Wall Street Journal & CalTech: Research on Performance, Loss Aversion, and Incentives

A recent article published in the Wall Street Journal called Big Incentives Can Hinder, Rather Than Help, which talks about a research coming out of CalTech that showed that positive incentives work up until a certain point, but then performance starts to drop. The suggested explanation is that performance drops due to distraction, which happens due to loss aversion – that is, performance drops due to anxiety introduced by the idea of “If I don’t do well, then I won’t get my reward!”

Big Incentives Can Hinder, Rather Than Help

by Melissa Korn
May 15th, 2012

Financial incentives can spur us to success—up to a point.

When the stakes get too high, performance can suffer, according to a new paper from researchers at California Institute of Technology. By studying brain-scan data of volunteers performing a basic motor task (controlling an object on a screen) for money, the Caltech team found that once the incentive for successfully completing the task hit a certain threshold, the brain’s reward center began to shut down, a response tied to loss aversion.

Previous studies have suggested that success rates decline with high incentives because people can be too motivated, but the newest research suggests otherwise, finding positive responses in the reward-response area only when the incentive was first introduced. In other words, participants responded well to the initial incentive but grew distracted once the task was under way.

To read the full article on the Wall Street Journal, please click here.

The original paper was published in Cell Neuron and is available here.  A little more about the paper:

Title: Neural Mechanisms Underlying Paradoxical Performance for Monetary Incentives Are Driven by Loss Aversion

Vikram S. Chib1,2, Benedetto De Martino3,4, Shinsuke Shimojo1,2, John P. O’Doherty1,2

1 Division of Biology, California Institute of Technology, Pasadena, CA 91125, USA
2 Computation and Neural Systems, California Institute of Technology, Pasadena, CA 91125, USA
3 Division of Humanities and Social Sciences, California Institute of Technology, Pasadena, CA 91125, USA
4 Psychology and Language Sciences, University College of London, London WC1H 0AP, UK
Accepted 27 February 2012. Available online 9 May 2012. Published: May 9, 2012.

Abstract: Employers often make payment contingent on performance in order to motivate workers. We used fMRI with a novel incentivized skill task to examine the neural processes underlying behavioral responses to performance-based pay. We found that individuals’ performance increased with increasing incentives; however, very high incentive levels led to the paradoxical consequence of worse performance. Between initial incentive presentation and task execution, striatal activity rapidly switched between activation and deactivation in response to increasing incentives. Critically, decrements in performance and striatal deactivations were directly predicted by an independent measure of behavioral loss aversion. These results suggest that incentives associated with successful task performance are initially encoded as a potential gain; however, when actually performing a task, individuals encode the potential loss that would arise from failure.

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