A BIRD IN HAND OR SOME IN THE BUSHES: AN EXPERIMENTAL STUDY ON THE DECOY EFFECT.

Abstract

The decoy effect is a phenomenon where we can observe a change in preference by adding a decoy option to the existing choice set. Li and Ning (2018) used the foraging theory to explain the occurrence of the decoy effect. They postulate that the decoy effect will manifest when there is ambiguity in the quality of products, and the presence of a decoy option will update the agent’s belief about the distribution of the quality of product. This paper seeks to validate their theory by running an experiment on MTurk. The experimental data showed that a significant proportion of the subject’s preference changed in the presence of a positive signal, suggesting that subjects are updating their beliefs and expectations. For the MPL section of the paper, I also found evidence that supports the finding that low stakes payoff increases MSB and can influence subjects to be less risk-averse.