A few thoughts on incentives

2 09 2010

People respond to incentives. In fact they do respond to incentives so amazingly well that you will probably be shocked, surprised and disgusted by their immaculate reaction. Set them the wrong incentives and watch the descent into the abyss.

However, I am often dismayed by how few of us actually grasp this basic notion. In mainstream economics incentives are sometimes (wrongly) associated with utility theory – an overly complicated mathematical fallacy, trying to normatively describe what the right (or “rational”) behavior should be. I do ask you to take a step back.

People respond to incentives in the broadest way possible. Most of the time. In groups, as well as individually. There is scarcely a more illuminating task than to look for those (sometimes hidden) sets of rewards and punishment human being react to.

The man is no Jesus. Neither is the woman. If they are rewarded for working the system, if they can exploit it and get away with it, chances are, they will. This is no inherent flaw in the human being. On the contrary – it is indeed functionally important that we do that. It has ensured our survival at the expense of other species, and still does.

On the bright side: if you reward people for being good, they probably will be. Warm glow and other nonsense apart.

Whatever you might want to do – don’t forget: incentives matter. In fact, only incentives matter. Arm yourself with the right stimulus and you will reach Olympus. (Disclaimer: this blog does not endorse the use or abuse of any substances)

***
And two personal favorites put this point in a brilliant manner – Freakonomics and Superfreakonomics. Their website here.

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