Durk Pearson & Sandy Shaw’s®
Life Extension NewsTM
Volume 15 No.
5 • September 2012
Why Monetary Incentives May Not Produce the Expected Result of Improved Performance
The publication of studies of increasingly sophisticated game playing, often with neuroimaging to follow activation (or not) of various areas of the brain, are resulting in a rapidly enlarging scientific literature to help understand how people make decisions in economic and social situations. Some of the pioneering work in the area of experimental economics was recognized when Vernon Smith shared the Nobel Prize for Economics in 2002.
On a practical, everyday level, this work may be useful in terms of how to market your goods and services. Some of the results of these studies offer surprises when people don’t behave as you expect.
A new paper reports such a result: an increasing financial incentive for greater employee performance that resulted in the exact opposite of what was expected when there was a decrement in performance in response to the increased incentive.
What the researchers found was that learning of the availability of the bonus money activated the ventral striatum of individual participants’ brains. This is an area of the brain known to be involved in mediating the effects of rewards on increases in motor performance. “The ventral striatum has been implicated in interactions between a Pavlovian system in which reflexive conditioned responses come to be elicited by a stimulus that predicts the subsequent delivery of a reward, and an instrumental system in which actions are selected flexibly in order to increase the probability of obtaining reward.” “All of the above studies [citations given in text] have focused on the role of ventral striatum in mediating enhancements in responding, as opposed to decrements. In this study, we aimed to investigate the role of the ventral striatum in mediating response decrements as a function of large incentives.”
The initial finding was that “the only brain region commonly active between the time of incentive presentation … and the execution of the motor task … was bilaterally encompassing ventral striatum.” What the researchers then observed, however, was that at the time when execution of the task required to get the offered incentive commenced, the ventral striatum went from being activated to being deactivated. “Such deactivation was strongly correlated with a behavioral measure of loss aversion.”
As a result of further experiments conducted as part of this study, the researchers concluded that “an individual’s incentive resulting in peak performance and her performance decrements for large incentives are due specifically to loss aversion” rather than to risk aversion, which was defined as “a more general aversion to increased variance in potential gains or losses.” (Loss aversion was defined by the authors as “a tendency to value losses greater than equal magnitude gains.”) The authors called performance decrements in the face of large incentives “choking.”
Hence, the potential reward available for improved performance only “worked” while the people receiving the offer were considering the possible gain, but tended to become a fear of loss when the “opportunity” came to actually achieve the payoff.
The authors report early attempts by economists on how to design incentive contracts so as to increase incentive but to avoid inducing risk aversion that limits performance. They cite Adam Smith, 1776. They have found in their earlier work that “people with less striatal sensitivity to incentive (i.e., the most stable neural response over the range of incentives) perform high stakes tasks with more proficiency.” They suggest that getting individuals to focus away from the prospect of failure might help to mitigate performance decrements.
Suppose you want somebody to work extra hard in exchange for a possible large money payoff. There is a risk for that person in that he or she may invest a lot of time/energy in the project and not get the monetary payoff. If it is a large payoff, one could easily imagine this being perceived as an even larger risk of not getting the payoff because of an expectation of even greater productive work to get it. In the book Secrets of the Moneylab,
the authors point out that a logical strategy to deal with this problem is to reduce the risk.
We suggest that one possible way to reduce the risk of not getting a large monetary reward would be to break up the large payoff into a series of smaller payoffs. The small payoff would provide an incentive to be more productive but it would not be so large as to turn greed into fear of loss. At the same time, the possibility of more payoffs later could still function to increase the anticipation of gain reflected by activation of the ventral striatum.
In fact, that is very similar to the way payoffs from slot machines work. You can play the slot machine and you may win a payoff of a few coins. The odds are against you, but not greatly so. If you sit there and keep on playing long enough, you have a chance to win a giant jackpot; the odds of winning the jackpot are against you, but far more so than they are for winning a small payoff, with a lure of possibly going for a giant jackpot. It would be interesting to see what the ventral striatum is doing while people are playing slot machines where there are small payoffs but also a potential jackpot. We hypothesize that the ventral striatum would be activated while playing for a small payoff where your loss would be small, but remain activated by the possibility of playing for the jackpot.
Catching Arrows—The Zen Buddhist Approach to Avoid Choking
As mentioned above, the researchers had explained that earlier work of theirs indicated that individuals who had less striatal response to incentives over a range of incentives were more likely to perform well—not to choke—no matter the level of the incentive. That reminded us of an approach that allows people to train themselves* to avoid choking: the ancient art of Zen Buddhist arrow catching.
Arrow catching is exactly what it implies, catching an arrow that is shot at you out of the air. The cost of failure would appear to be potentially high, yet an expert arrow catcher claimed that 80% of people could learn to catch arrows. (This particular expert had never heard of anyone dying as a result of attempting to learn the art, however.) It basically involves learning how to not care about the outcome so that the actual act of arrow catching is unimpeded by a choking response, a way of simply going with the flow. Buddhism itself is based upon a similar concept, that in the search for a life without bad karma, one should learn not to care about outcomes. (This may have developed as a result of historical circumstances—during the early period of Buddhist emergence as a major religion, life was very hard and not caring could be an effective way to deal with this. Indeed, the Christian religion’s focus upon an eternal life (that existence following the end of your regular life) rather than on the events of your life on Earth could be looked upon as another way to reduce concern about life’s outcomes (other than that you had better end up “living” your eternal life-after-death in heaven or you’ll be sorry).
- Chib et al. Neural mechanisms underlying paradoxical performance for monetary incentives are driven by loss aversion. Neuron 74:582–94 (2012).
- Adam Smith, The Wealth of Nations Fifth Edition (London: Methuen & Co., Ltd.); originally published in 1776.
- Kay-Yut Chen (Lead Economist, HP Labs) and Marina Krakovsky, Penguin Books, 2010.