By Ryan Pak, New York University Stern School of Business
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The decoy effect arises when a firm offers a product that is clearly inferior to another product in order to drive sales of the latter. This phenomenon has been displayed experimentally in many different situations, but remains understudied theoretically. We develop a model of almost rational consumer choice, with a single behavioral tendency — regret aversion. Continue reading BLOG: The Decoy Effect and Risk Aversion