The Compromise Effect And Why It Matters In Business

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.

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:

  1. 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.
  2. 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.
  3. 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 product relative to other products, they make a better decision based on the hierarchical nature of each product in the set.

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

Related Case Studies

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 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.
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.

Read Next: Heuristics, Biases.

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