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<psychminds.com

<psychminds.com>

…So this morning I was reading a great paper from Emir Kamenica at the Booth School of Business. You can read the full paper here, but in summary Kamenica examines the impacts of both monetary incentives and the environment on behavior. He cites a lot of great studies and experiments to support his case, which is essentially that there isn’t a straight line between pay and performance. This idea isn’t in and of itself anything new, but the piece is definitely worth a read on the strength of some of the assumptions it debunks alone (e.g. unlike some recent research on motivation suggests, while introducing a short-term incentive scheme may have a chilling effect on performance once the incentive is taken away, there is no significant evidence to suggest that long-term monetary incentives will adversely impact or otherwise diminish performance [5]).

With that said, the primary reason I’m sharing this paper is because I wanted to discuss the finding that people seek context from their environment when they are unsure of what to do. From the paper:

The idea behind contextual inference is that people are often unsure about what the best course of action is and consequently seek clues from the environment. This mechanism can explain many of the aforementioned anomalies. For example, if you are unsure whether solving puzzles is fun and someone offers you $5 per puzzle solved, you might reasonably infer that this activity is not enjoyable and thus forgo it, even though you might have tried and enjoyed solving a couple of puzzles in the absence of a monetary incentive (Be´nabou & Tirole 2003a). If an employee is given many investment options, she might not know which ones are suitable for her and therefore may be less likely to invest than if she had only a few options (Kamenica 2008, Iyengar & Kamenica 2010). If she is unsure of the appropriate fraction of income to invest, the default option may be an appealing suggestion (Madrian & Shea 2001). [3]

…The most well-known HR example I can think of that demonstrates this phenomenon in action is the relatively recent trend in the U.S. of having employees default into their 401(k) plan at ‘X’ percent upon hire. They can choose to change their contributions at any time, but upon receiving their first paycheck the default position is an election of a certain percentage of their salary into the plan. Most employees in this case will choose to stay enrolled in the 401(k) at whatever the default amount is, assuming this is a good idea. If the contribution amounts automatically increase on a year over year basis they will also – as a population – typically lean towards not changing the automatic elections. The cue that they’re getting from the environment is that the election is the right one to make, and furthermore it is the easiest option as it doesn’t require them to change their behavior.

As I shared on Sunday here, most people make a series of sub-optimal decisions everyday; these choices are often made despite the fact that people know they’re acting outside of their best interests. Often times, it’s simply too troublesome to change one’s behavior. As such, the best way to help someone do the right thing is to frame the matter in a context that they are compelled to do so.

…This has all sorts of implications that I’d love to get into, but it’s running late and I’ve got to wrap this up. I’ll revisit this topic in the next week or so, however, and in the interim I (as always) invite you to share your thoughts in the comments section below.

Best,

Rory

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