The Goal Gradient Hypothesis

June 11, 2012

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“The goal-gradient hypothesis describes a 1934 finding in behaviorism: rats running toward a reward (cheese) move progressively faster as they approach their goal. Laboratory tests conducted over the years provided support for the original finding in animals, but until recently there was little empirical evidence of a goal-gradient effect in humans.”

The bias was unconfirmed in humans until recently:

"They looked at the behavior of coffee drinkers participating in a café’s “buy 10 coffees, get 1 free” program and Internet users who rated songs in return for reward certificates. The results showed that the café customers purchased coffee more frequently as they got closer to earning a free coffee. Likewise, the Internet users visited the rating Web site more often, rated more songs per visit and were less likely to terminate a rating session as they approached the incentive threshold.”

“In both programs, participants reduced their level of engagement after achieving their first reward and then accelerated their efforts again as they approached their second reward. Individuals who more strongly accelerated toward their first reward were more likely to quickly reengage in the program. Moreover, the researchers found that illusionary goal progress also induces a higher level of engagement: customers who received a 12-stamp coffee card with two preexisting “bonus” stamps completed the 10 purchases more quickly than those who got a regular 10-stamp card (median completion times were 10 versus 15 days).”

There must be a multitude of ways beyond marketing to exploit this behavioral bias. Should you set short term reachable goals, while picturing yourself closer to the goal than might be true?  From a trading perspective, does one over-trade they begin to approach a goal? Collectively, do prices accelerate when near approaching significant new highs or lows?

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