Single-attribute choices – such as choosing the apartment with the lowest rent – are relatively simple. However, most of the decisions consumers make are based on multiple attributes which complicate the decision-making process. The compromise effect states that a consumer is more likely to choose the middle option of a set of products over more extreme options.
Table of Contents
Understanding the compromise effect
Consumers are faced with a multitude of choices every day. Single-attribute choices – such as choosing the apartment with the lowest rent – are relatively simple.
However, most of the decisions consumers make are based on multiple attributes which complicate the decision-making process.
For example, selecting a rental apartment can also be based on commute time and the availability of off-street parking.
Should the consumer choose an apartment that is close to work or school? Should they sell their car and choose the option without parking? Or should they choose based on price only?
Traditional rational choice theory argues that consumers will make the decision that yields the most value.
But research has shown the theory is not always applicable in complex decision-making situations.
Consumers find it difficult to assess or compare the relationship between various attributes which hinders their ability to make a rational decision.
This is where the compromise effect is useful.
Instead of making an extreme decision based on one option only, the apartment searcher compromises by choosing a mediocre option in the middle.
For example, they may choose an apartment within their price range but with a long commute time and a lack of off-street parking.
Conversely, they may choose an apartment with a short commute time but compromise by paying more rent.
Note that the mediocre option does not necessarily mean it is inferior.
Businesses can also use this tendency for consumers to select a mediocre option by offering two extremes.
In truth, this tactic is employed everywhere.
Car dealerships always offer a budget, mid-range, and premium model line.
Liquor stores offer cheap wine on the bottom shelf grading to more expensive wine on the top shelf.
Mattress companies offer three versions of the same mattress with various added features.
What causes the compromise effect?
Various theories have been put forth on what causes the compromise effect by scholars.
Here are some common perspectives:
The perspective of seeking reasons
Some believe consumers unable to choose between products with various attributes are seeking to reduce conflict and dissonance.
By providing a valid reason for their own choice, it is thought consumers can then justify their choices to others and be positively judged.
The perspective of loss aversion
There is often uncertainty around the consequences of making a decision and also the future consequences once it has been made.
Here, the compromise effect helps consumers choose an option they believe will minimize potential errors.
These options are commonly the safest option a consumer will regret making the least.
Furthermore, the attractiveness of an option if it is the middle option between two extremes is enhanced.
By extension, the attractiveness of the extreme options is reduced because they represent more risk.
The perspective of rational decision-making
While this article makes the distinction between rational decision-making theory and the compromise effect, some scholars argue the two phenomena are linked.
In other words, the compromise effect is a form of rational inference made by consumers based on market data.
More specifically, these inferences are based on commodity information provided by the market to predict product utility.
When a consumer understands a productrelative to other products, they make a better decision based on the hierarchical nature of each product in the set.
Compromise Effect Vs. Decoy Effect
The decoy effect is a psychological phenomenon where inferior – or decoy – options influence consumer preferences. Businesses use the decoy effect to nudge potential customers toward the desired target product. The decoy effect is staged by placing a competitorproduct and a decoy product, which is primarily used to nudge the customer toward the target product.
When the customer is not opting for the target option, it might be that the compromise effect is taking action, so you know that you need to tweak your strategy to generate less friction in the customer’s mind when it comes to picking up the options with the most perceived value.
In short, when you use the decoy effect, you can channel customers toward a product or package.
When customers instead go for the middle-value option, it means there is still too much friction or the value proposition of the targeted option is not as straightforward as you thought.
Key takeaways
The compromise effect argues a consumer is more likely to choose the middle option in a product set over more extreme options.
The compromise effect is most applicable in situations where a consumer has to compare multiple attributes for a single decision. An inability to compare these attributes effectively leads to the selection of a mediocre (though not necessarily inferior) option.
Research suggests the compromise effect is caused by several factors. Some argue the effect helps consumers reduce internal conflict and enables them to better explain their choices to others. Other scholars believe the effect is primarily a risk mitigation strategy.
Key Highlights
Complex Decision-Making: Most consumer decisions involve multiple attributes, making the decision-making process more complicated. For instance, choosing a rental apartment might involve factors like price, commute time, and parking availability.
Rational Choice Theory: Traditional rational choice theory suggests that consumers make decisions that maximize value. However, this theory doesn’t always hold in complex decision-making situations.
Compromise Effect: The compromise effect suggests that consumers are more likely to choose a middle option when faced with a set of products with varying attributes. This middle option is a compromise between extreme choices.
Mediocre Middle Option: The compromise effect doesn’t mean choosing an inferior option. Instead, consumers choose an option that may not excel in any single attribute but represents a balanced compromise.
Business Strategy: Businesses can leverage the compromise effect by offering extreme options along with a compromise option. This strategy nudges consumers toward the middle option, which is often more desirable due to its balanced attributes.
Perspectives on Causes: Scholars have proposed various perspectives on what causes the compromise effect:
Seeking Reasons: Consumers may choose the compromise option to reduce internal conflict and justify their choices to others.
Loss Aversion: The compromise option is seen as minimizing potential errors and regrets, especially compared to extreme choices.
Rational Decision-Making: Some scholars link the compromise effect to rational decision-making, suggesting that consumers infer utility based on market data.
Comparison to Decoy Effect: The decoy effect is another psychological phenomenon where inferior options influence consumer preferences. Businesses use the decoy effect to nudge customers toward the desired target product. The compromise effect and the decoy effect can both affect consumer decisions, but they operate in slightly different ways.
Convergent thinking occurs when the solution to a problem can be found by applying established rules and logical reasoning. Whereas divergent thinking is an unstructured problem-solving method where participants are encouraged to develop many innovative ideas or solutions to a given problem. Where convergent thinking might work for larger, mature organizations where divergent thinking is more suited for startups and innovative companies.
The concept of cognitive biases was introduced and popularized by the work of Amos Tversky and Daniel Kahneman in 1972. Biases are seen as systematic errors and flaws that make humans deviate from the standards of rationality, thus making us inept at making good decisions under uncertainty.
Second-order thinking is a means of assessing the implications of our decisions by considering future consequences. Second-order thinking is a mental model that considers all future possibilities. It encourages individuals to think outside of the box so that they can prepare for every and eventuality. It also discourages the tendency for individuals to default to the most obvious choice.
Lateral thinking is a business strategy that involves approaching a problem from a different direction. The strategy attempts to remove traditionally formulaic and routine approaches to problem-solving by advocating creative thinking, therefore finding unconventional ways to solve a known problem. This sort of non-linear approach to problem-solving, can at times, create a big impact.
Bounded rationality is a concept attributed to Herbert Simon, an economist and political scientist interested in decision-making and how we make decisions in the real world. In fact, he believed that rather than optimizing (which was the mainstream view in the past decades) humans follow what he called satisficing.
The Dunning-Kruger effect describes a cognitive bias where people with low ability in a task overestimate their ability to perform that task well. Consumers or businesses that do not possess the requisite knowledge make bad decisions. What’s more, knowledge gaps prevent the person or business from seeing their mistakes.
Occam’s Razor states that one should not increase (beyond reason) the number of entities required to explain anything. All things being equal, the simplest solution is often the best one. The principle is attributed to 14th-century English theologian William of Ockham.
The Lindy Effect is a theory about the ageing of non-perishable things, like technology or ideas. Popularized by author Nicholas Nassim Taleb, the Lindy Effect states that non-perishable things like technology age – linearly – in reverse. Therefore, the older an idea or a technology, the same will be its life expectancy.
Antifragility was first coined as a term by author, and options trader Nassim Nicholas Taleb. Antifragility is a characteristic of systems that thrive as a result of stressors, volatility, and randomness. Therefore, Antifragile is the opposite of fragile. Where a fragile thing breaks up to volatility; a robust thing resists volatility. An antifragile thing gets stronger from volatility (provided the level of stressors and randomness doesn’t pass a certain threshold).
Systems thinking is a holistic means of investigating the factors and interactions that could contribute to a potential outcome. It is about thinking non-linearly, and understanding the second-order consequences of actions and input into the system.
Vertical thinking, on the other hand, is a problem-solving approach that favors a selective, analytical, structured, and sequential mindset. The focus of vertical thinking is to arrive at a reasoned, defined solution.
Maslow’s Hammer, otherwise known as the law of the instrument or the Einstellung effect, is a cognitive bias causing an over-reliance on a familiar tool. This can be expressed as the tendency to overuse a known tool (perhaps a hammer) to solve issues that might require a different tool. This problem is persistent in the business world where perhaps known tools or frameworks might be used in the wrong context (like business plans used as planning tools instead of only investors’ pitches).
The Peter Principle was first described by Canadian sociologist Lawrence J. Peter in his 1969 book The Peter Principle. The Peter Principle states that people are continually promoted within an organization until they reach their level of incompetence.
The straw man fallacy describes an argument that misrepresents an opponent’s stance to make rebuttal more convenient. The straw man fallacy is a type of informal logical fallacy, defined as a flaw in the structure of an argument that renders it invalid.
The Streisand Effect is a paradoxical phenomenon where the act of suppressing information to reduce visibility causes it to become more visible. In 2003, Streisand attempted to suppress aerial photographs of her Californian home by suing photographer Kenneth Adelman for an invasion of privacy. Adelman, who Streisand assumed was paparazzi, was instead taking photographs to document and study coastal erosion. In her quest for more privacy, Streisand’s efforts had the opposite effect.
As highlighted by German psychologist Gerd Gigerenzer in the paper “Heuristic Decision Making,” the term heuristic is of Greek origin, meaning “serving to find out or discover.” More precisely, a heuristic is a fast and accurate way to make decisions in the real world, which is driven by uncertainty.
The recognition heuristic is a psychological model of judgment and decision making. It is part of a suite of simple and economical heuristics proposed by psychologists Daniel Goldstein and Gerd Gigerenzer. The recognition heuristic argues that inferences are made about an object based on whether it is recognized or not.
The representativeness heuristic was first described by psychologists Daniel Kahneman and Amos Tversky. The representativeness heuristic judges the probability of an event according to the degree to which that event resembles a broader class. When queried, most will choose the first option because the description of John matches the stereotype we may hold for an archaeologist.
The take-the-best heuristic is a decision-making shortcut that helps an individual choose between several alternatives. The take-the-best (TTB) heuristic decides between two or more alternatives based on a single good attribute, otherwise known as a cue. In the process, less desirable attributes are ignored.
The bundling bias is a cognitive bias in e-commerce where a consumer tends not to use all of the products bought as a group, or bundle. Bundling occurs when individual products or services are sold together as a bundle. Common examples are tickets and experiences. The bundling bias dictates that consumers are less likely to use each item in the bundle. This means that the value of the bundle and indeed the value of each item in the bundle is decreased.
The Barnum Effect is a cognitive bias where individuals believe that generic information – which applies to most people – is specifically tailored for themselves.
First-principles thinking – sometimes called reasoning from first principles – is used to reverse-engineer complex problems and encourage creativity. It involves breaking down problems into basic elements and reassembling them from the ground up. Elon Musk is among the strongest proponents of this way of thinking.
The ladder of inference is a conscious or subconscious thinking process where an individual moves from a fact to a decision or action. The ladder of inference was created by academic Chris Argyris to illustrate how people form and then use mental models to make decisions.
Goodhart’s Law is named after British monetary policy theorist and economist Charles Goodhart. Speaking at a conference in Sydney in 1975, Goodhart said that “any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes.” Goodhart’s Law states that when a measure becomes a target, it ceases to be a good measure.
The Six Thinking Hats model was created by psychologist Edward de Bono in 1986, who noted that personality type was a key driver of how people approached problem-solving. For example, optimists view situations differently from pessimists. Analytical individuals may generate ideas that a more emotional person would not, and vice versa.
The Mandela effect is a phenomenon where a large group of people remembers an event differently from how it occurred. The Mandela effect was first described in relation to Fiona Broome, who believed that former South African President Nelson Mandela died in prison during the 1980s. While Mandela was released from prison in 1990 and died 23 years later, Broome remembered news coverage of his death in prison and even a speech from his widow. Of course, neither event occurred in reality. But Broome was later to discover that she was not the only one with the same recollection of events.
The bandwagon effect tells us that the more a belief or idea has been adopted by more people within a group, the more the individual adoption of that idea might increase within the same group. This is the psychological effect that leads to herd mentality. What in marketing can be associated with social proof.
Moore’s law states that the number of transistors on a microchip doubles approximately every two years. This observation was made by Intel co-founder Gordon Moore in 1965 and it become a guiding principle for the semiconductor industry and has had far-reaching implications for technology as a whole.
Disruptive innovation as a term was first described by Clayton M. Christensen, an American academic and business consultant whom The Economist called “the most influential management thinker of his time.” Disruptive innovation describes the process by which a product or service takes hold at the bottom of a market and eventually displaces established competitors, products, firms, or alliances.
Value migration was first described by author Adrian Slywotzky in his 1996 book Value Migration – How to Think Several Moves Ahead of the Competition. Value migration is the transferal of value-creating forces from outdated business models to something better able to satisfy consumer demands.
The bye-now effect describes the tendency for consumers to think of the word “buy” when they read the word “bye”. In a study that tracked diners at a name-your-own-price restaurant, each diner was asked to read one of two phrases before ordering their meal. The first phrase, “so long”, resulted in diners paying an average of $32 per meal. But when diners recited the phrase “bye bye” before ordering, the average price per meal rose to $45.
Groupthink occurs when well-intentioned individuals make non-optimal or irrational decisions based on a belief that dissent is impossible or on a motivation to conform. Groupthink occurs when members of a group reach a consensus without critical reasoning or evaluation of the alternatives and their consequences.
A stereotype is a fixed and over-generalized belief about a particular group or class of people. These beliefs are based on the false assumption that certain characteristics are common to every individual residing in that group. Many stereotypes have a long and sometimes controversial history and are a direct consequence of various political, social, or economic events. Stereotyping is the process of making assumptions about a person or group of people based on various attributes, including gender, race, religion, or physical traits.
Murphy’s Law states that if anything can go wrong, it will go wrong. Murphy’s Law was named after aerospace engineer Edward A. Murphy. During his time working at Edwards Air Force Base in 1949, Murphy cursed a technician who had improperly wired an electrical component and said, “If there is any way to do it wrong, he’ll find it.”
The law of unintended consequences was first mentioned by British philosopher John Locke when writing to parliament about the unintended effects of interest rate rises. However, it was popularized in 1936 by American sociologist Robert K. Merton who looked at unexpected, unanticipated, and unintended consequences and their impact on society.
Fundamental attribution error is a bias people display when judging the behavior of others. The tendency is to over-emphasize personal characteristics and under-emphasize environmental and situational factors.
Outcome bias describes a tendency to evaluate a decision based on its outcome and not on the process by which the decision was reached. In other words, the quality of a decision is only determined once the outcome is known. Outcome bias occurs when a decision is based on the outcome of previous events without regard for how those events developed.
Hindsight bias is the tendency for people to perceive past events as more predictable than they actually were. The result of a presidential election, for example, seems more obvious when the winner is announced. The same can also be said for the avid sports fan who predicted the correct outcome of a match regardless of whether their team won or lost. Hindsight bias, therefore, is the tendency for an individual to convince themselves that they accurately predicted an event before it happened.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
