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Incentives for Nothing or Why Behavioral Experiments are Needed? Uri Gneezy talks in Barcelona

Incentives for Nothing or Why Behavioral Experiments are Needed? Uri Gneezy talks in Barcelona
Andrew Ivchenko
in Blog

Hosted at Banc Sabadell Auditorium, Prof. Uri Gneezy from Rady School of Management at University of California San Diego gave an interesting talk about “Incentives and Behavioral Change” and introduced his book “ The Why Axis” at the event organized by Barcelona GSE and Banco Sabadell yesterday. The room was full of people from Banco Sabadell, faculty members and PhD students from UPF, UAB, and UB interested in the research in the field of behavioral economics and judgment & decision-making. Barcelona’s prominent scholars in the field have also attended this event including Robin Hogarth (who chaired the talk by the way), Rosemarie Nagel, Gaël Le Mens, Antoni Bosch-Domènech among many others.

Uri_Gneezy_barcelona_behavioral_experiments_talk

It was an interesting talk for me for several reasons. First of all, Uri does a great job in popularizing behavioral and experimental research among business audience. It is important that business audience is driven no only by realizing the costs of mistakes (e.g. Uri’s example of Netflix rolling out new subscription plans in USA few years back), but also by realizing potential benefits (read: profits) from field testing their products and services with a pool of consumers using behavioral research methods. Again, stealing example from Uri’s talk:

Most of us are careful when making donations and selecting the organization to donate to. We are concerned whether our money will reach those who needed them and not used for “overheads” costs of charity organization itself. So, Uri and his colleagues have designed a field experiments where they offered different groups of people to donate money for some charity activity (read more about Randomized Controlled Trial (RCT) format on Wikipedia). Each of those different groups including a control group received information about possibility to donate but in a different format. While one group received a “standard” or classical donation request (this is our control group), other groups had donation requests where, for example, the donation request suggested that there is some organization that would match every dollar that a person donates. So if a person donates $5 than this organization matches donation of the this person and also donates $5.
Playing with different formats donation formats, Uri and his team were able to identify the best donation request format. So, the best donation request format was when this request clearly stated that there is some organization which would cover overhead costs if a person donate let’s say 10 dollars thus making this person confident that money will go only for donation purpose.

“Incentives for Nothing” was another theme of Uri’s talk. Do incentive schemes at your organization work? How do you know? And that’s was the point that not many organizations are actually test whether the proposed incentives do make a change in people behavior. In yet another example:

Uri talked about “health plan” among employees of one financial institution in US. Concerned (? 🙂 ) about health of its workers, institution wanted to test existing and new incentives that would nudge employees to attend a gym lets say at least 5 times a month. Organization was already paying scaling up incentives for each time their employees went to gym. For example, if employee went once – he or she got $2. If he or she went twice than $5 and so on. If employee went 5 times than the payout would be $50. These are just made up numbers, but the idea should be clear now.
Interesting part is that organization was already spending on this (on employees, contract with gym etc.) $100 million a year and getting little results.
So, behavioral experiment was design to test new possible schemes that would improve participation rate. Designing different formats for different groups participating in the field experiment, the outcome of this research was unpredictable. When offering employees to pay $50 only if they attend 5 times and not less – nothing has changed in terms of participation rate. The “gut feeling” would be that at least people who attended 4 times a month would attempt to make it 5, but not! So, after this financial organization implemented this change in the incentive scheme ($50 only for 5 times a month) nothing has changes from the health perspective. However, now this organization was spending only half or $50 million a year.
The learning point is that behavioral research might not give the right answer (or if it exists), but field experiments may help your organization to learn more about the efficiency of your existing policies or give insights on consumer behavior.
Nudge-cover

In the following ‘cava’ reception, I have asked Uri whether he thinks that behavioral tools that lead to behavioral changes (or nudges) do actually work in the long run. Behavioral research and number of experiments has shown that nudges work (for main reference, I suggest you take a look at the book on nudges by Richard Thaler and Cass Sunstein here: http://en.wikipedia.org/wiki/Nudge_(book)), but what happens when people are repeatedly exposed to nudges? Uri suggested that indeed the effect of individual nudges like Tobacco warning labels may be arguable or not so clear, however step-by-step these and other nudges do reduce number of smokers. Whether you believe in libertarian paternalism or not, it is another big question.

UPDATE: Check the highlights of the talk  in a 5 minutes video here

What do you think? Offer your thoughts or links to existing research on the topic in the comments section

You can also read our blog  on Google+, Twitter and LiveJournal.

Also check some of our behavioral experiments that we did together with our partners for European Commission on Tobacco warning labels, Testing CO2/Car labelling options and Online gambling nudges.

About:

Uri Gneezy is Renown scholar in individual decision-making and behavioral economics fields the Epstein/Atkinson Endowed Chair in Behavioral Economics and Professor of Economics & Strategy at the Rady School of Management, UC San Diego The Barcelona Graduate School of Economics, commonly referred to as Barcelona GSE, is an independent institution of research and graduate education located in Barcelona, in Catalonia, Spain. Banco Sabadell is the fourth-largest banking group funded by private Spanish capital. It includes several banks, brands, subsidiary and holding companies spanning the whole range of financial business.

Image courtesy: Wikipedia

13 Aug 2014
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Andrew Ivchenko
Andrew Ivchenko

I design behavioral strategies that enable businesses, public agencies and NGOs to reach their goals and objectives challenged by modern consumer behavior and digitalization. I employ tools & methods of behavioral economics and field experimentation to develop effective practical solutions that explore causal relationships and are evidence-based (factual). Google+ | Twitter

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