You’d probably say: “Yeah, yeah, I know. They are equal, but the right one looks larger because it’s surrounded by smaller circles.”
You’re right. But, did you know that logical illusions, similar to the above visual illusion, lead us towards wrong decisions in our daily life? Let's look at a classic example from Dan Ariely's book, Predictably Irrational.
The following two options are presented to people who are interested in The Economist articles:
- The Economist subscription to access website: $59/year
- The Economist subscription to paper edition and website: $120/year
Experiments show that the ratio of people who selected the second option sharply increases when the following option (called decoy) is added to the list:
- The Economist subscription to paper edition: $120/year
Why? Here is the answer: In the first scenario, people are forced to decide in absolute terms: “Do I usually read articles online, or on paper? Do I really need both?” In the second scenario, the added option provides people with an opportunity to decide relatively: “oh, look at options 2 and 3. Definitely, option 2 is a sweet deal!”
In this example, the decoy has the same role as the small blue circles surrounding the orange circle on the right to make it look bigger (more valuable).
When a decision-maker is incapable of evaluating the real value of an option, he takes the relative decision making shortcut. On the other hand, we can achieve high quality decisions by taking some more time to take out the noise - wipe out the blue circles - and evaluate options in absolute terms. This way, we keep the relative decision making for the situation where saving time is more important than the quality of the decision.
Now, imagine how lame the decisions would be in an environment where most of decision-makers are using relative decisions. A good example is the stock market. The trading decisions are all logical; however, the logic is usually used to find out how much a stock values compared to other stocks which, ironically, are evaluated by the same logic! Few traders evaluate the stock itself – Most people are distracted by blue circles instead of concentrating on orange centers.
