Belligerati

« Terrible Op-Ed on the Electoral College | Main | Interesting article but bad statistics »

November 20, 2008

What can we infer when behavior fails to respond to incentives?

Duke economics professor Dan Ariely has an interesting Op-Ed (What’s the Value of a Big Bonus?) on how performance is actually harmed in some cases by large performance incentives.

Of course, there are many reasons to be disgusted with executive pay. It feels unfair that so many people make so much money managing our money, and it is often difficult to see how their talent and abilities justify their compensation. We find it particularly offensive when executives receive high bonuses after disastrous performances. But doesn’t the promise of a big bonus push people to work to the best of their ability?

To look at this question, three colleagues and I conducted an experiment. We presented 87 participants with an array of tasks that demanded attention, memory, concentration and creativity. We asked them, for instance, to fit pieces of metal puzzle into a plastic frame, to play a memory game that required them to reproduce a string of numbers and to throw tennis balls at a target. We promised them payment if they performed the tasks exceptionally well. About a third of the subjects were told they’d be given a small bonus, another third were promised a medium-level bonus, and the last third could earn a high bonus.

We did this study in India, where the cost of living is relatively low so that we could pay people amounts that were substantial to them but still within our research budget. The lowest bonus was 50 cents — equivalent to what participants could receive for a day’s work in rural India. The middle-level bonus was $5, or about two weeks’ pay, and the highest bonus was $50, five months’ pay.

What would you expect the results to be? When we posed this question to a group of business students, they said they expected performance to improve with the amount of the reward. But this was not what we found. The people offered medium bonuses performed no better, or worse, than those offered low bonuses. But what was most interesting was that the group offered the biggest bonus did worse than the other two groups across all the tasks.

An interesting result. Certainly that seems at odds with simple models of rational agents responding to increasing rewards of doing similar tasks. However, I see a couple of problems. First, the narrow tasks and lack of selection challenge the external validity. Isn't the real question how people who choose to work in industries with performance based compensation do, not how the average person does? Plus, I wonder how the tasks in question relate to real work. Finally, these tasks all seem to be short duration. Maybe in the sort term bonuses don't do much, even having big bonuses interfere through nervousness to reduce performance. But over the long term they keep the mind focused and allow people to not just work better (intensively) but also for longer (extensively). Therefore total productivity increases.

Posted by OneEyedMan at November 20, 2008 7:59 AM

Comments

Posted by: REggert at November 22, 2008 8:11 AM

Post a comment