Transcript Behavioral Economics of Incentives

BEHAVIORAL
ECONOMICS OF
INCENTIVES
SCOTT JEFFREY, PH.D.
MONMOUTH UNIVERSITY
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“What a piece of work is man. How
noble in reason, how infinite in
faculties”
Hamlet, Act II, Scene 2
“What fools these mortals be”
A Mid-summer’s Night’s Dream
Act III, Scene 2
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The economist may attempt to ignore psychology, but it is sheer
impossibility for him to ignore human nature. If the economist
borrows his conception of man from the psychologist, his
constructive work may have some chance of remaining purely
economic in character. But if he does not, he will not thereby avoid
psychology. Rather, he will force himself to make his own, and it
will be bad psychology.
Behavioral Economics:
Good Economics and Good Psychology
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Source: John Maurice Clark, "Economics and Modern Psychology“, Journal of Political Economy 1918
TWO “ACADEMIC” VIEWS OF PEOPLE
• “Econs”: Economists and Decision Scientists
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Self-Interest with guile
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Optimization (max or min some objective function)
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Expected Utility
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Full information (or at least well specified uncertainties)
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Unlimited computational ability
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“Rational” preferences
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Known, Non-transitive, Stable
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TWO “ACADEMIC” VIEWS OF PEOPLE
• “Humans”: Psychologists and Sociologists
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Heuristics (Cognitive Short Cuts)
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Biases (Cognitive Errors)
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Myopic Decision Making
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Changing Preferences often constructed “real time”
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Limited Cognitive Powers
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Poorly behaved utility functions
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Hard to specify arguments to “utility function”
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Fairness, Altruism, Reciprocity
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SCOTT’S SECRETS
1.
Your employees are humans, not econs, although they may want to look
like they make decisions like econs
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DOES THIS SOUND FAMILIAR?
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SOME EVIDENCE
555 Sales People were asked: “If you had the opportunity, would you trade in
your incentive travel for the equivalent cash?”
No: 5%
Yes: 95%
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MORE EVIDENCE
“What is the most motivating reward?”
$1,500 Cash:
79%
$1,500 Travel:
15%
$1,500 Merchandise:
6%
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Source: Incentive Magazine, 1988
REASON BASED CHOICE
• When people are making a decision they like to have a compelling reason for
their choice
•
Justify to others
•
Justify to themselves
• Many different ways to provide these reasons but the presence or absence of
a reason changes behavior
• Choice of Cash much easier to justify
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WHAT DO WE WANT FROM EMPLOYEES?
Choosing?
Striving?
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THE ESSENTIAL PROBLEM
• “Dual Self” problem
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Planner/Doer (Self-Control)
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•
Elephant and Rider
•
•
(Haidt, 2006, Heath and Heath, 2010)
Competing Internal Preferences
•
•
(Thaler & Shefrin, 1981; Adam Smith, 1759)
(Bazerman et al., 1998, Schelling, 1984)
System 1 and System 2
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(Kahneman, 2011)
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ADAM SMITH (BEHAVIORAL ECONOMIST?)
• Adam Smith wrote that all behavior is determined by the struggle between
“the passions” and the “impartial spectator”
• The passions are driven by physical needs and wants such as hunger and sex,
emotions such as fear and anger
• The spectator does not feel the solicitations of our present appetites. To him
the pleasure which we are to enjoy a week hence, or a year hence, is just as
interesting as that which we are to enjoy this moment
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“I’m holding the reins in my
hands, and by pulling one
way or the other I can tell
the elephant to turn, to
stop, or to go. I can direct
things, but only when the
elephant doesn’t have
desires of his own. When
the elephant really wants
to do something, I’m no
match for him.”
Jonathan Haidt, The Happiness Hypothesis
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Everybody behaves like two
people, one who wants clear
lungs and long life and the
other who adores tobacco, or
one who wants a lean body
and the other who wants
dessert …the “straight” one is
often in command…but the
wayward one needing only to
get occasional control to spoil
the other’s best laid plans.
Thomas Schelling, Choice and Consequence: Perspectives of
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an Errant Economist.
SYSTEM 1 AND SYSTEM 2
• System 1:
• System 2:
• Fast
• Slow
• Emotional
• Cognitive
• Effortless
• Deliberative
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Participants in a survey study told they won a lottery and had a choice of prize
Majority of participants would
choose the cockroaches
2.0 oz. of chocolate
0.5 oz. of chocolate
Majority of participants would feel
better eating the heart
Source: Hsee, C.K. 1999. Psychonomic Bulletin and Review
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EFFORT VS. CHOICE
If you worked at a company where the top 5% of sales
people had a choice of cash or a trip to Hawaii, which
option would you choose?
Hawaii: 17%
Cash: 83%
If you worked at a company where the top 5% of sales
people earned _____, how much effort would you
expend (7 point scale)?
Hawaii: 4.7
Cash: 3.8
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LAB EXPERIMENT
•
63 University of Chicago Staff Members
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Played a “Word Prospector” word game twice
•
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Raw difference in scores used as dependent measure
3 Incentive conditions given to separate groups
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No Incentive
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Monetary Incentive
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Non-Monetary incentive
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Source: Jeffrey, S.A. 2009. Justifiability and the Motivational Power of Noncash Incentives, Human Performance, 22. 143-155.
PERFORMANCE REWARDS
Hedonic prizes for non-monetary with stated market values as monetary prizes
at multiple performance levels.
Relative
Performance Level
Non-Monetary
Award
Monetary
Award
No Award
Top 5%
1 Hour
Massage
$100.00
Thank you!
Next 20%
20 minute
massage
$30.00
Thank you!
Next 30%
5 minute
massage
$10.00
Thank you!
Next 30%
Fancy Candy
Bar
$2.00
Thank you!
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36.4%
STATED PREFERENCE
“I would prefer to receive the cash value of the
prize rather than the prize itself”
18.2%
9.1%
13.6%
13.6%
5
6
9.1%
0.0%
1
Strongly
Disagree
2
3
Disagree
4
Neither
Agree Nor
Disagree
Agree
7
Strongly
Agree
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PERFORMANCE UPLIFT
38.6%
14.6%
Cash
Tangible
Relative to No Incentive
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SCOTT’S SECRETS
2.
Be careful what you are asking and that you know how to interpret the
response.
3.
Choice is sometimes inconsistent with value
4.
Companies should be more concerned with performance (valuation) than
preference (choice)
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MORE EVIDENCE
• 156 working professionals in a semi-conductor factory
• Three types of short term performance bonuses
•
100 NIS ($25)
•
Voucher for pizza
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Choice of reward
•
Verbal reward
• Measured performance in pursuit of incentive and after receipt of incentive
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Source: Bareket-Bojmel, Hocman, and Ariely. Fortcoming. It’s (not) all about the Jacksons: Testing different types of short
term bonuses in the field, Journal of Management.
MORE EVIDENCE
• 72% of employees in choice condition chose cash
• Uplift from base productivity
•
Cash: 4.6%
•
Pizza: 6.7%
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Verbal Recognition: 6.6%
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Choice: 4.6%
• Differences not statistically significant
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MORE EVIDENCE
• After Bonus Removal:
•
•
Cash:
•
-13.2% relative to first day
•
-6.5% relative to base productivity
Pizza:
•
-8.7% relative to first day
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-2.1% relative to base productivity
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MORE EVIDENCE
• After Bonus Removal:
•
•
Verbal Recognition
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-5.9% relative to first day
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+0.64% relative to baseline productivity
Choice
•
-5.9% relative to first day
•
+0.2% relative to baseline productivity
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WHAT ABOUT GIFT CARDS?
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BAD NEWS ON GIFT CARDS
Percentage of Total Spend
25.0
• Recipients spend gift
cards much like they
spend income from
other sources
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$2.7M of $8.3M
taken out as cash
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People do not
purchase “luxury”
items
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“Hedonicity”
Score: 3.21 Cash,
3.28 Card
20.0
Cash
Card
15.0
10.0
5.0
0.0
Enterntainment
Food Away from
Home
Food at Home
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Source, Mu and Jeffrey, Unrestricted Gift Cards: Compensation, not Recognition,
Apparel and
Services
Household
Furnishings
Personal Care
Products
Alcoholic
Beverages
Household
Operations
Housekeeping
Supplies
MORE BAD NEWS
• Research has shown “monetized” non-cash rewards act much like cash
•
Moves from “social exchange” to “economic exchange”
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Source: Heyman and Ariely, 2004. Effort and payment: A tale of two markets, Psychological Science, 15 (11), 787-793.
SUMMING UP….
• Your employees are “human” and are susceptible to all the limitations
associated with being human.
•
We are each “Two people” competing for control. Reach the right one
• Choice and the decision to exert effort are driven by different psychological
processes
•
Just because they state a preference for cash does not mean it is the best incentive
•
Be careful what you ask and that you understand what the response means
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SUMMING UP
• Cash incentives can have negative effects on the social relationship with
employees
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They move relationship into the “money for service” domain
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Can also crowd out intrinsic motivation to do a good job
• Gift cards are NOT tangible incentives, they are just like cash
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Monetizing “gifts” makes them behave like cash
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Be honest with yourself, gift cards are really just a convenient method for
distributing cash
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Gift cards may be “efficient” but they are not as effective as other recognition
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