Decoy effect

We make decisions based on the principle of relativity and then consider them “rational.”

This also happens when making investment decisions, especially when we use the multiples method in the valuation of organizations.

How does this work in practice?

When we have two organizations with different attributes to compare, it’s difficult to make a comparison. However, if a third organization appears that is comparable to one of the others, we make an irrational decision.

Below in the diagram, A and B are comparable. As soon as -A appears, we conclude that A is better than -A, and we automatically follow that conclusion by thinking that A is better than B.

Of course, you might disagree. But I’ll give an example from a book*: Look at the advertisement from The Economist, where an illusory choice is made because the second and third options offer two different benefits at the same price. What decision do you think most subscribers will make under the influence of such an advertisement?

And if we eliminate the illusory choice, will anything change?

Now, look at the test results:

It appears that the principle of optical illusion works well in the decision-making process too.

Source:

Predictably Irrational: The Hidden Forces That Shape Our Decisions
By Dan Ariely