Make better decisions by understanding how incentives shape our behavior

Imagine this: $100 today or $110 tomorrow. What's your choice?

Most people say they’ll wait a day for the extra $10 – but research shows that they usually do the opposite.

Too often our behavior goes against our best intentions, even when the incentives – like an additional 10 percent for just a bit of patience – are solid. But why?

The field of behavioral economics sheds a lot of light on irrational human behavior, bridging the gap between actual actions and logical decisions. It dives into the psychology, environment, culture, and circumstance behind our choices. The aim? To create better decision-making strategies.

In this content we’ll discover why incentives often fail, despite seeming foolproof. You’ll learn about the impact of social norms and self-perception on decisions, and explore common workplace conflicts. You can harness this knowledge to navigate behavior and problem-solving.

So stay tuned as we break down the basics of mixed signals  – making sense of the irrational.

Money isn’t a universal motivator

Incentives play a major role in how we make choices – but our responses to incentives aren’t simple, especially when they come into contact with biases.

Consider the $100 offer again and how people don’t go for the additional $10. What’s happening here is called the “present bias” in which immediate satisfaction usually trumps a delayed gain, especially if that gain is relatively small. The incentive – an extra $10 – just isn’t strong enough when held up against having to wait another day.

There are many more biases and emotions that affect our perception of money as incentives, too. While money can be a powerful motivator, it doesn't always lead to better performance or outcomes. The evidence of this can be seen in professional sports where teams reward players with contracts that include big bonuses tied to what that player does individually. Consider an example from the NFL in which Baltimore Ravens player Terrell Suggs had a contract rewarding him with $5.5 million once he reached a goal of sacks for the year. While Suggs reached his goal, the team overall didn’t finish the season well. While that’s not necessarily his fault, his individual incentive didn’t seem to help the team’s outcome.

Sometimes, using money as an incentive backfires if you set the amount too low. Consider the case of daycares charging parents whenever they’re late picking up their kids. Let’s mention one instance of being late and the embarrassment the father felt. The daycare wasn’t yet charging fees, and father felt bad enough already to make sure not to repeat the offense. When the daycare started a fee system, it announced the fee would be about $3 for anyone arriving late by ten or more minutes. Now with a relatively low price tied to being late,  parents got the message that it’s not that big a deal – a much smaller deal than they’d originally thought. The fine was so low that the number of late pickups actually increased.

It’s researched that other daycares around the world and found that fine structures can work, but the fine must cause a bigger financial hit. Some daycares charge parents $5 for every minute they’re late. Another charges a $20 flat late pickup fee, then tacks on larger amounts in half-hour increments.

Using money as an incentive is tricky in the case of blood donation, too. In his book, The Gift Relationship, Richard Titmuss contrasts how in 1979 people were paid for blood donation in the US versus not receiving compensation in the UK. His research showed that the money-motivated donors were more likely to be drug addicts seeking cash, and therefore the quality of blood collected had a greater likelihood of being infected with hepatitis B. Today, over 75 percent of blood collected in wealthy countries worldwide comes strictly from volunteers. Research has also shown these types of donors are more motivated by things besides money — even something as small as a logo pen.

So why would anyone want a cheap pen over cash?

Social norms, status, and self-perception matter

Now we see how money isn’t always the best incentive to inspire people to take action. In some cases, it has the opposite effect or results in other outcomes you didn’t want. If you set a late fee too low, you’re sending the message that being late isn’t so bad. Some people are more motivated by altruism than cash.

These points are true because of the terms “social signals” and “self-signals,” which are messages you send to others and yourself based on social norms.

Take the case of blood donors again. Research shows that most blood donors do it because they like the feeling of giving, which is a satisfying self-signal of being a thoughtful, caring person. A couple of effective campaigns rewarded people with noncash incentives, like recognizing them in the local newspaper and giving away special pens to show they gave. The media shout-out sent a positive social signal, while the pens allowed people to signal to others and themselves about their good deeds each time they used them.

Now imagine if a cash reward was also attached in these instances. Do you think the donors would be as proud to be in the paper or as likely to use their pens? It might contradict their desire to be perceived as purely altruistic. It would also weaken the self-signal, lessening the feeling of having done something solely to help people.

It’s human nature to care how we perceive ourselves in the world and how others see us, too. Take another example based on recycling. Consider you have a neighbor who’s always picking up cans around the neighborhood and dutifully taking them to the recycling center. If the recycling center doesn’t pay for the cans, you probably assume they’re a thoughtful environmentalist acting from the goodness of their heart. If the center pays a lot of money for each load, you may question your neighbor’s motives. Maybe they’re struggling for money or just a bit of a cheapskate. They likely care about the impression, too. Just as most people do, they weigh how much they care about what you think against their own motivation for recycling. That balance affects whether they do it at all.

Let’s explain how social signaling paved the way for Toyota to dominate the hybrid car market in the first decade of the twenty-first century. Toyota’s Prius became the runaway choice over Honda’s Insight. The biggest difference? Unlike the Insight, the Prius looked totally different from every other car on the road. Totally different as in, not cool looking at all. So uncool that people made jokes about it.

Yet because the Prius was so noticeable, there was no mistaking it – and the social signal its drivers wanted to send loudly, which was “I care about the environment.” A 2007 study confirmed that a whopping 57 percent of Prius buyers said they’d bought the car for the message it sends, ranking higher than those who said they’d chosen it for fuel economy or low emissions.

We make choices based on what we value – whether that’s money, our social status, or how we feel about ourselves. Most often it’s a combination. Next up, we’ll look at what happens when we send unintended messages about what we value and how to correct it.

Clear up mixed signals in the workplace

Let’s say you’re hired at a large bank that’s respected for being ethical. It even proudly proclaims itself as such. You’re then told your main goal is to sell eight products to each customer, and hitting that goal is how you’ll be judged and rewarded. You quickly see that this goal is much easier said than done, and you get discouraged quickly. The threat of losing your job looms. Other people seem to be hitting the goal just fine, but nothing you do seems to work. Then you ask around and are let in on a little secret: you can inflate your numbers by setting up fake accounts. Maybe your ethics alarm goes off, but you’re assured that everyone’s been doing it for years with no trouble. Meanwhile, you hear of a few people who tried to report it and were sent packing pretty quickly. You might conclude it’s an accepted practice up the chain of command, so why not give it a go?

That scenario gives a glimpse into what played out for Wells Fargo in the years leading up to 2016 when it was revealed employees had opened thousands of fake accounts totaling $3.5 million, and 5,300 employees were fired as a result. At the root of the problem? An overly simplified incentive that emphasized quantity over quality. The company claimed strong ethics as a top value yet incentivized employees to hit a number at all costs – and many of them did exactly that.

The quantity-versus-quality conflict is just one of four typical disconnects between values and incentives often seen in the workplace. Others include telling people you value fresh ideas while not allowing room for error and setting long-term goals but giving greater rewards for short-term wins. Another, emphasizing individual performance while saying you value teamwork, is one we’ve covered in the story of the star football player getting a big bonus that didn’t benefit the team.

In a work environment, balancing individual aspirations with teamwork comes up often and companies must decide which they truly value most. Consider a race where people are divided into teams and the way to win is for one member to cross the finish line first. The teams will structure around that incentive, choosing their strongest runner. Now, if the winning metric is changed to where every team member must cross, the focus shifts to helping the slowest runner improve.

In the workplace, you can structure incentives to help you avoid everything from common friction to potentially massive embarrassment. Start by making sure your stated values actually match what you’re asking of people. Think carefully about what you call a win and how you want your teams to operate to get it.

Next, we’ll look at what to consider as you do that.

Find the sweet spot in designing incentives

The final element to using incentives to achieve results is knowing your audience and situation thoroughly, then customizing your approach accordingly. Aim for the crossroads of simplicity and thoughtful complexity.

The signal must be clear and easy to follow while taking into account the motivations and pain points of people you want to influence, including yourself. If an incentive is too simple, people will find workarounds that bring unintended outcomes, like in the case of Wells Fargo. One thing history has shown is that the simpler an incentive is, the easier it is for people to game the system to their advantage.

Let’s see how incentives and behavioral economics impacted centuries-old architecture in Europe. The odd-shaped “trulli” buildings in Puglia, Italy, which originated in the early fourteenth century. The buildings are shaped like cones and constructed so their roofs would collapse easily after removing just one stone. Why would anyone do this? At the time, taxes were assessed based on what a building was used for, and the tax for homes was high. The king defined a home as anything with a roof.

Getting the picture? No roof? Not a home. No tax. For the poor peasants who lived in the trulli, it was less expensive to drop the roofs and rebuild them than to pay the taxes.

Similarly, several centuries later, England introduced a property tax attempting to increase liability on the wealthy. Their measure? Count the windows of a structure to estimate its size and increase the tax by the total number of windows. Many people got around it by simply bricking up windows to meet a lower bracket.

Meanwhile, if you send conflicting signals, you’re going to see results that are just as conflicting or at best, inconclusive. Again, consider your audiences and their motivations. In cases where you can’t appeal to every one of them, identify your top-priority audience and go from there. This played out in the rollout of COVID-19 vaccinations, where many governments, businesses, and public figures put forward many incentives encouraging people to get vaccinated. But heavy incentives from so many sources may have further deepened the convictions of vaccine skeptics, who weren’t likely to be swayed by any incentive to start with. Cash incentives probably didn’t motivate those who chose to be vaccinated for the public good. The incentives did serve to sway the people who were on the fence, and by that measure were effective.

There are always many parts to the puzzle when considering how incentives impact your own behavior as well as when designing them for others. Examining each piece carefully will help you arrive at the picture you want to see.

Incentives can be incredibly powerful in motivating people and understanding them will help you make better decisions for yourself and others. Accounting for complex reactions and behaviors will help you avoid undesired consequences and achieve desired outcomes. Remember, money isn’t always the solution, often falling far behind other motivators, such as how we feel about ourselves and what others think of us.

You can avoid unwanted friction by making sure your stated values actually match what you’re asking of people. And finally, you must always customize your incentives to your audience and situation. People will find workarounds when incentives are too simple, and overly complex incentives may bring conflicting results. Now you’re on your way to finding that balance.