The Frontal Cortex

Incentives

Barry Schwartz has a very interesting op-ed in the Times. It’s about the psychology of incentives, and the mistaken assumptions of economic theory. Simply put, economists assume that people are selfishly rational agents, which means that we should be extremely responsive to external incentives (like cash rewards). But such assumptions are dangerously oversimplified:

New York City has decided to offer cash rewards to some students based on their attendance records and exam performance. Diligent, high-achieving seventh graders will be able to earn up to $500 in a year. The plan is the brainchild of Roland G. Fryer, an economist who has been appointed as “chief equality officer” of the city’s Department of Education.

The assumption that underlies the project is simple: people respond to incentives. If you want people to do something, you have to make it worth their while. This assumption drives virtually all of economic theory.

The logic of the plan reveals a second assumption that economists make: the more motives the better. Give people two reasons to do something, the thinking goes, and they will be more likely to do it, and they’ll do it better, than if they have only one. Providing some cash won’t disturb the other rewards of learning, rewards that are intrinsic to the process itself. They will only provide a little boost. Mr. Fryer’s reward scheme is intended to add incentives to the ones that already exist.

Unfortunately, these assumptions that economists make about human motivation, though intuitive and straightforward, are false. In particular, the idea that adding motives always helps is false. There are circumstances in which adding an incentive competes with other motives and diminishes their impact. Psychologists have known this for more than 30 years.

In one experiment, nursery school children were given the opportunity to draw with special markers. After playing, some of the children were given “good player” awards and others were not. Some time later, the markers were reintroduced to the classroom. The researchers kept track of which children used the markers, and they collected the pictures that had been drawn. The youngsters given awards were less likely to draw at all, and drew worse pictures, than those who were not given the awards.

Why did this happen? Children draw because drawing is fun and because it leads to a result: a picture. The rewards of drawing are intrinsic to the activity itself. The “good player” award gives children another reason to draw: to earn a reward. And it matters — children want recognition. But the recognition undermines the fun, so that later, in the absence of a chance to earn an award, the children aren’t interested in drawing.

Similar results have been obtained with adults. When you pay them for doing things they like, they come to like these activities less and will no longer participate in them without a financial incentive. The intrinsic satisfaction of the activities gets “crowded out” by the extrinsic payoff.

An especially striking example of this was reported in a study of Swiss citizens about a decade ago. Switzerland was holding a referendum about where to put nuclear waste dumps. Researchers went door-to-door in two Swiss cantons and asked people if they would accept a dump in their communities. Though people thought such dumps might be dangerous and might decrease property values, 50 percent of those who were asked said they would accept one. People felt responsibility as Swiss citizens. The dumps had to go somewhere, after all.

But when people were asked if they would accept a nuclear waste dump if they were paid a substantial sum each year (equal to about six weeks’ pay for the average worker), a remarkable thing happened. Now, with two reasons to say yes, only about 25 percent of respondents agreed. The offer of cash undermined the motive to be a good citizen.

Comments

  1. #1 MattXIV
    July 3, 2007

    I don’t find Schwartz’s argument particularly persuasive.

    First off, he cherry picks two examples of odd responses to incentives from the thousands of examples of normal response to incentives we see and experience personally every day. I got up to go to work today because of a monetary incentive. I didn’t speed on the way to work today because of a monetary incentive. I didn’t eat lunch at a fancy resturant because of a monetary incentive. People are generally very responsive to monetary incentives.

    The first example he gives is of dubious relevance because the incentives for education persist and become even clearer as time goes on. Also, he leaves the description of the behavior of the group that participated but did not receive an award out, which is necessary to interpret the other part of the results. He also excludes the two obvious explainations for adults growing less interested in doing things they are compensated for for free, namely 1) participation in an activity has diminishing returns which the hobbyist is free to stop upon meeting while the employee is expected to continue to labor on in the face of and 2) the information about potential compensation makes holding out on performing an activity until a chance to be compensated for it arises more attractive.

    The second example is a great demonstration of how different starting offers in negotiations can result in different outcomes when there is asymetric information. When the offer-maker reveals a starting point, they’re telling you a bit about what they think about the relative values of something. Some advertisers not only know about this, they exploit it by falsely signalling that they’re relucant to sell at the given price or to sell above a certain quanity – TV ads for collectable plates and coins and such are doing exactly this when they specify “Limit 3″. In this case, the offer of compensation signals that there is some risk that needs to be offset, while the lack of compensation signals that the risk is negligible. It’s also worth noting that what people say and what they will do are two different things, especially on an issue where an appeal was being made to someone’s sense of duty or justice.

    Finally, the reason to offer immediate incentives is largely that the incentives for doing well in school are very long term and consequently get discounted to below their present value, so offering an immediate incentive can offset the discounting of future incentives. And his worry about a love of learning being lost is largely bull. For most people, knowledge does seem to be purely instrumental – they only seek it out when it is useful to them for some other purpose. For those who enjoy learing, the incentive may still be necessary, since what you have to do for school is rarely what you actually want to learn and includes not just learning, but demonstrations of knowledge which aren’t particularly fun even for people who enjoy the subject; I’ll read an advanced math book for fun, but you won’t see me slogging through the problem sets or pulling all nighters to study for a self-administered exam.

  2. #2 Peterbart
    July 3, 2007

    I am going to have to agree with MattXIV on this one. Essentially all that Barry has shown is that in every situation, there are multiple incentives which influence decision making; frankly, I don’t think that anyone would think that humans (or rats, or even Drosophila) are slaves of single incentives. Old examples from physiology include the conflict between the drive (read incentive) to eat and the drive to reproduce; at any given time, animals weigh these conflicting desires and derive an outcome that is (approximately) appropriate to the situation. That psychologists can bias this process really speaks to their cleverness rather than some inherent fallability in the system. While I am hardly an adherent to Francis Fukuyma’s premature ejaculation entitled The End of History and the Last Man, he was correct in asserting that social democracies that rely upon both economic incentives and socially progressive policies are, to date, the most effective means of organizing society.

    Yikes. Did I really just shill for Fukuyama?

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  4. #4 Webs
    July 5, 2007

    I was going to examine Barry Schwartz’s OpEd, but previous commenters did a fine job. All Barry showed was that different people respond differently to incentives.

    But his basic premise of:

    Simply put, economists assume that people are selfishly rational agents, which means that we should be extremely responsive to external incentives (like cash rewards).

    is wrong. Economics is the study of incentives and how they effect human behavior. A good economist and research will make no assumptions and see what effect an incentive will have.

    For more info on incentive effects read Freakonomics.

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