Incentives are fine, but incentives are also fines

MANAGING FOR SOCIETY

It’s surely meant well, the proposal of Rep. Rufino Biazon of Muntinpupa urging education authorities to record the volunteer work of students and credit it toward their National Service Training Program (NTSP) requirements. It makes even more sense these days when everything feels a bit like the 70s again—the floods, the sense of something epochal coming, the “Serve the People” ethos among the young.

What can we do to get more of this (the volunteerism, not the floods), we often ask. Nearly all economists, most management practitioners, and a few psychologists will say: incentivize. Introduce explicit rewards (monetary or any other type) for desirable behavior and penalties for bad behavior.

If only it were so simple. As a growing number of social psychologists and behavioral economists are showing us, there are good reasons to rethink how incentives affect behavior. Here are two examples, both based on the idea that people seem to have built-in (“intrinsic” or “hard-wired”) motivations for doing things—and that explicit incentives may end up competing with rather than reinforcing them.

The first is from a talk by Barry Schwartz titled “Moral Will and Moral Skill,” which you can view on the workday-consuming website TED.com. In it, he tells us about a series of polls conducted in Switzerland in the early 90s. People were asked whether they would be willing to have a nuclear waste dump opened in their communities. Astonishingly, Schwartz reports, 50 percent said yes even if they knew the risks it brought to their health and property values.

Another set of respondents was asked a slightly different question: “If we paid you six weeks’ salary every year, would you be willing to have a nuclear waste dump in your community?” This time, instead of 50 percent saying yes, only 25 percent agreed. Apparently, the introduction of an explicit incentive can “frame” a situation differently: instead of getting people to focus on their civic responsibilities, for instance, they may cue people to think more in terms of private costs and benefits. Rather than increasing volunteerism, incentives may unwittingly diminish it.

Apparently, fines can have the same motivation-switching effect. Nine years ago, Gneezy and Rustichini reported the results of a fairly well known field experiment conducted in several Israeli day-care centers that had problems with parents fetching their children late. The administrators were worried about the costs of keeping staff past normal working hours and decided to impose fines on tardy parents. Again, instead of reducing the tardiness, the fines appeared to increase it significantly. Worse, the tardiness persisted even after the fines were removed.

Of course, we must report that the paper has come under criticism over data integrity issues, notably by Ariel Rubinstein in his survey of behavioral economics (2005), but other more carefully designed experiments have produced similar results. They suggest that fines, like incentives, can change the “information set” a person uses to decide, causing him or her to behave in unexpected ways. In the case of the tardy parents, the fine may have acted as a “price” for being late, framing the situation as an economic transaction that was now less connected to any previous intrinsic motivators such as guilt.

Perhaps this is why instead of formal incentives, Schwartz seems to prefer more unstructured, spontaneous (some might say old-fashioned) measures to nurture kagandahang-loob: celebrating exemplars of good behavior in daily conversation, and for those in positions of influence—striving to be good examples ourselves.

Dr. Gerardo Largoza ( gerardo.largoza@dlsu.edu.ph This e-mail address is being protected from spambots. You need JavaScript enabled to view it ) is an associate professor at the Economics Department of De La Salle University. –Gerardo Largoza, Manila Times