Mixed Signals summary

Incentives play a major role in how we make choices – but our responses to incentives aren’t simple, especially when they come into contact with biases.

Consider the $100 offer again and how people don’t go for the additional $10. What’s happening here is called the “present bias” in which immediate satisfaction usually trumps a delayed gain, especially if that gain is relatively small. The incentive – an extra $10 – just isn’t strong enough when held up against having to wait another day.

There are many more biases and emotions that affect our perception of money as incentives, too. While money can be a powerful motivator, it doesn't always lead to better performance or outcomes. The evidence of this can be seen in professional sports where teams reward players with contracts that include big bonuses tied to what that player does individually. Consider an example from the NFL in which Baltimore Ravens player Terrell Suggs had a contract rewarding him with $5.5 million once he reached a goal of sacks for the year. While Suggs reached his goal, the team overall didn’t finish the season well. While that’s not necessarily his fault, his individual incentive didn’t seem to help the team’s outcome.

Sometimes, using money as an incentive backfires if you set the amount too low. Consider the case of daycares charging parents whenever they’re late picking up their kids. Gneezy began to study this after his own experience. He describes one instance of being late and the embarrassment he felt. The daycare wasn’t yet charging fees, and he felt bad enough already to make sure not to repeat the offense. When the daycare started a fee system, it announced the fee would be about $3 for anyone arriving late by ten or more minutes. Now with a relatively low price tied to being late,  parents got the message that it’s not that big a deal – a much smaller deal than they’d originally thought. The fine was so low that the number of late pickups actually increased.

Gneezy also researched other daycares around the world and found that fine structures can work, but the fine must cause a bigger financial hit. Some daycares charge parents $5 for every minute they’re late. Another charges a $20 flat late pickup fee, then tacks on larger amounts in half-hour increments.

Using money as an incentive is tricky in the case of blood donation, too. In his book, The Gift Relationship, Richard Titmuss contrasts how in 1979 people were paid for blood donation in the US versus not receiving compensation in the UK. His research showed that the money-motivated donors were more likely to be drug addicts seeking cash, and therefore the quality of blood collected had a greater likelihood of being infected with hepatitis B. Today, over 75 percent of blood collected in wealthy countries worldwide comes strictly from volunteers. Research has also shown these types of donors are more motivated by things besides money — even something as small as a logo pen.

So why would anyone want a cheap pen over cash? We’ll look at that next.