compromise-effect

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:

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

Compromise Effect Vs. Decoy Effect

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 competitor product and a decoy product, which is primarily used to nudge the customer toward the target product.

The decoy effect is a nudge strategy to channel customers toward the desired 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

Connected Thinking Frameworks

Convergent vs. Divergent Thinking

convergent-vs-divergent-thinking
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.

Critical Thinking

critical-thinking
Critical thinking involves analyzing observations, facts, evidence, and arguments to form a judgment about what someone reads, hears, says, or writes.

Systems Thinking

systems-thinking
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

vertical-thinking
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

einstellung-effect
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).

Peter Principle

peter-principle
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.

Straw Man Fallacy

straw-man-fallacy
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.

Streisand Effect

streisand-effect
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.

Heuristic

heuristic
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.

Recognition Heuristic

recognition-heuristic
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.

Representativeness Heuristic

representativeness-heuristic
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.

Take-The-Best Heuristic

take-the-best-heuristic
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.

Biases

biases
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.

Bundling Bias

bundling-bias
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.

Barnum Effect

barnum-effect
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

first-principles-thinking
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.

Ladder Of Inference

ladder-of-inference
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.

Six Thinking Hats Model

six-thinking-hats-model
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.

Second-Order Thinking

second-order-thinking
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

lateral-thinking
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

bounded-rationality
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.

Dunning-Kruger Effect

dunning-kruger-effect
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

occams-razor
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.

Mandela Effect

mandela-effect
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.

Crowding-Out Effect

crowding-out-effect
The crowding-out effect occurs when public sector spending reduces spending in the private sector.

Bandwagon Effect

bandwagon-effect
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.

Read Next: Heuristics, Biases.

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