Do incentives really work? Exploring behavioral economics

In our class, our teacher gives us the opportunity to study our own topic. For my topic, I chose economics. at first, I wanted to study market economics, but I quickly realized that there was a much more interesting field to dabble in: behavioural economics.

Regular economic theory suggests that all humans are 2 things: incredibly rational and incredibly greedy. Most economic ideas are built around this concept. However, the field of behavioral economics challenges that claim, saying that humans aren’t as rational as we assumed. For example, suppose you’re at the store buying a new case for your phone. There are three cases on the shelf:

A low-quality case for $1

 

 

A medium-quality case for $5

 

 

Or a high-quality case for $10

Most likely, you’d buy the second case, because it’s not as bad as the first one, and not as expensive as the third one.

Now imagine that same scenario, except when you go to the store, there’s a fourth case on the shelf. It’s a high quality, waterproof, gold plated case, which costs $50.

There’s no way you’re going to buy that! Sure, it’s really good, but you can’t even afford the thing! That $10 case is looking really good now. You might not even know it, but in the second scenario, you are likely to buy the $10 case, and in the first scenario, you are more likely to buy the $5 case. Imagine how much power the person arranging the shelves has over you and other customers! Just by placing an expensive case on a certain shelf, they can make customers pay more than they usually would!

This proves that humans aren’t as rational as standard economic theory suggests. There are many more examples of this, including an experiment that I, myself conducted, using my own class as subjects.

I told my entire class that I needed to do a survey for my research. But instead of a survey, I handed everybody a word search puzzle and told them to find as many words as possible, in the span of one minute. However, there were three different sheets. One sheet asked them to do the word search and didn’t offer any sort of reward. Another sheet offered them a small Starburst candy as a reward for attempting the word search. And the third sheet offered them a large Mars bar for attempting the word search.

I collected the sheets of each person(after giving them their reward) and compared their offered reward to the number of words that they found. After I laid all the data out, what I found was surprising. Those offered no reward did the best out of everyone on average. And those offered a high reward, the Mars bar, did the worst out of everyone on average! At first, I was completely baffled by this outcome. Normal economic theory suggests that work should increase if the reward increases! However, normal economic theory was devised during the Industrial Revolution. At the time,  most people worked in factories, and their day job would be to do one thing over and over again on an assembly line, like hammering in nails over and over again or drilling in screws over and… you get the idea. Doing work would require absolutely no mental effort at all.

Now let’s go back to my word search experiment. A word search is quite different from a job at an assembly line because you do have to put some mental effort into finding words. For mindless assembly line work, incentives and rewards help one focus on the task at hand. But for even the slightest of cognitive tasks, rewards constrain one from thinking critically and therefore decrease the output of work.

The thing is, most white-collar work nowadays isn’t mindless assembly-line work, but software development and financial work. These, like the word search, are cognitive tasks, and in theory, should be hindered by rewards. So maybe we need to change our economic thinking, to better adjust to these findings.