% and a dividend yield of 2%.
Stock B: long-term growth of 10% and a dividend yield of 7%.

In this situation, the investors divided their answers according to their personal preferences.

Paris offered a second group three stocks:

Stock A: long-term growth of 20% and a dividend yield of 2%.
Stock B: long-term growth of 10% and a dividend yield of 7%.
Stock C: long-term growth of 15% and a dividend yield of 1%. (The decoy)

This time, most investors chose stock A over stock B.

Why? Well, Stock C was asymmetrically dominated by stock A in both growth and yield. As a result, the decoy effect caused investors to increase the perceived importance of growth over income.

A third group was also offered three stocks but with a different decoy:

Stock A: long-term growth of 20% and a dividend yield of 2%.
Stock B: long-term growth of 10% and a dividend yield of 7%.
Stock D: long-term growth of 8% and a dividend yield of 4.5% (The decoy).

In this scenario, most investors preferred stock B and valued income over growth, due to the attractiveness of stock B in both dimensions (in contrast to stock D).

The introduction of a  third option that is dominated in both dimensions by the target, but only in one dimension by the competition, made the target all the more attractive and influenced investors to choose the target.

Of course, deciding to purchase the upgrade can indeed work out to our benefit, and may be the more economical option, but what about all those instances where we purchase more than we really need and can consume? Over time, falling prey to this can also add up to a big hit on our finances.

Think of that online subscription that you purchased because you saw a good deal, but you rarely use; the car model with extra features that you upgraded to for “marginally extra” than the original model you intended to get; that more expensive phone you purchased because there were a couple extra features (that it turns out you don’t use anyway); or the flights that you purchased because there was a deal on, when you were not even originally intending on travelling anytime soon.

It’s likely possible for us to cut our entertainment and miscellaneous spending budget in half if we paid attention to these little things, giving us more wiggle room in our budget to allocate towards investing, paying off debts, or towards that bucket list vacation you’ve been planning to go on.

So, what should we do to avoid falling victim to the decoy effect? Well, awareness does help but there is more to it than that.

Firstly, figure out what you really want ahead of time. To go back to the example above, if I planned my popcorn choice ahead of time, I would likely have been satisfied with the small or medium and would not have been swayed to upsize. This also ties into another tip…

Ask yourself, “Do I really need subscriptions to all of these services? Do I really need the limited edition case for my Mont Blanc?” Think about the reason you’re buying it instead of the deal presented to you. Will purchasing the more expensive option provide any more utility than the cheaper alternative would? Sometimes yes, but many times no. 

And finally, beware of sets of three! This is when the decoy effect is most effective!