Nobody's perfect, and everybody knows it. But it wasn't until relatively recently that we began to recognize the many ways our imperfections affect our everyday decision making.
There's been an explosion of popular interest in how empirical research from economics and psychology can help explain, essentially, why it is we do what we do - and not what we want to do, or even what we, on some level, know we should do. More than forty years after Daniel Kahneman and Amos Tversky conducted their groundbreaking series of experiments on decision making - and fifteen years after that work was recognized with a Nobel Prize - the fathers of behavioral economics have received what is, arguably, an even greater honor: they're the subject of a bestselling book by Michael Lewis.
Behavioral economics has gotten the moneyball treatment. One day there might be a film version in which Brad Pitt talks about "prospect theory" and "heuristics," but already there are terms from behavioral economics that have entered the lexicon. We acknowledge that we're not perfectly "rational agents" because of "hindsight bias" and "anchoring effects," but are consoled by the knowledge that the right "nudges" can help save us from ourselves.
Two, Four, Six, Eight ... What Do We Appreciate?
Behavioral economics hasn't made us perfect, just more aware of the ways in which our actions are less than perfectly rational. Social, cognitive, and emotional factors all subtly influence the countless decisions we make every day, including the decisions we make in the environment where we spend the largest portion of the day: the workplace.
In recent years some of the most interesting research in applied cognitive science has focused on worker motivation. Daniel Ariely, the famous behavioral economist and bestselling author of Predictably Irrational, has just published a new book that will bring wider attention to this subset of research. Payoff attempts to explain what forms of motivation are most effective in different contexts, and why they're often not what we expect.
It turns out that employees aren't always good at knowing what they want, and employers aren't always good at structuring compensation to maximize performance.
It's a foundational concept in economics that workers who are more productive tend to earn higher wages. That explains why people with college degrees or advanced job training have, on average, higher incomes than those who don't. Things are more complex when it comes to the effect increasing wages has on an individual worker's productivity and reported sense of well-being.
Being paid more might make someone work harder, or longer, but there's a limit. Moreover, salary is by its very nature a big, cumbersome lever for incentivizing employees. The majority of compensation is fixed, while variable pay systems (commission, stock options, or performance bonuses) can introduce additional problems, such as the perverse incentive to pursue short-term returns over long-term profitability.
Ariely's book sheds light on ways in which intrinsic motivation - the desire to do something for a personal reward - can be as powerful as the desire for material gain, even in a professional setting. It's no secret that people look to get more out of their work than just a paycheck. A sense of meaning, accomplishment, and ownership are all critical for long-term job satisfaction. But recognition is also surprisingly important for driving productivity.
Cash Is King, But Pizza Is Delicious
Recognition and pizza, that is. In one experiment recounted in Ariely's book, employees at an Israeli semiconductor factory were divided into four unique groups and had their productivity measured. One group was told they'd receive a cash bonus of roughly $30 for hitting a daily output goal; a second was told they'd be given a voucher for pizza; a third was promised a special compliment from a boss; the fourth group served as a control, and received no message.
On the first day, all three groups who had been given an added incentive were more productive than the control group. Pizza was the most effective motivator, and although less delicious, compliments had nearly as strong an effect on worker output: productivity in the pizza and compliment groups increased on the first day of the experiment by 6.7% and 6.6% percent, respectively. Cash was found to be less effective, only increasing productivity 4.9% relative to the control.
For the experimenters this was unexpected. The cash bonus was objectively more valuable than the pizza, but provided less motivation. Over the course of the next week, the experimenters recorded an even more unusual effect. Workers in the cash group actually saw their productivity drop 6.5% relative to the control group. Monetary bonuses had backfired. The one-time pay increase incentivized greater productivity, but once it went away, workers were left with a diminished sense of intrinsic motivation.
By contrast, the pizza and compliment groups maintained some productivity boost relative to the control group. Though they had less monetary value than the cash bonus, these incentives had a greater emotional salience for employees.
Research like this provides evidence of how complex our motivations are. In a workplace context, businesses that want to encourage employees to take a desired action - to be more productive, undergo extra training, spend company money more carefully - will see better results if they supplement conventional incentives with other types of rewards.
At my company, Rocketrip, we've incorporated these findings about effective incentive structures into our product offering. Rocketrip helps clients reduce their costs by motivating employees to spend less on their business travel. Employees get a custom budget before every trip, and if they come in under budget, they keep half of the savings they generate.
Not surprisingly, people spend company more carefully when a portion of it belongs to them. On average, travelers spend roughly 30% less than budget and earn over $100 in rewards per trip. That's hardly an insignificant amount of money, but it's not enough to stand out when mixed in with a paycheck that's automatically deposited into a bank account. By contrast, we've found that employees respond much more strongly when the rewards they earn create some sort of emotional attachment. Charitable donations, travel perks, or gift cards all register more than an incremental increase in a paycheck.
Incentives are a useful lens through which to study workplace dynamics. The same sort of cost-benefit analyses that economists have long used to explain the relationship between consumers and firms, or between two competing firms, also apply within firms - to the relationships between employers and employees, and even between coworkers. To some extent, these relationships resemble the interaction of rational actors. That is, employees respond to incentives and look out for their own self-interest. But human psychology also plays a part: we're all subject to loyalties, emotional attachments, and occasionally, to hunger for pizza.