hey welcome back to pete's behavioral insights and theories aka pete's bits do you like a good deal because i love a good deal but what does it really mean to be a good deal and can companies use what looks like a good deal to trick us into spending more money of course the answer is yes today i'm going to be talking to you about something called the decoy effect it's a pricing strategy used by companies like starbucks apple and mcdonald's to get you to spend more money on their products so if you're excited to find out about the decoy effect please can you do me a massive favor by hitting that big red subscribe button below this video and ringing that notification bell so that you don't miss out on any of my future behavioral science content all right thanks for doing that and let's get on with the video so a few weeks ago my dad sends me this photo which he saw on facebook and he says hey pete what effect is this and this picture of this man selling watermelons which might seem a bit unremarkable at first but i like this photo because it has a nice story that goes along with it an old man was selling his water balance his price list reads one for three dollars and three for ten dollars a young man stopped by and bought three watermelons one by one paying three dollars for each as the young man was walking away he turns around and says hey old man do you realize i just bought three watermelons for nine dollars instead of ten dollars maybe business is not your thing the old man smiled and mumbled himself people are funny every time they buy three watermelons instead of one yet they keep trying to teach me how to do business now the old man here was right he's using a pricing strategy which is used by those big companies i mentioned earlier starbucks mcdonald's apple etc so my dad asks me what effect is this old man using and it turns out he's using the decoy effect and to explain why you're gonna have to stick around to the end of the video after all of the explanations perhaps the most famous example of the decoy effect comes once again from dan ariely dan ariely noticed this effect in the subscription plans available for the economist magazine this is the pricing structure of the economist magazine you could get a web only subscription for 59 a print subscription for 125 or a print and web subscription also for 125 seems suspicious so dan suspected that this could be the decoy effect at play and then that print subscription for 125 was actually there to shift people's preferences so he did an investigation in the first group he only showed people two options the web subscription for 59 and the print and web subscription for 125 dollars and this is what the preferences were 68 of people preferred the cheaper web subscription whereas only 32 percent wanted the print and web subscription for the full 125 but look what happens when we add that third option the print only subscription also for 125 in the second group when there were three options the preferences have switched now only 16 of people want the cheaper web subscription nobody wants the print only subscription for 125 and now a whopping 84 percent of people are choosing the more expensive print and web subscription for 125 now isn't this an interesting effect why would this third option that nobody wants affect people's preferences it doesn't really make much sense imagine ask to give you these three options you could have your web only subscription for 59 you could have your web and print subscription for 125 or you could drink urine why would this third option that obviously nobody wants affect your preferences you wouldn't think that the unwanted third option of drinking urine would affect your decision on whether you want web or web and print subscription but when the third option is very similar to one of the other options but just a little bit worse then it actually shifts our preferences when we have a decoy which is slightly worse than the target the target not only looks more favorable than the decoy but also more favorable than all of its competitors now a lot of successful companies understand this phenomenon and so they use it in their own pricing strategies here's apple's selection for the 13-inch macbook pro now imagine you're choosing between these two laptops you have the cheaper 1500 laptop with the slower processor and half the storage or you can get the 2 000 laptop with the touch bar the faster processor and double the storage which one do you choose it's actually pretty hard to compare the two right there's so many variables and a huge price differential between the two in this scenario i expect the preferences would either be 50 50 or even more people going for the cheaper 1500 laptop because 500 is a lot of extra money to spend on a 13-inch laptop however apple wants you to spend more money so they don't just present these two options they give you a third option they give you this option in the middle it has the touch bar the touch id the faster processor but it only has half the storage of the better one so now when you're presented with these three options for only 200 more you can get all the extra features plus double the storage this middle option is exactly the same as the more expensive option except that it has worse storage and as a result this makes the more expensive laptop look preferable to the decoy but also preferable to the lower power 1500 laptop this middle offering is probably not very popular it's there as a decoy this effect also exists in starbucks coffee which cup size do you go for the tall or the grande perhaps most of us would be content with the size of the tall and the extra money spent on the grande doesn't seem worth it but by adding a venti a far bigger more expensive coffee the grande suddenly seems far more appealing most of us don't need a venti unless you've had a particularly rough night but by having this venti this unpopular larger option suddenly the price jump from tall to grande doesn't seem so dramatic and so you're much more likely to choose the bigger grande coffee and now to an old favorite of mine to discuss mcdonald's so i found this paper on the decoy effect called the perceived value of value meals and i couldn't believe that it's only been cited 12 times because it's absolutely awesome as a paper and it discusses how value meals at fast food restaurants are actually an unintentional decoy the authors argue that by grouping these popular items together in a value meal you then make buying individual components a worse option it's a slightly worse version of buying the better value meal which therefore makes the value meal look more appealing not only than buying in the individual components separately but also more valuable than purchasing any smaller order of food from the fast food restaurant by including a meal deal you actually make the individual components the decoy so maybe you're a business owner and you want to use the decoy effect in your pricing strategy this is how you do it so here's how to make a decoy with pete's bits step one to make a decoy start with two options in the same category step two decide which one you want more customers to buy presumably that's the one which owns you a higher margin step three is make a third option that is just slightly worse than the preferred choice in one dimension it could be a little bit more expensive for virtually the same thing it could be significantly worse than just one key feature but be otherwise exactly the same the key is that has to be worse in just one dimension this will create what we call in psychology the asymmetric dominance effect by making one feature slightly worse than your target you make the target look better not only than the decoy but also better than all of its competitive options in the same category and it turns out the decoy effect even extends outside of pricing illusions in an experiment assessing people's perception of attractiveness there were two computer-generated faces tom and jerry now in the first group there was also a third option a slightly uglier version of jerry and in the second group there was a slightly uglier version of tom now it turns out the decoy effect also applies to human attractiveness when the participants were showing the lineup with a slightly uglier version of jerry jerry is seen as more attractive and when there was a lineup shown with a slightly uglier version of tom tom is more attractive so if you're trying to pick a good wingman you want someone who looks pretty much the same as you but just slightly uglier than you and it turns out the decoy effect even plays into politics here's george bush and barack obama george bush is of course a white republican obama is a black democrat now people really hated george bush in his presidency they really didn't like him but what if we had a decoy now people hate george bush but people really hate donald trump now when you see this lineup of three presidents you see that george bush is basically the slightly less hated version of donald trump they're both white republicans they're the same category and so the polling has shown that since donald trump took office george bush's polling numbers have been steadily increasing ever since and you could attribute this to a kind of political decoy effect so finally we come back to the man with his watermelons but before i explain how he is using the decoy effect if you haven't yet subscribed please can you subscribe and if you enjoyed this video please can you give it a thumbs up i'd really appreciate it so the man in his watermelons are actually very very sneaky you see his prize board looks like there's only two options one for three dollars or three for ten dollars but there's actually a third option in there which is hidden and that's buying three individual watermelons for three dollars each now can you spot which offer is the decoy of course it's the three for ten dollar option by having this terrible option the three for ten dollar watermelons which nobody wants he makes the idea of buying three watermelons for nine dollars seem more appealing it's the worst version of that deal the three for ten dollars is a worse version of the three for nine dollar deal which therefore makes a three for nine dollar deal not only seen better than the three for ten dollar deal but also better than just buying one watermelon for three dollars and as a result the old man has sold two extra watermelons per customer hey so i hope you enjoyed this video i have a link in the description to an article where i got a lot of the information for this video it also tells you how you can defend yourself from companies trying to use the decoy effect to exploit your biases so if you're interested in reading that check out the article below next week we have a pretty spicy topic it's the psychology of racism so if you're interested in finding out about that make sure you're subscribed and that you've rang that notification bell so that you don't miss out on that next video alright thank you guys for watching and i'll see you next week bye