It’s Not the Incentives, Stupid?

One of the consistent themes on this blog is the power of incentives to motivate behavior. Well, here’s an article from Dan Ariely (behavioral economist and author of Predictably Irrational) in the most recent issue of Wired UK magazine discussing how monetary incentives might not increase the quality of activity, only the quantity. Ariely and a couple of co-authors conducted some experiments that had subjects completing tasks that required creativity, attention, memory and concentration. The subjects were split into three groups that were offered different levels of bonuses for doing well: a day’s pay, two weeks’ pay, and five months’ pay. It turns out that the first two groups performed about the same while the last group (the high bonus group) performed the worst.

If our tests mimic the real world, then massive bonuses clearly don't work. They may not only cost employers more but also discourage executives from working to the best of their abilities. The financial crisis, perhaps, didn't happen in spite of the bonuses, but because of them.