Famous Psychologist, Barry Schwartz, The Dark Side of Incentives!
To prove my fanatical interest in psychology I’ve linked to almost all of Barry Schwartz’ work (lol), here’s his latest article in Business Week on the failure of incentives.
It’ doesn’t take an active imagination to apply these concepts to the financial sector…(think hr)
Tagline: They consistently backfire when efforts to boost bonuses override moral considerations
(H/T Jacob Bettany)
Click Here To Read: Famous Psychologist, Barry Schwartz, The Dark Side of Incentives!
Introduction (Via Business Week)
Right now, there’s little that makes a typical American taxpayer more resentful than the huge bonuses being dispersed at Wall Street firms. The feeling that something went terribly wrong in the way the financial sector is run—and paid—is widespread. It’s worth recalling that the incentive structures now governing executive pay in much of the corporate world were hailed as a miracle of human engineering a generation ago when they focused once-complacent CEOs with laser precision on steering companies toward the brightest possible futures.
So now there’s a lot of talk about making incentives smarter. That may improve the way companies or banks are run, but only temporarily. The inescapable flaw in incentives, as 35 years of research shows, is that they get you exactly what you pay for, but it never turns out to be what you want. The mechanics of why this happens are pretty simple: Out of necessity, incentives are often based on an index of the thing you care about—like sound corporate leadership—that is easily measured. Share price is such an index of performance. Before long, however, people whose livelihoods are based on an index will figure out how to manipulate it—which soon makes the index a much less reliable barometer. Once share price determines the pay of smart people, they’ll find a way to move it up without improving—and in some cases by jeopardizing—their company.
Excerpts (Via Business Week)
Incentives don’t just fail; they often backfire. Swiss economists Bruno Frey (University of Zurich) and Felix Oberholzer-Gee (Harvard Business School) have shown that when Swiss citizens are offered a substantial cash incentive for agreeing to have a toxic waste dump in their community, their willingness to accept the facility falls by half. Uri Gneezy (U.C. San Diego’s Rady School of Management) and Aldo Rustichini (University of Minnesota) observed that when Israeli day-care centers fine parents who pick up their kids late, lateness increases. And James Heyman (University of St. Thomas) and Dan Ariely (Duke’s Fuqua School of Business) showed that when people offer passers-by a token payment for help lifting a couch from a van, they are less likely to lend a hand than if they are offered nothing.
What these studies show is that incentives tend to remove the moral dimension from decision-making.
Click Here To Read: Famous Psychologist, Barry Schwartz, The Dark Side of Incentives!
