Pay Enough - Or Don't Pay at All

Abstract: Economics seems largely based on the assumption that monetary incentives improve performance. By contrast, a large literature in psychology, including a rich tradition of experimental work, claims just the opposite. In this paper we present and discuss a set of experiments designed to test the effect of different monetary compensations on performance. In our experiments we find that whenever money is offered, a larger amount yields a higher performance. It is not true, however, that offering money always induces a higher performance: participants who were offered a small payoff gave a worse performance than those who were offered no compensation at all. These results suggest that the behavior of participants is influenced by their perception of the contract that is offered to them. When the contract offers money the environment is perceived as monetary, and participants respond in a qualitatively different way in monetary and non-monetary environments. In a different set of experiments we test subjects who, acting as principals, have to provide the appropriate incentive to agents. We show that principals do not anticipate the drastic difference in behavior. The vast majority of principals seem to think incorrectly that a larger compensation is unambiguously a better incentive.Monetary incentives;performance;motivation;principal-agent

Putting Behavioral Economics to Work: Testing for Gift Exchange in Labor Markets Using Field Experiments

Recent discoveries in behavioral economics have led scholars to question the underpinnings of neoclassical economics. We use insights gained from one of the most influential lines of behavioral research -- gift exchange -- in an attempt to maximize worker effort in two quite distinct tasks: data entry for a university library and door-to-door fundraising for a research center. In support of the received literature, our field evidence suggests that worker effort in the first few hours on the job is considerably higher in the "gift" treatment than in the "non-gift treatment." After the initial few hours, however, no difference in outcomes is observed, and overall the gift treatment yielded inferior aggregate outcomes for the employer: with the same budget we would have logged more data for our library and raised more money for our research center by using the market-clearing wage rather than by trying to induce greater effort with a gift of higher wages.

Evaluation Periods and Asset Prices in a Market Experiment

We test whether the frequency of feedback information about the performance of an investment portfolio and the flexibility with which the investor can change it influence her risk attitude in markets.In line with the prediction of Myopic Loss Aversion (Benartzi and Thaler, 1995), we find that more information and more flexibility result in less risk taking.Market prices of risky assets are significantly higher if feedback frequency and decision flexibility are reduced.This result supports the findings from individual decision making, and shows that markets do not eliminate such behavior.information;portfolio investment;performance;financial risk;asset valuation

Pay Enough - Or Don't Pay at All

Abstract: Economics seems largely based on the assumption that monetary incentives improve performance. By contrast, a large literature in psychology, including a rich tradition of experimental work, claims just the opposite. In this paper we present and discuss a set of experiments designed to test the effect of different monetary compensations on performance. In our experiments we find that whenever money is offered, a larger amount yields a higher performance. It is not true, however, that offering money always induces a higher performance: participants who were offered a small payoff gave a worse performance than those who were offered no compensation at all. These results suggest that the behavior of participants is influenced by their perception of the contract that is offered to them. When the contract offers money the environment is perceived as monetary, and participants respond in a qualitatively different way in monetary and non-monetary environments. In a different set of experiments we test subjects who, acting as principals, have to provide the appropriate incentive to agents. We show that principals do not anticipate the drastic difference in behavior. The vast majority of principals seem to think incorrectly that a larger compensation is unambiguously a better incentive.

Brain Drain: The Mere Presence of One’s Own Smartphone Reduces Available Cognitive Capacity

Our smartphones enable—and encourage—constant connection to information, entertainment, and each other. They put the world at our fingertips, and rarely leave our sides. Although these devices have immense potential to improve welfare, their persistent presence may come at a cognitive cost. In this research, we test the “brain drain” hypothesis that the mere presence of one’s own smartphone may occupy limited-capacity cognitive resources, thereby leaving fewer resources available for other tasks and undercutting cognitive performance. Results from two experiments indicate that even when people are successful at maintaining sustained attention—as when avoiding the temptation to check their phones—the mere presence of these devices reduces available cognitive capacity. Moreover, these cognitive costs are highest for those highest in smartphone dependence. We conclude by discussing the practical implications of this smartphone-induced brain drain for consumer decision-making and consumer welfare.Marketin

Evaluation Periods and Asset Prices in a Market Experiment

We test whether the frequency of feedback information about the performance of an investment portfolio and the flexibility with which the investor can change it influence her risk attitude in markets.In line with the prediction of Myopic Loss Aversion (Benartzi and Thaler, 1995), we find that more information and more flexibility result in less risk taking.Market prices of risky assets are significantly higher if feedback frequency and decision flexibility are reduced.This result supports the findings from individual decision making, and shows that markets do not eliminate such behavior

Evaluation Periods and Asset Prices in a Market Experiment

We test whether the frequency of feedback information about the performance of an investment portfolio and the flexibility with which the investor can change it influence her risk attitude in markets.In line with the prediction of Myopic Loss Aversion (Benartzi and Thaler, 1995), we find that more information and more flexibility result in less risk taking.Market prices of risky assets are significantly higher if feedback frequency and decision flexibility are reduced.This result supports the findings from individual decision making, and shows that markets do not eliminate such behavior

Competitiveness, gender and handedness

We conduct an intercultural experiment in three locations on three different continents to elicit competitiveness and study whether individual differences in competitiveness are related to handedness. Being a “lefty” (i.e., having either a dominant left hand or a dominant left foot) is associated with neurological differences which are determined prenatally, and can therefore be seen as a proxy for innate differences. In large-scale data with incentivized choices from 3664 participants from India, Norway and Tanzania, we find a significant gender gap in competitiveness in all cultures. However, we find inconsistent results when comparing the competitiveness of lefties and righties. In north-east India we find that lefties of both genders are significantly more competitive than righties. In Norway we find that lefty men are more competitive than any other group, but women's competitiveness is not related to handedness. In Tanzania, we find no relationship between handedness and the competitiveness of either gender. The merged data show weak evidence of a positive correlation between being a lefty and competitiveness for men, but no such evidence for women. Thus, our data provide suggestive but not robust evidence that individual and gender differences in competitiveness are partially determined by innate factors, where innate factors are proxied by the complex, prenatally shaped trait of handedness.</p