Friday, July 24, 2009

the right incentives

I was reading Sway, by Ori and Rom Brafman, cousins, not partners. Sway is a book about irrational behaviour. It introduces some mind blowing concepts and research results, somre more known than others.

I found particularly interesting two, in this wealth drop I will talk about one: incentives. Next week I'll cover the second one: a sense of justice.

Ori and Rom explore several experiments about incentives. I've known for ages the love-hate relationship most people have with wealth. There are many explanations to it, one is that we perceive the full pie of wealth as a static figure and whatever we take out comes from someone else's wealth. It is what is called zero sum game in economics. You win, someone loses. it is the basis of socialism, yet it is not the basis of capitalism.

The experiments described in Sway show how we - people - can make decisions against monetary compensation.

One experiment was carried out in Switzerland, where the residents of a town had to approve or reject a nuclear waste disposal facility. Researchers posted a couple of surveys to evalute the responses. One survey considered the greater good of the population, the other survey had a minor change, it added a monetary compensation. Contrary to what economists would have believed. Monetary compensation had a negative impact in the accetance of the facility. Even when the compensation was increased, the results were worse than when no compensation was offered.

A second experiment involved students in Israel, taking a test to enter Universities, the GMAT. Researchers wanted to test the impact of a monetary compensation on good answers. Although the students knew this was a test, when offered a small prize for correct answers, the overall score dropped! The 2.5 cents reward per correct answer was enought to actually detter them!

It seems that involving monetary compensation throws people off.

What do you think?

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