Reward undermining is an extraordinarily powerful idea. As we will see in today’s article incentives can not only undermine small-scale interpersonal interactions like in the daycare example but can also undermine some very large-scale social policies.

Blood donations

Take the example of blood donation. That’s actually what sparked the idea of reward undermining. In 1970 the social scientists Richard Titmuss observed that people tended to donate more blood when they weren’t being paid for their donations. For example donation rates were higher in Great Britain which did not pay donors then they were in the United States which did.

Now that’s just a correlation and other factors could contribute to higher donations in Great Britain but more recently economists have conducted randomized experiments that manipulated the incentives offered to different potential donors in the basic result held. People who were offered payment for blood donation were less likely to donate overall.

So economic incentives can decrease or potentially even eliminate people’s actions to benefit an important social good, like blood donation. That’s a big deal! Let’s look at reward undermining in more detail so that you can understand how different sorts of incentives can actually come in the conflict. I defined reward undermining by saying that an external incentive can undermine internal motivation and I want you to think about what that simple definition implies.

It means that there are two different sorts of motivation: external motivation and internal motivation are just two factors on the same scale utility, they may represent different scales altogether. Economic theory has historically given pride of place to external sources of motivation. A monetary incentive for example should have much greater influence of behavior that any internal factors.

External incentives

External incentives should have more consistent effects too – people should all be motivated by money in a generally similar way even if their internal motivations are very different, but reward undermining argues that internal sources of motivation can be more important at least some of the time. So what determines whether external incentives or internal motivations shape our decisions?

One answer is that there are actually two different currencies for decision-making. One currency is economic – our choices lead to physical gains and losses good outcomes and bad. The other currency is social – our choices change how other people see us or how we see ourselves. Different incentives change the currency in which we make our decisions from social economic or vice versa.

When the economists who conducted the daycare study wrote the paper describing their surprising results they summarized study with a simple title: A fine is a price. A fine is a price. Before the fine was introduced the parents were making decisions about social currency. They had to consider what the daycare workers would think about them and what they would think about themselves.

A parent who is regularly late might think of themselves as inconsiderate irresponsible, someone who doesn’t hold up their end of a social relationship, but the fine set a price for being late. We don’t have prices in our social interactions we have prices in our economic transactions. Once the parents could think about being late as an economic transaction they could then decide whether the additional time was worth the monetary cost.

Money changes how we think

Social relationships don’t matter in our economic transactions. When we go shopping we don’t worry about what the store thinks of us and we don’t think of ourselves as inconsiderate whenever we take advantage of a good deal of the store. Monetary incentives change the context of a decision from a social relationship to an economic transaction, from social currency to economic currency.

Money changes how we think about our social relationships, we resist leaving lending money to friends and family not because of the value of money but because of the value of our social ties. We don’t want to think about money whenever we think about our friends and we don’t want to risk your friendship over a loan. Incentives can work in the opposite way too. Social relationships can change how we think about economic incentives.

Salespeople in many industries know this. They tried to build rapport with their customers getting to know them and their families, they host customers a dinners at sporting events on trips they want to build social relationships with those customers so the customers choose their firm among many in a crowded marketplace.

Pharmaceutical and medical device companies have historically courted physicians by offering them small gifts: free meals, travel to conferences or inexpensive goods like books or bags. Now you might think that a $20 lunch isn’t a large enough economic incentive to change what drug physician prescribes or what device of physician implants but the primary effect of those small gifts isn’t economic, it’s social.

Economic and social currencies

Those gifts establish a social relationship between the company and the physician and what we expect in our social relationships: reciprocity, gifts and favors are reciprocated perhaps not consciously reciprocated nonetheless. Research shows that even simple small gifts like free meals can have powerful effects on a physician’s practices.

For example they become more likely to prescribe drugs from those companies and this is a good for patients. Reviews of real-world physician behavior show that small gifts lead to systematic and negative effects on clinical care. So these two currencies, economic and social, can compete with and even undermine each other potentially leading to bad decisions.