I've heard about this before. The person who was telling me about it said that in almost all cases the C-level person they were dealing with would choose the "hairy arm". Had an unintended way of backfiring frequently.
Yes. That is where the term comes from... but it encompasses the practice of using an intentionally "wrong" option.
From the linked article:
"FREASE: Exactly. And it's funny I'm saying this but yeah. You know, it happens. Everybody does it. Like, for example, I worked with - 10 years ago - I worked - we did these logos for a famous musician. And they had a lot of people working for them and a lot of voices. And after working with them for a couple weeks, we realized that they hated the color blue. So if we showed them three logos, we would show the ones we loved. And then, we'd do one that they wanted, but we'd put it in the color blue."
In this scenario, the "hairy arm" could also be considered a way of "thinking out of the box", of trying something that's totally outside how you normally create. Maybe the novelty inherent in that was attractive to the clients, if the work really was considered "bad" and not just different.