“Everyone who took economics at school or university was probably bored to death,” jokes Gneezy. “Traditional economics largely assumes humans are hyper-rational such as Mr Spock of Star Trek. Behavioural economics is different. It looks at how you and I make decisions. We’re more like Homer Simpson. We make mistakes. We have limited attention spans.”
How incentives shape decision making
Gneezy does not say we are irrational. He says we respond to incentives and that we need to understand how the incentives work.
Gneezy recounts the story of his daughter’s day-care. “I was always rushing like crazy to be on time to pick her up. Then one day the principle introduced a small fine for parents who were late. The next time I was running late I decided not to risk my life just to avoid that small fine. I decided to run an experiment at various day-cares and found I wasn’t unique.”
Before introducing fines for being late parents would do all they could to be on time. As it turns out, once there was a fine, parents believed it was OK to be late. Paying a fine negated the guilt parents felt about being late.
What happened when the day-cares stopped fining parents for being late? “Parents still came late!” says Gneezy. “Introducing a fine changed the norm. Before that you just didn’t come late, but now you ‘know’ it’s OK as the principle valued being late at only $3.”
Incentives don’t exist in a vacuum; they can even be insulting. “I would be insulted if my friend offered me $10 to help him move the sofa,” says Gneezy. Incentives change the meaning of interactions.
Incentivising charitable donations
“Volunteers do it because they care about a cause and it makes them feel good,” says Gneezy. “It’s harder to feel good about themselves when they are paid. You’ll find it harder to recruit volunteers if you pay them.”
Imagine the following scenarios. In one you see a friend lugging around a huge bag full of cans in the rain. You think she’s a wonderful person, so dedicated to the environment. In another there’s an incentive of, say, 10 cents per can. You see your friend lugging around a huge bag full of cans in the rain. You think she’s cheap and not so great.
The incentive, in this example, acts as a disincentive.
Why women earn less than men for equal work
Discrimination is only one explanation for why women earn less than men. Another explanation, according to Gneezy, lies in competitiveness.
“Our experiments show that men are more competitive than women everywhere in the Western world.”
If the reasons for men being more competitive are evolutionary then it’s going to be very hard for public policy to have an impact. However, if the reasons are cultural then public policy can be very effective.
To test whether or not the competitiveness of men is cultural Gneezy looked at the few matriarchal societies we do know exist. “We went to Northeast India to study the Khasi, a matriarchal society where women wield far more power than most places on Earth. We found Khasi women to be just as competitive as men.”
Description on Amazon
Can economics be passionate? Can it centre on people and what really matters to them day-in and day-out? Can it help us understand their hidden motives for why they do what they do in everyday life?
Uri Gneezy and John List are revolutionaries. Their ideas and methods for revealing what really works in addressing big social, business and economic problems give us new understanding of the motives underlying human behaviour. We can then structure incentives that can get people to move mountains and change their behaviour — or at least get a better deal.
But finding the right incentive can be like looking for a needle in a haystack. Gneezy and List’s pioneering approach is to embed themselves in the factories, schools, communities and offices where people work, live and play. Then, through large-scale field experiments conducted “in the wild,” Gneezy and List observe people in their natural environments without them being aware that they are observed.
Their randomised experiments have revealed ways to close the gap between rich and poor students; to stop the violence plaguing inner-city schools; to decipher whether women are really less competitive than men; to correctly price products and services; and to discover the real reasons why people discriminate.
To get the answers, Gneezy and List boarded planes, helicopters, trains and automobiles to embark on journeys from the foothills of Kilimanjaro to California wineries; from sultry northern India to the chilly streets of Chicago; from the playgrounds of schools in Israel to the boardrooms of some of the world’s largest corporations. In The Why Axis they take us along for the ride and present lesson with big payoffs through engaging and colourful stories.
Their revelatory, startling and urgent discoveries about how incentives really work are both revolutionary and immensely practical. This research will change both the way we think about and take action on big and little problems. Instead of relying on assumptions we can find out, through evidence, what really works.
Anyone working in business, politics, education or philanthropy can use the approach Gneezy and List describe in The Why Axis to reach a deeper, nuanced understanding of human behaviour and a better understanding of what motivates people and why.
Listen to the Soundcloud clip for more detail.