Jul 20

Here is an email that I got last week from a financial planner:

Dear Dan.

My hourly model lets clients use whatever retail custodian they like.  For various reasons, I tend to recommend the two best as Vanguard and Fidelity.  I go over the pros and the cons for each and, as soon as I mention Fidelity gives 25,000 frequent flyer miles, most clients stop me and choose Fidelity.  Some will move tens of millions to Fidelity in order to get frequent flyer miles that might have a $200 economic value (and I may be generous).  That would be the equivalent of 0.001% on a $20 million portfolio and .01% on a $2 million portfolio.

Any idea why this seems to have more impact than traditional economics might explain?

Curios.

XXX, CFP®, CPA, MBA (name hidden)

Here is my (short) response

Dear XXX,

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 ….

I am not sure whether this should make you more or less appreciative of your clients, but hopefully you can now understand them a bit better.  Or maybe it means that you should start offering them frequent flyer miles?

Irrationally yours

Dan