A visitor to the website of the The Economist magazine several years ago who clicked on the subscribe link would have been presented with an advertisement.
Which would you choose?
Before continuing, take a minute to make your decision. Don't deliberate too long—use your judgment and record your choice.
This scenario was used as the basis of an experiment conducted by Dan Ariely—professor, researcher, author, and entrepreneur. The results are described in Ariely's book, Predictably Irrational, and what they reveal about decision making is fascinating!
How Do People Behave?
Ariely's experimental group consisted of one hundred MBA students at the MIT Sloan School of Management. When presented with the three offers, 84% selected the print-and-Internet subscription for $125. Not a single individual selected the print-only subscription for $125, which Ariely calls the "decoy."
The experiment was run again but this time with the decoy removed. Interestingly the percentages reversed. Selection of the print-and-Internet subscription declined sharply to 32% and the majority (68%) selected the print-only subscription for $59. Why would this be? Why would removing an option that no one selected cause decision making behavior to change so drastically?
Ariely contends that people are constantly comparing the relative advantage of the choices they are presented with as is there is no absolute measure available to assess the value of a single option in isolation. In this experiment, individuals had a hard time deciding whether the print-and-Internet subscription was valuable enough to justify paying more than twice as much as the Internet edition alone. In comparison, it is trivially easy to conclude that the print-and-Internet subscription for $125 is superior to receiving only the print subscription for the same price. It is as if you are getting the Internet version for free.
When the decoy is introduced the mind subconsciously substitutes the easier comparison between print-only and print-and-Internet, both priced at $125, for the more difficult comparison between print-only for $59 and print-and-Internet for $125. This mental shortcut results in the vast majority opting for print-and-Internet. If the decoy is removed and the shortcut is not available most people select the less expensive option of Internet-only for $59. Introduction of an inferior third option that no one prefers drastically alters decision making when it should have no effect.
These results are fascinating because they contradict the long held belief of economists that individuals are "rational agents." In standard economic theory the individual is assumed to "take account of available information, probabilities of events, and potential costs and benefits in determining preferences, and to act consistently in choosing the self-determined best choice of action."1 As this experiment demonstrates people's behavior is not only irrational but predictably irrational.
Have you encountered this dilemma?
I certainly have, particularly when making digital purchases online in which offers I'm unacquainted with vary significantly in price. It is difficult to decide whether the value of the premium product or service is worth exchanging an even greater amount of money for. After much deliberation you purchase the higher priced option believing you have made a rational judgment: you are receiving more value for your money. In reality your subconscious mind is making an easier decision that has little to do with comparing the perceived value of the high and low price options.
By Chance or Design?
"...individuals engage in consumption- related cognition, motivation, decision making, emotion, and behavior without recognizing the role that nonconscious processes played in shaping them." —Tanya L. Chartrand, Gavan J. Fitzsimons2
This experience is the result of a strategic effort by marketers to construct buying decisions that increase the probability a consumer will select the option the retailer prefers. A relatively new field known as neuromarketing research has emerged over the past two decades with the promise of applying neuroscience principles to marketing. By leveraging what has been learned about human behavior, neuromarketing research helps marketers produce ads that increase the chance of changing behavior by inciting the nonconscious mind. Tanya Chartrand, Professor of Psychology and Neuroscience at Duke University, defines nonconscious consumer psychology as "behavior that is driven by processes that occur outside a consumer's conscious awareness."2
This intersection of online shopping, advertising, neuroscience, and behavioral economics has its roots in the decades of research conducted by Amos Tversky and Daniel Kahneman on behavioral psychology and behavioral economics, which is summarized in Thinking, Fast and Slow. Their studies revealed that these errors in judgment or decision making, or cognitive biases, result from the mind's use of shortcuts, or heuristics. The decoy effect described earlier is just one of many cognitive biases. It is worth noting that not all heuristics lead to poor decisions. In many contexts they are a beneficial strategy employed by the mind to quickly and efficiently make the right decision.
Can we do anything about it?
Our mind is constantly comparing things in relative way. It helps us efficiently make decisions in life—print versus digital subscriptions, one house versus another house, one car versus another car, or one romantic partner versus a different one. While it is fairly easy to understand the way one option is compared relative to another option, there are nonconscious processes that can cause mistakes in judgment without us even realizing it. When presented with a difficult buying decision the mind will look for ways to shortcut the decision making process by comparing things that are easily comparable and avoiding things that are difficult to compare.
The first step is awareness. Think critically about how the advertisement and pricing is constructed. If there is a decoy eliminate it and review the remaining choices a few hours later to see if your preferences change. Secondly, try to think broadly when making the decision. Rather than only considering the options presented by the marketer compare the amount of money being spent with what else you could buy for the same amount. Is the value you are getting worth what you are paying?
Whenever you are making a nontrivial buying decision keep in mind that advertisers are aware of our predictably irrational decision making and will construct buying choices to take advantage of it.