business career entrepreneur success

Why Economic Incentives Can and Will Backfire

Are you motivated by money? You might answer: “No I am motivated by helping others, by doing what’s right! Money is not really that important to me!”So let me change this question: Are people motivated by money? Do they work hard to earn money? Do they give up their most precious resource: their time to gain more money? Do they prefer more money than less money?

Economic incentives discourage behavior

If we are talking about people in general the answers seem obvious: yes, people are motivated by money. To use a term from economics, money serve as an incentive for our behavior and we are more likely to seek out jobs that pay more money rather than less.  When we shop we prefer to spend less money rather than more.

That money serves as an incentive for behavior is central to our economy into almost every other facet of our lives. In today’s article I want to describe one of the more striking findings from recent research in behavioral economics psychology and neuroscience: economic incentives can backfire, they can actually discourage behavior rather than encourage it.

I want to illustrate this concept by describing an elegant study conducted by the economists Uri Gneezy and Aldo Rustichini. They began their experiment by going to 10 daycare centers in Israel and just watching if did parents pick up their kids on time or were they late. Now if you’ve ever had kids in daycare or known someone who has than you might know that parents are sometimes despite their best efforts late.

Between work, picking up other children and all the demands of a busy family parents are sometimes late. For four weeks the economists counted how often parents were late in a given week. On average, parents in a typical day care related about 5% of the time and that’s not too bad, but it’s still disruptive to the daycare center since the caregivers can go home at all the children have been picked up.

Economic incentives replace social incentives

Perhaps if there were some incentive to encourage timeliness the number of late parents would go down. So after a month has passed the economists asked the daycare centers to institute the fine for being late. Each time a parent was late their monthly bill would go up by the equivalent of a few dollars. This isn’t a huge penalty it’s enough to be a reasonable incentive for parents to pick up their kids on time.

What happened next was really remarkable. Over the next month the number of late parents went steadily up. The parents were now in late twice as often as before, instead of being late 5% of the time there were now late 10% of the time even though they were now paying a fine for being late. Let’s think about this phenomenon for a moment.

Before there was a fine, there was no economic incentive to show up on time, parents didn’t pay more money if they were late and they didn’t save any money if they were early, but there was a social incentive to not be late, parents didn’t want to inconvenience a day care workers much less delay seeing their own kids.

When the fine was introduced that same social incentive should be there, the daycare want workers still want to go home as soon as possible. The fine provided an additional economic incentive, however motivated someone was before to show up on time they should be even more motivated by the potential loss of money.

Reward undermining

The social incentive and the economic incentive should work together. They should add up to shape behavior even more strongly, but that’s not what happened. The fine did not add to parents motivation to show up on time if anything did undermine the motivation. And it gets worse. The economists measured how often parents were late for three months.

Throughout that time parents were consistently late about 10% of the time. Again that’s twice what it was before the fight then the daycare centers took the fine way. Did parents behavior go back to what it was before the fine? No! the parents were still late about 10% of the time and that high rate remained consistent until the end of the experiment a month later.

So in this case the introduction of an economic fine not only increased the very behavior it was intended to discourage but the bad behavior lasted well after the fine went away. This incentive failed spectacularly. This phenomenon were an incentive decreases motivation for behavior reward undermining – the external incentive undermines a sense of internal reward that normally motivates a behavior.