Behavioral Economics and Psychology of Incentives

Abstract

Monetary incentives can backfire while nonstandard interventions, such as framing, can be effective in influencing behavior. I review the empirical evidence on these two sets of anomalies. Paying for inherently interesting tasks, paying for prosocial behavior, paying too much, paying too little, and providing too many options can all be counterproductive. At the same time, proper design of the decision-making environment can be a potent way to induce certain behaviors. After presenting the empirical evidence, I discuss the relative role of beliefs, preferences, and technology in the anomalous impacts of incentives. I argue that inference, signaling, loss aversion, dynamic inconsistency, and choking are the primary factors that explain the data.

Behavioural economics of organization: employees and managers

“…As we will show in this section, work effort can even bring positive utility of fulfi lling intrinsic motivation, m, to some workers (or under some circumstances). If we have i = {g} just like in the gift exchange case, we get c(e i |i) < 0 (Gneezy, Meier, & Rey-Biel, 2011;Kamenica, 2012). In this framework the workers' effort is not so much infl uenced by extrinsic motivation such as money or extensive oversight by the employers, it can even be destroyed by them.…”

“…The standard economic model, which explains employee's effort only through the wage (determined by productivity), is therefore incomplete. In particular, it does not consider that incentives to work do not have to be monetary; in other words, that there are other things besides the disutility of labour ( (Kamenica, 2012) and section 1.3 here). This perspective article aims to make the simple labour economic model more realistic in order to account for the mounting empirical evidence, which might otherwise be dismissed as anomalies.…”

Reward and Feedback in the Control over Dynamic Events

“…Work in decision sciences (incl., psychology, behavioral economics, economics, management) has often shown that the presentation of monetary incentives can actually have a detrimental rather than corrective or positive effect on decision-making performance (for review see Kamenica, 2012). The speculation is that financial incentives interfere with personal intrinsic motivations to perform a given task (Ariely, Gneezy, Loewenstein, & Mazar, 2009;Bahrick, 1954;Eisenberger & Cameron, 1996;Kamenica, 2012;Lepper, & Greene, 2015;McGraw, 1978;Deci & Ryan, 1985).…”

Behavioral political economy: A survey

“…It is a well-known empirical insight in behavioral economics that hard incentives of this type may have unintended consequences (Kamenica 2012). A popular example is the observation by Gneezy and Rustichini (2000) that a fine intended to discourage immoral behavior may be 46 See e.g.…”

“…Mill therefore goes a step further than Smith, in offering explanations in terms of incentives for the supposedly low quality of collective action, such as governments crowding out the informal institutions underlying voluntary cooperation. 6 See also Kamenica (2012). 7 On Smith in this context see also Buchanan (1976).…”