The Fallacy of Rational Thought

For everyone who is a follower or subscriber to #RobinofTheHood, you know my passion for going out and finding information held by those who enjoy an information delta over the masses, and then bringing that information right back to the masses. One of the things that I personally think is so often missed by the masses is the role emotions play in transactions every day. When you sit in a classroom or just talk to people about any transaction, Rational Thought rules the day. Everyone agrees that the deal will eventually happen or not happen for some perfectly rational reason. There is a belief that if you are selling something, people will purchase it based on its price and their own want/need for the product, but in reality, most of these decisions are driven by many things other than Rational Thought.

John Birrer is one of my great friends and mentors. JB is the kind of guy who is smarter than you and perfectly comfortable with you thinking otherwise. Anyone who knows him knows that if he offers you a $10 bet, no matter how far-fetched the premise, he is probably right, and he has a picture frame full of $10 bills in his office to back that up.

A few months ago, he was doing some spring cleaning and decided to set an old bookcase out on the curb with a sign on it that simply said "FREE." The bookcase was in good shape and of great quality. Unfortunately, after two days, the "FREE" bookcase continued to sit in front of his house. On day 3, John decided he knew exactly what he needed. For the last two days, he was counting on Rational Thought, a totally reasonable belief that a quality bookcase would be snatched up quickly at the low, low price of $0. What John decided to do next was introduce some emotion into the transaction, so he marched out to the curb and replaced the sign that said "FREE" with one that said "$20." In just under 2 hours, the bookcasef disappeared from in front of the house. The same bookcase that no one took for free for 48 hours was "stolen" in 2 hours after JB added some emotion to the transaction. In this case, he anchored a price/value of the product, and the equation changed from "Someone wants me to haul off their junk that isn't worth anything" to "I have a chance to take something that has a value of $20 for free!" I could stop right here in this article. You have learned a great lesson in pricing

(Pro Tip: That lesson is Anchoring—in a pricing context, it refers to the cognitive bias where consumers rely heavily on the first piece of information they receive (the “anchor”) when making decisions. In pricing, this means that the initial price a consumer sees for a product or service can significantly influence their perception of what is a fair or reasonable price.)

Plus I have introduced you to one of the great thinkers on LinkedIn that you didn't know before now in John Birrer , but I want to go a little deeper than this example.

Let's talk about Asymmetrical Domination. I see this pricing strategy every single day. In some ways, it is so common that it could easily not be featured in Robin of The Hood, but the thing that makes it relevant here is that so many people have no idea how it affects their decision-making.

Asymmetrical domination, also known as the “decoy effect,” is a concept in pricing and consumer behavior where the introduction of a third option (the decoy) can influence customers’ choices between two other options.

In a typical scenario, there are two products, A and B, with A being more expensive but of higher quality and B being cheaper but of lower quality. Without a decoy, consumers may be split in their choice between A and B based on their preferences for price versus quality.

When a third option, C, is introduced, it is priced or positioned in such a way that it is clearly inferior to one of the other two options but still comparable. For example, C might be slightly cheaper than A but significantly worse in quality, making A look like a much better deal in comparison. This can lead more consumers to choose A over B, even though they might not have chosen A in a head-to-head comparison with B alone.

In essence, the decoy (option C) is not intended to be purchased; its role is to make one of the original options (often the more expensive one) appear more attractive, thereby increasing the likelihood of that option being chosen.

Scenario: Buying a Subscription Plan

Imagine you’re considering a subscription to an online magazine. The website offers you three pricing options:

1. Basic Plan: $5 per month, digital access only.

2. Premium Plan: $10 per month, digital access + print version delivered monthly.

3. Deluxe Plan: $12 per month, digital access + print version delivered weekly.

In this scenario, the Deluxe Plan acts as the decoy:

- Without the Deluxe Plan:

- You might compare the Basic Plan ($5) with the Premium Plan ($10). If you only need digital access, the Basic Plan seems more appealing due to its lower price.

- With the Deluxe Plan:

- Now, when the Deluxe Plan ($12) is introduced, it makes the Premium Plan ($10) seem like a better deal. For just $2 more than the Premium Plan, you get the print version delivered weekly instead of monthly, but it’s significantly more expensive than the Basic Plan.

- The Premium Plan now appears to offer a great balance of value and cost compared to the other two options. It’s much better than the Basic Plan (for just $5 more) and almost as good as the Deluxe Plan, but much cheaper.

In this case, even if the company doesn’t expect many people to choose the Deluxe Plan, its presence makes the Premium Plan look more attractive, leading more customers to choose it over the Basic Plan, which they might have opted for otherwise.

Remember when you are faced with a negotiation, transaction, or everyday buying decision to do your homework and be as rational as possible, but also account for your emotions and the factor they will ultimately play in the decision to move forward or pass on a deal. Most things in our everyday life have no actual intrinsic value (If you were stranded on a desert island, you would much rather have a bushel of bananas over a crate full of diamonds). The true value is only what someone is willing to pay for it, and willingness will not be ruled solely by rational thoughts.