Motivating people is an extremely difficult and delicate task as anyone who’s ever taught, managed, collaborated with or given birth to someone knows. In business, as opposed to say, child-rearing, the debate is slightly less daunting, though not always much clearer. For instance, offering incentives to employees for improved performance is a fairly common approach to encouraging higher sales —though surprisingly unproven by data.

For the most part, the effectiveness of incentives is supported by intuition and some anecdotal evidence. Wouldn’t everyone work at least a little harder for a $100 bill on top of their usual paycheck? Certainly it can’t hurt. But one important open question is whether monetary or tangible (spa retreat, ipod, dinner for two, etc) rewards more efficacious motivators?

Those who advocate for monetary incentives claim they have the greatest appeal given that the winners can do anything with them; what if someone needs an ipod like they need another hole in their head? On the other side, those in favor of tangible incentives argued that money lacks the emotional appeal of, say, a weekend for two at a romantic country inn or swank hotel. But either way, there was nothing to back up either camp.

Thankfully, there is some data on this debate.  A few years ago Goodyear Tire & Rubber Company decided to test which method was more successful in an effort to improve sales of a new line of Aquatred tires. Their plan was simple and elegant: first they ranked their 60 retail districts according to previous sales, then divided them into two groups of equal performance and assigned one group to receive monetary incentives and the other to receive tangible incentives of equal value to the first group.

The results were very interesting; it turned out that the tangible-reward group increased sales by 46% more than the monetary-reward group. They also improved in terms of the mix of products sold by 37%. One explanation, and it seems to me a fairly good one, is that we can visualize tangible rewards (imagine yourself on a Hawaiian beach), which creates an emotional response. Money, on the other hand, is not accompanied by images as often (aside from maybe Scrooge McDuck swimming in piles of it), and lacks the emotional pull that tangible rewards have, so they’re less effective in motivating employees. I guess it’s called “cold, hard cash” rather than “future beach vacation cash” for a reason.

In a follow-up to the much acclaimed “Pinch of Saffron” , this latest Predictably Irrational Short Story is a thrilling Wall Street tale of overpricing CDOs, again written by one of my Behavioral Economics students, Andrew Holmberg. It’s entitled, “Fixed Income”, and you can find it here.

So, today I tried one approach for office hours

We had some complexities and a learning curve, but I think this technology has a future for such “office hours”.

Tomorrow at 12 (EST) I will try this again, this time with a different technology, holding online office hours with Duke this Friday, July 31, at noon Eastern Time.

Feel free to ask questions, in advance or during the event, three ways: 1) Post a comment on this Facebook page — http://apps.facebook.com/dukeuniversitylive/. 2) Send an email to live@duke.edu. 3) Post a Twitter comment with the tag #dukelive. Or write comments on this blog in advance.
You can also watch on Ustream (http://www.ustream.tv/dukeuniversity) or Facebook (http://apps.facebook.com/dukeuniversitylive). <http://apps.facebook.com/dukeuniversitylive>  <http://apps.facebook.com/dukeuniversitylive>

After both of these attempts, we will see what approach to adapt….

This is another lovely example of people getting annoyed with companies (this time with United Airlines over breaking up a Taylor guitar), and making it into a revenge type of advertisement.

On July 30th, I’m going to hold a virtual office hour 12:00PM-1:00 PM EDT.

I’ll talk about some new research that we’ve been doing and will take some questions.

I recently started using GoToMeeting, and I am looking forward to see how it works on a larger scale.

If you want to take part, and have a question that you’d like me to try to answer, shoot me an email in advance at dan at predictablyirrational dot com.

Directions to join the office hours:

on Thursday, July 30 at 12:00 PM EDT.
1.  Click on this link
https://www2.gotomeeting.com/join/249041699

2.  Use your microphone and speakers (VoIP) – a headset is recommended. Or, call in using your telephone.
Dial 309-946-4601
Access Code: 249-041-699
Audio PIN: Shown after joining the meeting
Meeting ID: 249-041-699

Irrationally yours

Dan

I pleased to announce a new series of short fictional stories written by Duke undergraduate students who took my Behavioral Economics class this last spring.

I will post another one of these stories twice a month for the next few months.

The first story is called “A Pinch of Saffron,” which is about a business executive who redesigns her mother’s traditional Indian restaurant to monetize on people’s irrationalities. You can download it here.

A few days ago Dan wrote about Don Moore’s research on how we accept advice from others. A lab experiment showed that subjects adhered to advice from confident, not necessarily accurate, sources. The findings of another research, led by Prof. Gregory Berns of Emory University, show another aspect of our reaction to advice.

Berns recorded his subjects’ brain activity with an fMRI machine while they made simulated financial decisions. Each round subjects had to choose between receiving a risk-free payment and trying their chances at a lottery. In some rounds they were presented with an advice from an “expert economist” as to which alternative they consider to be better.

The results are surprising. Expert advice attenuated activity in areas of the brain that correlate with valuation and probability weighting. Simply put, the advice made the brain switch off (at least to a great extent) processes required for financial decision-making. This response, supported by subjects’ actual decisions in the task, are troublesome, perhaps even frightening. The expert advice given in the experiment was suboptimal – meaning the subjects could have done better had they weighted their options themselves. But how could they? Their brains were somewhat dormant.

References:
Jan B. Engelmann, C. Monica Capra, Charles Noussair, Gregory S. Berns (2009). Expert Financial Advice Neurobiologically “Offloads” Financial Decision-Making under Risk.

I found this quote in a wonderful book called 3 men in a boat.  The book was written in 1889 by Jerome K. Jerome, and interestingly it does not seem that much has changed since then.

I knew a young man once, he was a most conscientious fellow and, when he took to fly-fishing, he determined never to exaggerate his hauls by more than twenty-five percent.
“When I have caught forty fish,” said he, “then I will tell people that I have caught fifty, and so on. But I will not lie any more than that, because it is sinful to lie.”

A few people purchased the original version of Predictably Irrational since it came out in February 2008.

Now that the expanded edition is out, it seemed to me that the right thing would be to get the extra material to those who have purchased the book already.  After discussing this idea with HarperCollins, my publisher, we decided to try an honor system for distributing the extra material.

So — if you purchased the original version of Predictably Irrational and you want the extra material, please email  piexpanded@gmail.com and we will email you back the added information in 3 PDFs (a new introduction, added material about the original chapters, and reflections about the financial markets).

Irrationally yours

Dan

“For the great majority of mankind are satisfied with appearances, as though they were realities, and are more often influenced by the things that ‘seem’ than by those that ‘are.'”
-16th-century Italian politician Niccolo Machiavelli

It’s something we come across regularly: presentation trumps content. Often what matters is not what we know, or what we have done, but rather how we spin it. It’s why cover letters are so important, and why the peripheral route to persuasion – one of advertising’s biggest weapons – works.

Now, Don Moore of Carnegie Mellon University demonstrated yet another way that we are heavily influenced by delivery — We tend to seek advice from experts who exhibit the most confidence – even when we know they haven’t been particularly accurate in the past.

In his experiment, Don had volunteers guess the weight of people in photographs, and paid them for their correct answers. But before each guess, the volunteers were asked to choose one of four advice-givers (also volunteers) from whom to buy advice. Each advice-giver submitted their weight guess in percentage form, with some advisers spreading out their advice over multiple weight ranges. So, one advisor might have said that there was a 70% chance that the person’s weight was 170-179 pounds, a 15% chance that it was 160-169, and a 15% chance that it was 180-189. A more confident advisor, however, would have put all his eggs in one basket and said there was a 100% chance that the weight was within the 170-179 range.

Now here’s the really important part: in each round, before they chose their adviser, volunteers got to see each adviser’s percentage spread, but not the associated weight ranges. (See this really handy chart for more on the set-up.)

What did Moore find? Volunteers were more likely to buy advice from confident advisers (such as the 100% adviser from above) than those who spread out their percentages. What’s more, this tendency led advisors to make their advice more and more precise in subsequent rounds – but not more accurate.

These findings are troublesome. Because though confidence and accuracy sometimes go hand-in-hand, they don’t necessarily do so. And when we want confident advisors, some will exaggerate to give us what we want.  Maybe this is why so many pundits on TV for example exaggerate their certainty?