How are bonuses influencing performance?
Often people expect that higher bonuses will yield higher level of ability and performance — but do they?
Here is a talk I gave on this topic (see also Chapter 1 in “The Upside of Irrationality”)
According to this speech, Clutch players have no change in their shooting percentage in the last few minutes of the game.
I am wondering if players other than cluch players have lower shooting percentage in the last few minutes of the game.
Good question. They don’t.
fascinating, i grew more excited about this whole human irrational thing.
Nice outfit. Keep it up.
Dan, what’s your take on this movement?
Dan, I’d like to begin by saying that I’m a big fan of your work. I would like to offer some thoughts on your findings about clutch basketball players.
1) Clutch players take responsibility more often when the game is on the line. Players who can take responsibility are rare, others may panic.
2) Shooting more often means using more energy. You need to create an opportunity to shoot, whether it is by running away from a defender, or dribbling the ball. When you are tired, you tend to perform worse.
3) Defense plays better at the end of the game. Hence, getting into an opportunity to take a shot off takes even more energy at the end of the game.
4) Basketball is still about good decision making – which gets more complicated at the end of the game. There is more stress, think of it as a very strong electric shock.
Hence, the fact that such players can keep their percentage the same when they shoot more is quite remarkable. On the other hand the other players may keep their percentage at the end of the game because they are poorly defended – the defense converges on the clutch players, and usually non-clutch players get more open shots at the end of the game. They are also less tired since they shoot less often.
I think the effects of stress(anxiety/arousal) on performance is understood rather well. The inverted “U” as well as the “individual zone of optimal functioning” (where each person has their own personal anxiety tipping point) is discussed and experimented a lot in Sport/Performance Psychology. However, it’s great to see it illustrated in terms of labor and $$$.
What is interesting to me (as a Sport & Exercise Psychology student and martial arts instructor) is how to help people reach their optimal level of performance in these stressful situations. Helping those used to operating in low payment situations excel when given a “high stakes” opportunity.
I’m not as concerned with those on Wall Street as I am with those in the India experiment. It would be great to work with those individuals in the “high stakes” situation and teach them some arousal management tools that will aid them in performing well in high stress situations.
This is one reason I think Behavior Economics is such a cool field. It helps to highlight those areas of everyday life where we can help people live a more fulfilling life.
I think this is right. A clutch player is more valuable because he doesn’t choke–i.e. he can maintain a high level of performance when the pressure is on–contrary to the expectation set out in the performance curves you show in your lecture. Indeed, maintaining your performance level while others are declining is effectively as good as an increase, no?
btw. my comment was in reply to Vojislav
have you seen this video?
I prefer your talk though ;-) keep them coming!
I did see it and I think it is a very nice approach to explaining complex issues. I wish i could do this myself.
@Aaron I think your missing the point when it comes to high bonuses creating stress for bankers. Unlike a high stakes situations in sports, high bonuses are not inherent to the way the business of banking works. If bonuses lower performance by creating stress, the solution is not to give bankers better coping mechanisms; the solution is to take the stress away. Banking decisions don’t suddenly become more important at the end of the year (i.e. during bonus season). It’s just that bankers perceive their the stakes as being much higher because bonuses are at the forefront of their minds.
The great thing about taking the stress away is that it saves the (government owned) companies alot of money (I believe AIG handed out $165M in bonuses the year they got bailed out). More importantly, it would make their compensation more equitable; there is no way of justifying $165M in bonuses when your business was just brought back from the brink on the tax-payers’ back to the tune of hundreds of billions of dollars.
Sorry for my trolling. I guess I didn’t heed the lesson about not making decisions (mistakes) under a heightened emotional state. I think what I meant was that if you applied the results of the India experiment to bankers, you’d see the current bonus system as a problem, and you wouldn’t try to solve it by giving bankers better coping mechanisms.
@Daniel W. ~ no worries. I think the point you made is exactly what is on everyone’s mind when we talk about these big bonuses. I was actually trying to stay away from addressing my feelings (yes, my lovely, lovely irrational feelings) about the current situation with the insanely large amounts of money that is being thrown around these days.
Instead, I was thinking about those, in very low income situations, who were given an opportunity to obtain a large amount of money but blew it because they couldn’t cope with the sudden increase in anxiety. I think it’s worthwhile to help those people. Closer to home, think about those who have been out of work for months and are finally called in for a job interview. It is vital for them to be able to control the increase in anxiety/stress when this happens (performance on the interview is not just a “big bonus” but a “life changing bonus”). Of course, this was not the design of the experiment… this is just where my mind took me when presented with Dr. Ariely’s examples.
Another interesting point to consider, when we talk about removing these Gazillion dollar bonuses, is the effect of Loss Aversion (and loss in general). If these huge bonuses are expected, then how will performance and motivation react to their removal?
@Aaron (this is Daniel Wong using my WordPress account) I see your point about how teaching coping mechanisms could be useful. Maybe Dr. Ariely should repeat his India experiment to figure out what sorts of things make people more or less prepared. Since many people strongly believe it helps them perform, one thing I’d like to see tested is caffeine. My guess is that it would actually have a significant negative effect on performance.
As for taking away bonuses leading to loss aversion, I think that shows exactly what’s screwed up about the current bonus system. It’s not really a bonus when your sense of entitlement forces you to see it as a loss, arousing your sense of aversion. If bankers feel bad because this sort of thing would be unprecedented (this was actually their stated counter-argument), it’s time for them to get a reality check. Back when Intel created their infamous FPU debacle, nobody got their Christmas bonuses. Why should financial companies be treated differently from high-tech companies with respect to bonuses being paid in years with devastating performance?
your work has created new cognition in my mind, i understand that if you want to find rationality you need to look with in the irrationality – chaos theory…
Here’s the reason you must relay with me over email, i have logic that helps better understand human logic, it starts from basics like why do dogs poop on the lawn and not on the soil? its irrational behavior to us, because we think irrationally,
the rational behind it is physiological, dogs have a warm anus, fever is induced by fluxes of hot and cold, the grass is warm the soil is cold, therefore if the anus gets a fever it will get hemorrhoids.
Thats the basic basics… The advanced logic has proved that 1 isosceles triangle can be devised into a square to create 2 new equal isosceles triangles. From Axiom, to proof, to algebraic equation of area of new shape is the limit and so is 360 degrees, therefore b²=2(½(b.h)
The axiom can be proved by taking a square piece of paper and folding it in half, if you are a linear thinker you find the rectangle first and if you are non-linear you will find the triangle.
Irrationality/Rationality = Understanding
Cognition/Intuition = Human Logic
for a quad and any triangle you change b² function of the equation to the area equation of a quad.
Application, set limit for inside circle, 2D therefore shape = 360 degrees.
Now if i take 3 triangles and devise them into a circle my new shape will be similar to that of a nuclear sign.
3▲/❍ = ☢
thats the advanced application, the basic application explains human logic.
If you’d like to find more i can send you my peer review research to evaluate :)
At everyone, you lost the plot, because you drive automatics in the states you have a con-native meaning of what a clutch is, basketball is old and the term clutch is old, look at the denotative meaning of clutch plate or clutch; i don’t wanna blatantly call you guys idiots and i’d like a logical reason for you critiquing me.
I under stand Dans logic, not yours.
Please do actual research(like Dan) before you apply your brain farts to experimental sciences…
rationality/irrationality and irrationality/rationality
Daniel Wong, you need to set limits with caffeine, find the half life or LD50 of how long it stimulates the brain and then you can give the person caffeine every 20 minutes if its half life is 20 minutes thus his performs will average out to that on caffeine cause you have equated for the LD50… Think about that before you use yourself as lab rat and save yourself a hell of a lot of trouble with addiction, the end result will be addiction.
Dan the main thing you looking for in psychology, is emerging markets, think along these lines:
Sigmund Freud worked on his theories under the influence of cocaine – he was under the limits of cocaine in the brain.
Cocaine’s one side affect is increased confidence, his brain was overly confident, his basis model is right but his logic or rational is all kinds of fucked up, i guess its cause he was an atheist and believed he was the master of his universe thus he must be god.
Let me correct his ID, Ego and Super-Ego. and you will understand limits of humans.
Look at research into DMT for proof of the soul.
ID covers the most space, therefore if a computer has a master, and a dog has a master(alpha) and demi-gods(start after alpha and works down the hierarchy to least important which is Omega) because it has no theological references of God, the dog will asume the alpha to be God, and the computer assumes any user to be God because it has cognition like an animal but no intuition, it has fight(solve problem) or flight(cant compute) but no intermediate which is creativety which means you think your way through the obstacle.
So the ID is the soul, the Ego is the vessel aka primitive self and the Egos cognition is to learn the souls lessons, and the result is empirical(divine) knowledge which manifests in this world(software) from the astral plane(hardware) and primitive self being in unisons thus ego + knowledge must be the Super-Ego.
The Ego works in the way of a triangle, the soul is at the top, and the ego and super ego is lower down in the hierarchy according to that order.
Now the Illuminati don’t have to explain why the symbol of enlightenment is a Pyramid with an eye at the top, Big brother is your soul which is your guide in the video game of life…
Not mind blowing stuff, rationality…
Now people cant stop thinking about the illuminati, that is all they know, the true relationship of humans to the universe; computer to user… thats why so many people in Africa and South Africa(my current i was born in and have never left) live in poverty. Poverty creates emerging markets, giving poverty stricken people food only makes them lazy, its the concept of the beggar moving from the robots to outside the shop front, he worked out that if you in the shop you have money, and you cant lie to a destitute, can you? Thats what the illuminati have done, in stead of sharing this information money and laziness made them greedy and because they are alpha and and the destitute or the omega. Hence why hard work pays of.
I am not part of the illuminati, i am 23, this is my own work.
John Cecil Rhodes started Rhodes college in Grahamstown in the poorest state in South Africa known as the Eastern Cape and Anglo-Gold owned by the illuminati family the Oppeinhemers worked to find functional communism and capitalism which was apartheid, the white man is the alpha(director) and the black man is a well taken care of slave… South Africa is the only place you will find a black person, now currently also including white people due to our President only having Grade 3 schooling; where these domestic workers earn anywhere form $10 – $25 a week… Now thats fuct up by anyones standards…
You Americans are arrogant because you think you are smart, your public school system churns out idiot after idiot.
Externalize your point of view and lets debate logically, and after the argument you will find i am write – because i know i’m right because i used logic and rational…
If it wasn’t 2:35 in the morning here in RSA(Republic of South Africa, yes we moved away from colonialism(royal rule) half a century and more ago.) i would relate Genesis to the Big Bang and Revelations to the greed of man and war; which relates The Bible to Evolution…. and why the cult of music will be the next religion after the fundamental christians either die or accept the musician as the preacher of life; his life; learn from his mistakes and triumphs.
That is all, Good Night/Morning/Afternoon
P.s. I LOVE YOU DAN!!! DAN THE MAN :D
i just woke up with no replies :(
Did i win :( Damn you guys suck at debate…
In relation to the beginning of your talk when you said that it’s hard to study the effect of individuals’ irrationalities in the market, have you considered using Agent-Based Modeling? it’s a very powerful tool especially when there is a massive amount of data about individuals and not enough information about the patterns of the systems’ emergent behavior. The financial crisis is definitely a stronger reference but maybe ABMS can be a good complementary method to gain a better perspective on the large-scale long-term behavior of the system.
I don’t wanna answer on behalf of Dan, but if you look at supply and demand / needs and wants you will quickly be able to evaluate a human being. Addiction / Health…
when you bring the complex systems such as society, greed, pride and human emotions, then Dan is correct, because to find the root of the human being emotionally is so much harder.
@Maryam: ABM seems pretty cool, but I don’t think it can answer the question “How would markets actually behave differently if we constructed them differently?”. Empirical answers to this question are exactly what we need in order to validate agent-based models. This means the best ABM can do at this time is to suggest how markets might evolve differently based on an assumed set of rules governing behavior. The problem is that these rules often ignore significant aspects of human behavior. For example, you might assume that agents behave rationally (based on Wikipedia, this is a typical starting point); however, behavioral economics has empirically has show how people are systematical prone to a whole slew of irrational behaviors. This means we have to take a large grain of salt when it comes to making predictions based on simulations involving purely rational agents.
Sorry if I’m trolling again. I should probably stop now.
@Maryam, I probably should have scrolled down to the “Verification & Validation” section in the ABM Wikipedia article before. I’m not sure if what it’s saying implies that ABM can help us understand the importance of irrationality in determining outcomes in the marketplace, but I’d certainly be interested in hearing Dr. Ariely’s take on it as well.
Dan, similar to this India study you discuss here, are there any insights into the effects of cutting down bonuses. Let’s say a team/person has X bonus for a particular year. Next year, we cut that into half – what impact would this be on the performance of team/individual? Again, simple thing would be to say – “yes, that demotivates the individual/team” – but has there been any test/experiment along these lines.
In popular culture,the production of mass food,specifically meats such as chicken and beef like this..Really great post..
What you do not realize concerning sunglass could be costing a lot more than one thinks.
This blog was… how do you say it? Relevant!! Finally I have found something that helped
[…] In Dan Ariely’s book The Upside of Irrationality, he talks about pay for performance bonuses and how they actually affect our behavior. http://danariely.com/2010/06/20/a-talk-i-gave-at-poptech/ […]
Hi, I’m Dan Ariely. I do research in behavioral economics and try to describe it in plain language. These findings have enriched my life, and my hope is that they will do the same for you.
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