When financial rewards backfire
by Chetan Parikh
  
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In a great book “SWAY”, the authors, Ori Brafman and Rom Brafman write on why financial rewards sometimes backfire.

 

“Whether they’re Fortune 500 CEOs or high school principals, managers are always looking for ways to better motivate people. But is there a hidden side effect of bonuses and incentives meant to spur performance? What are the unintended consequences of offering people a financial carrot? To get a unique angle on the relationship between motivation and reward, let’s travel to the University of Zurich, where researchers made some surprising findings.

 

Switzerland conjures up images of idyllic green pastures, snowy mountain ranges, and men in lederhosen blowing alpenhorns. The last thing that comes to mind is a mound of containers filled with toxic sludge.

 

In the 1940s, alarmed by the atrocities of World War II, Switzerland’s political leaders began developing a nuclear program. In typical Swiss fashion, the program priorities soon shifted to the more peaceful goal of creating nuclear power: five plants now provide about 40 percent of Switzerland’s electricity. The country has a relatively clean energy program, but with any nuclear power comes nuclear waste-waste that has to go somewhere.

 

In 1993 the Swiss government identified two small towns as potential nuclear waste depositories, but they didn’t know how the townspeople would react. Would they be outraged? Or, understanding the importance of the nation’s nuclear energy program: would they “take one for the team”?

 

Two University of Zurich researchers were equally’ curious and decided to try to get some answers to this question. They asked the residents of the towns: “Suppose that the National cooperative for the Storage of Radioactive Waste (NAGRA), after completing exploratory drilling, proposed to build the repository for low-and midlevel radioactive waste in your hometown. Federal experts examined this proposition, and the federal parliament decides to build the repository in your community.” In a town hall meeting, the townspeople were asked whether they would accept this proposition or reject it.

 

Naturally, many people were frightened by the prospect of hung the waste facility so close to their homes. But, at the same time, whether out of social obligation, a feeling of national pride, or just a sense that it was the fair thing to do, 50.8 percent of respondents agreed to put themselves at risk for the common good. The other half of the respondents, however—those who said they would oppose the facility— still represented a significant obstacle for the government.

 

To see if this problem could he resolved, the researchers tested out a seemingly rational solution to bring the nuclear waste dump opponents on hoard. They talked to a new group of individuals from the same community and presented them with the same scenario, but added, “Moreover, the parliament decides to compensate all residents of the host community with 5,000 francs [about $2,175] per year and per person… financed by all taxpayers in Switzerland.” Once again they were asked, in a town hall meeting, would they accept this proposition or reject it?

 

Now, from an economic perspective, a monetary incentive should make the proposition of living close to a nuclear waste storage facility easier to swallow Indeed, we naturally assume that the best way to get someone to do something unpleasant or difficult is to offer some kind of financial incentive. It’s why employers give bonuses when their employees take on more challenging or time—consuming work and why parents tie their children’s allowances to performance of specific chores. Along this line of reasoning, the higher the compensation, the more likely it should be that people would do what you were paying them for.

 

Regardless of how much money is actually offered, though, rationally speaking, any amount of money should be better than nothing at all. That is, the $2,175 the Swiss researchers proposed might not be enough to convince all residents, but it should win over at least of those who were opposed.

 

But that’s not what happened.

 

For some reason, when the researchers introduced financial compensation into the equation, the percentage of people who said they would accept the proposition not only didn’t increase—it fell by half. Instead of being motivated by the financial incentive, the townspeople were swayed to reject the nuclear dump en masse: only 24.6 percent of the people who were presented with the monetary offer agreed to have the nuclear dump close to their town (compared with the 50.8 percent who agreed when no money was offered). In addition to contradicting the laws of economic theory, this response just doesn’t make sense.

 

Even when the researchers sweetened the deal to $4,330——and then again to $6,525—the locals remained Firm in their opposition. Only a single respondent, in fact, changed his mind and accepted the offer when more money was put on the table.

 

Managers, parents, and, of course, economists have long operated under the assumption that monetary incentives increase motivation. But psychologists are beginning to discover that the connection between the two is trickier than it first appears. To understand what was really going on in Switzerland, we need to look into a paradoxical aspect of financial compensation, one that illuminates the strange relationship between monetary incentives and two very different parts of our brain.

 

Our first insight into this mysterious relationship can be found at an Israeli university where forty students sat with number 2 pencils in hand, preparing to take a mock version of the Graduate Management Aptitude Test (GMAT), the entrance exam used by most business schools.

 

Now, these Israeli students weren't actually applying to business school; they were taking the GMAT as part of a psychological study. Though they knew a high score on the mock test wouldn't result in admission to any MBA program, the volunteers were encouraged to do their best anyway.

 

Next the researchers brought in a separate group of forty students and asked them to complete the same test-but they added a concrete reward: for every right answer, a student would get 2.5 cents-not exactly enough to retire on, but better than nothing-which is what the first group of students received.

 

Check out the list of the actual student scores, ranked from highest to lowest. See if you can spot the surprising pattern.

 

Scores (out of a possible 50 points)

   

Students receiving no compensation

 

Students receiving 2.5 cents per correct answer

 

49

50

48

44

48

44

45

43

42

40

42

39

42

36

40

35

37

35

37

35

37

34

37

34

36

32

36

32

36

31

35

30

34

26

34

26

34

26

31

26

31

24

31

23

31

23

29

22

29

21

24

21

23

21

23

19

23

19

22

13

22

11

20

8

20

0

18

0

7

0

3

0

0

0

0

0

0

0

0

0

 

 

At first, the two columns look pretty similar. But the most interesting numbers are found down toward the bottom. Of the forty participants who weren't paid anything, four scored a zero on the test. Because the exam was multiple choice, getting a zero by dumb luck is virtually impossible. More likely, the four students simply thumbed their noses at the researchers. You pay me nothing, these rebels must have thought while filling the Scantron sheet with mockingly artistic designs, you get nothing in return.

 

But the group of paid participants had twice as many zeros. Now, you'd think that the opposite would be true: payment, after all, should act as an incentive to perform better. This is where the paradox witnessed in the Swiss countryside comes in. In each situation, the money effectively seemed to serve as a disincentive: paid townspeople were less willing to host the dump, and compensated test takers underperformed on the exam.

 

When you look at the top 50 percent of performers in each group of test takers side by side, you see that the unpaid students still consistently beat out their paid counterparts, with an average score of 39 to the paid students' 34.9. In fact, looking across the board at all the scores, the students who didn't get a penny performed better than their paid counterparts, with an average score of 28.4, compared to the paid test takers' average of 23.1.

 

Economists can debate the reasons that such financial rewards backfire. But researchers at the National Institutes of Health (NIH) have been able to pinpoint the neurophysiology behind this paradox.

 

The NIH researchers placed participants in a specially modified MRI machine fitted with a computer monitor and a simple joystick. Lying inside the machine, the subjects played a video game reminiscent of the Atari era. At the start of each round of the game, either a circle, a square, or a triangle would appear on the screen. Each shape held a unique meaning. A circle meant that if you succeeded in completing an upcoming task-zapping a figure as it appeared on the screen-you'd earn a monetary reward. Different circles corresponded to different rewards. An empty circle was worth twenty cents. If the circle had a line through it, it meant that $1 was up for grabs; two lines meant a $5 reward.

 

When the subjects saw a square instead of a circle, they braced themselves for potentially bad news. The object of the game would be the same-zap the figure-except that failing to do so would result in a penalty of twenty cents, $1, or $5.

 

If the participants saw a triangle, it meant that no money was on the line. Regardless of whether they hit the target or not, they would neither lose nor gain any money on that round.

 

While the participants were playing the game, they were shown a running tab of their earnings and losses. Meanwhile, the scientists monitored their brain activity. The scientists noticed that every time a circle or a square appeared-that is, every time there was money to be gained or lost-a certain part of the brain lit up. This region, which remained dormant when a triangle was shown (and no money was on the line), is called the nucleus accumbens.

 

The nucleus accumbens is, evolutionarily speaking, one of the most primitive parts of the brain, one that has traditionally been associated with our "wild side": it's the area of the brain that experiences the thrill of going out on a hot date, that sparks sports fans’ exuberance when their team pulls out a last-minute victory, and that seeks out the excitement of Las Vegas. Scientists call this region the pleasure center because it is associated with the high that results from drugs, sex, and gambling.

 

At its most extreme, the pleasure center drives addiction. A drug like cocaine, for example, triggers the nucleus accumbens to release dopamine, which creates a feeling of contentment and ecstasy. The reason cocaine is so addictive is that the pleasure center goes into overdrive and the threshold for excitement climbs higher and higher. The MRI study surprised the researchers because it revealed that the pleasure center is also where we react to financial compensation. And the more money there is on the line, the more the pleasure center lights up. A monetary reward is- biologically speaking-like a tiny line of cocaine.

 

Now, compare this reaction with our neurological reaction to altruistic behavior. In 2006, a few years after the NIH study, Duke Scientists asked subjects to play a similar Atari style video game, but instead of earning money for themselves, the participants were told that the better their score, the more money would be donated to charity.

 

In the MRI images, the pleasure center remained quiet throughout the game. But a completely different region of the brain, called the posterior superior temporal sulcus, kept lighting up. This is the same part of the brain responsible for social interactions-how we perceive others, how we relate, and how we form bonds. To make sure that the participants were reacting to altruism and not just to the act of playing a video game, they were also scanned while they watched a computer playing the game with the same charitable results. Despite the fact that the participants were just observers, the posterior superior temporal sulcus-what we'll call the "altruism center"-was hard at work.

 

Taken together, the findings of the Swiss nuclear depository survey and the Israeli GMAT study shed new light on the relationship between these two parts of the brain. Unlike, say, the parts of our brain that control movement and speech, the pleasure center and the altruism center cannot both function at the same time: either one or the other is in control. If the two brain centers functioned concurrently, then in the Swiss survey you would expect a compounding effect-that is, the percentage of townspeople who agreed to host the nuclear dump would have grown in accordance with the increase of the stipend. But that didn't happen. In the first half of the study-when no money was offered-the altruism center took charge, as people weighed the danger of having a nuclear dump nearby against the opportunity to help their country. The moment money was introduced; on the other hand, the entire situation got processed differently. The pleasure center took over, and in people’s minds the choice came down to the dangers of the dump on one side and making a "quick franc" on the other. But the 5,000-franc stipend was much too low to excite the pleasure center.

 

The same thing happened with the GMAT takers. The moment monetary incentives were introduced, the altruistic motivation (completing the task to help out the researchers) waned, and money became the reason to proceed. But with such a small reward for the pleasure center, the students were more prone to slack off.

 

It's as if we have two "engines" running in our brains that can't operate simultaneously. We can approach a task either altruistically or from a self-interested perspective. The two different engines run on different fuels and also need different amounts of those fuels to fire up. It doesn't take much to fuel the altruism center: all you need is the sense that you're helping someone or making a positive impact. But the pleasure center seems to need lot more-2.5 cents per right answer or a 5,000-franc stipend for agreeing to tolerate a nuclear dump site just isn't enough.”