Decoy Effect

Decoy effect is a cognitive bias defined by Wikipedia as a situation in which preferences for either option A or B change in favor of option B when option C is presented, which is completely dominated by option B (inferior in all respects) and partially dominated by option A.

Investors will find a deal more attractive when additional deals of lesser quality are presented at the same time.

During pitch sessions, investors change their preferences based on the quality of deals shown as the session proceeds.

An inferior deal will make a previous pitch look more attractive.

Investors subconsciously compare each deal to the others in the lineup and choose the best one among them.

As an investor, it’s important to maintain an absolute criteria rather than a relative one.

Criteria such as revenue levels, team experience, and target growth rates will help you avoid selecting the best deal in a group as that deal may fall below the investor’s standards.

 

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