HBR Blog: When Your Incentive System Backfires

userpic-841-100x100The author goes to an Asian city and tries to get on the bus.  The bus keeps passing by.  Why?  Because the bus driver’s bonus is connected to being on time, not servicing customers, resulting in a behavior that is opposite to that which would be optimal.  This model is the focus of the article.  Conclusion: be careful about identifying what’s important and how you drive participation. Continue reading

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!”

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Video: TED – Rory Sutherland – Perspective is Everything

Rory Sutherland discusses the importance of perception making the point that it cannot be disconnected from economics.  Some important takeaways:

  • perception of control leads to happiness
  • existence of expectations reduces anxiety
  • ROI without analysis of perception is incomplete
  • classical economics is preoccupied with reality