Farnam Street helps you make better decisions, innovate, and avoid stupidity.

With over 350,000 monthly readers and more than 87,000 subscribers to our popular weekly digest, we've become an online intellectual hub.

Large Stakes and Big Mistakes

If you work for a large institution that provides very large incentives for tasks requiring creativity, problem solving, and memory I suggest you stop reading now. The study below challenges the assumption that increases in motivation would necessarily lead to improvements in performance.

Payment-based performance is commonplace across many jobs in the marketplace. Many, if not most upper-management, sales force personnel, and workers in a wide variety of other jobs are rewarded for their effort based on observed measures of performance. The intuitive logic for performance-based compensation is to motivate individuals to increase their effort, and hence their output, and indeed there is some evidence that payment for performance can increase performance.

The expectation that increasing performance-contingent incentives will improve performance rests on two subsidiary assumptions: (1) that increasing performance-contingent incentives will lead to greater motivation and effort and (2) that this increase in motivation and effort will result in improved performance.

…Although there appear to be exceptions to the generality of the positive relationship between pay and effort, our focus in this paper is on the second assumption—that an increase in motivation and effort will result in improved performance. … We find that in some cases, and in fact most of the cases we examined, very high incentives result in a decrease in performance. These results provide a counterexample to the assumption that an increase in motivation and effort will always result in improved performance. …

Our primary goal in the studies reported herein is to test, in experiments that satisfy standard experimental economics criteria, whether increasing monetary incentives beyond some threshold may result in lower performance. A second major goal that distinguishes our work from previous contributions is to examine the generality of any detrimental effect of incentives. Among the six tasks in the first experiment, therefore, we included some that drew primarily on motor skills, some that drew primarily on memory, and some that drew primarily on creativity. Based on the literature showing detrimental effects of incentives on motor skills and creativity, we anticipated that the high monetary rewards might interfere with tasks that draw primarily on these skills, but not with those involving primarily memory. As will be seen, however, no such differences emerged; the highest levels of monetary rewards produced lower performance on all tasks in the first experiment. To examine this issue further in the second experiment, we included a task that required only physical effort. Such a task should not be subject to any of the mechanisms leading to choking under pressure as identified in the psychology literature. In this case the predicted differences between tasks did emerge. Finally, our third experiment extends the scope of investigation from financial to social incentives. …

Read the Entire Study

Christmas Shopping? If you’d like to support the site, do your amazon.com shopping through this link (it won’t cost you any extra)!