Monday, March 28, 2011

Medium Maximization

From Dan Ariely's blog, comes this interesting post on the theory of "medium maximization"Behavioral finance lesson – frequent flyer points?: "

In response to a reader's email on his clients tending to select a financial retail custodian on the basis of which offered more frequent flyer miles, which is an odd way to be sure of making such critical decisions, Dan Ariely offers this interesting concept to explain how people make decisions...
This phenomenon is what we call “medium maximization.”
The basic idea is that often people focus on near term concrete goals (such as frequent flyer miles), and while trying to maximize these immediate and clear goals they forget or discount the real reason for their actions — which in your case is maximizing their financial outcome. (For a great paper on medium maximization see this paper by Chris Hsee)
Why do people engage is such medium maximizations? Because it is easy. It gives people a clear direction for behavior — and just having something measurable within reach can redirect our motivation. Another reason for the efficacy of medium maximization is that such immediate and concrete goals by which to measure ourselves against give us a sense of progression ….

Abstract: A medium--for example, points or money--is a token people receive as the immediate reward of their effort. It has no value in and of itself, but it can be traded for a desired outcome. Experiments demonstrate that, when people are faced with options entailing different outcomes, the presence of a medium can alter what option they choose. This effect occurs because the medium presents an illusion of advantage to an otherwise not so advantageous option, an illusion of certainty to an otherwise uncertain option, or an illusion of linearity to an otherwise concave effort-outcome return relationship. This work has implications for how points influence consumer choice and how money influences human behavior. Copyright 2003 by the University of Chicago.
When applying such a concept to the area of employment, do people sometimes decide to join a company based on the company providing free soft-drinks. Sure it is a perquisite, a convenience, but certainly not one on which an employment decision should be made.