The Attraction Effect in Crowdfunding

Abstract

Crowdfunding has reached enormous popularity among entrepreneurs, yet many struggle to fund their projects. For example, only 39.8% of all Kickstarter projects get funded. Why? Entrepreneurs need to set a predefined funding goal, which needs to be reached to get the project funded. If not reached, they do not get the money. To reach the funding goal, entrepreneurs can design reward menus from which backers can choose low-priced to high-priced rewards to support a given project. We show that simply inserting a so-called decoy option—an option in the first place that does not make sense but makes higher-priced options more attractive—can lead to significantly more backers choosing a high-priced option (up to 28% more high-priced choices). This makes it more likely for entrepreneurs to reach their predefined funding goals and thus start their designated projects.