Do better incentives limit cognitive biases?

There is a new paper by Benjamin Enke, Uri Gneezy, Brian Hall, David Martin, Vadim Nelidov, Theo Offerman, and Jeroen van de Ven:

Despite decades of research on heuristics and biases, empirical evidence on the effect of large incentives – as present in relevant economic decisions – on cognitive biases is scant. This paper tests the effect of incentives on four widely documented biases: base rate neglect, anchoring, failure of contingent thinking, and intuitive reasoning in the Cognitive Reflection Test. In preregistered laboratory experiments with 1,236 college students in Nairobi, we implement three incentive levels: no incentives, standard lab payments, and very high incentives that increase the stakes by a factor of 100 to more than a monthly income. We find that cognitive effort as measured by response times increases by 40% with very high stakes. Performance, on the other hand, improves very mildly or not at all as incentives increase, with the largest improvements due to a reduced reliance on intuitions. In none of the tasks are very high stakes sufficient to debias participants, or come even close to doing so. These results contrast with expert predictions that forecast larger performance improvements.

Via Kadeem Noray (EV winner, btw).  This is perhaps related to behavior during and leading up to the lockdown…

Comments

Speaking of incentives and lockdowns, many of the usually free-market economists seem to favor the various lockdowns, most often because of some presumed "externality". The idea is that it's not enough to expect individuals to take proper precautions to avoid disease for themselves because those individuals aren't considering that, when they avoid disease, they also benefit others by making it less likely that they will infect others.

Rather than blunt, broad universal lockdowns, which are kind of like banning cars to combat climate change, why not just impose a Pigovian tax on those that become infected or, equivalently, pay a prize to those that manage to stay uninfected for say 12-18 months until a vaccine is available? That would be analogous to a carbon tax and would provide the additional incentive, beyond the private incentive, to stay disease-free. That would allow, for example, individuals to consider distributed, local information such as whether it's easy or hard to maintain 6-ft separation in various workplaces rather than shutting down all workplaces.

Why aren't more economists advocating such targeted measures that directly address the presumed externality?

Because until the person has actually been tested, neither they nor the tax authorities know if they have been infected or not.

If you go walking out your door right now, should we tax you?

And the tests are not 100% accurate, so there's uncertainty even after testing.

No, because not walking out the door is a method of reducing infection probability, not reducing infection probability itself. Some people will have a higher infection probability when they walk out the door than others because of what they do after they walk out the door. That's the point. Just as some people can reduce carbon emissions more effectively than others. Tax the outcome (infection or carbon emitted) rather than mandating the method (stay inside or use particular carbon-friendly technology).

You can either select people for random testing and tax the infected or pay a prize to anyone that produces a negative test. It doesn't matter if the test is 100% accurate. The non-zero probability of needing to pay a tax or getting to claim a prize in the future produces an incentive, just like the threat of criminal prosecution deters crime even if every criminal is not caught and convicted with 100% probability.

My Boss knew this a long time ago. He said that people's performance would not improve with higher remuneration. I had to agree.

@J - and amplifying a theme that BC here talks about, how do we know if innovation can be taught via incentives? In other words, are inventors "born not made"? (the traditional view is they are, i.e., "he's a nerd, he'll invent for the love of it, not money", a form of sexist anchoring bias). Or, to use a chess analogy, "she's a girl, she's no good at math or chess' (pace world class mathematicians like that Iranian woman who died of cancer and the Polgar sisters in chess). Anchoring bias. So if you offer a lot of money in accordance with Ray's Improved Patent system (RIP™ system) will people go into inventing rather than the traditional high-income jobs of doctor, lawyer and Indian Chief? I doubt it. It will probably take a Big Push that's several generations long before people finally realize that yes, a beauty queen like https://en.wikipedia.org/wiki/Hedy_Lamarr can invent spread-spectrum technology of the kind used in smartphones today and Bluetooth.

Incentives certainly increase effort invested in any activity. Incentives do not improve creativity, they do not increase performance (in compeitive sports, in music, in arts, etc.). Incentive will motivate people to channel their efforts to certain goals: for example, Napoleon's Prize for a solution to conserve food for the army led to the canned food industry.

"incentives do not increase performance in competitive sports"--which ones do you watch?

"incentives do not increase performance in competitive sports"--which ones do you watch?

I think he's got a point in general. Clearly incentives matter to the point of being able to practice for a sport full time. A minor league athlete who has to work another job is going to perform better if he gets enough money to quit his other job.

However, above that level, it's probably accurate for professional athletes and workers in general.

On the other hand higher incentives, keep talented people for leaving for a competitor or conversely incentivize them to leave their current employer. But when a sports star gets a huge increase in pay, it's not because they expect him to significantly improve, it's because the person offering the increase want him to work for them. The high salaries come from proven performance.

To be clear here, it might not be higher performance as much as longer hours. But that would depend on how you define higher performance.

This reminds me of a story from Dan Ariely’s book, Payoff. Pardon the paraphrase, but He and his collaborators experiment with incentives in a production based environment and learn that amounts of incentives weren’t as effective as the types of incentives and their delivery method.

Reading the comments reminds me just how counterintuitively people can respond to monetary incentives and how we can’t see why that would be the case.

Why when trying to decipher incentives do we overlook the complexity of motivation and the trade offs one must accept for those incentives to be had? It’s superior to want more?

In actual markets, there is a selection component to the effect of incentives. Incentives don't just merely improve the performance of randomly selected individuals on certain tasks. Connecting incentives to those tasks leads some individuals to self-select to take those tasks on out of a belief that they will collect the positive incentives while other individuals self-select to avoid those tasks to avoid the negative incentive. For example, replacing fixed salary with sales commissions attracts better (self-identified) salesmen and repels poor salesmen.

@BC - perhaps at the margin, but it's not that big an effect. Surely a poor salesperson on a salary knows they will be fired if they don't perform? But you're right in that commissions encourage the better salespeople to perform even better.

Bonus trivia: in drug sales, I notice the good salespeople are often hot chicks with a science background, I'm pretty sure it's to cater to their customers, horny old doctors?

"Surely a poor salesperson on a salary knows they will be fired if they don't perform? But you're right in that commissions encourage the better salespeople to perform even better."

Or the person who is not the good salesperson will quit or not be attracted to jobs with sales-based commission.

I've been in that position. And I've decided to push into a late night more than once to score an extra sale to get a bigger check next week. Particularly in the case when there was a sales incentive and your commission was higher than normal for the marginal sale.

In that regard it worked similar to overtime pay. A flat salary leads to the type of salesman who is headed out the door at 15 minutes till quitting time.

I'm reminded of this AER article from 1992, except they looked at students in China rather than Kenya. Also they were looking at risk preferences rather than cognitive bias. But the idea of having the subject win prizes worth multiple months' salaries is the same. Enke et al however didn't cite this article.
https://www.jstor.org/stable/2117470?seq=18#metadata_info_tab_contents

I think it would be wrong to infer from the paper’s results that cognitive biases are immutable. Developing cognitive skill requires substantial investment, much effort over an extended period of time. It can’t be brought forth like opening a spigot with a sufficiently large snap reward.

Tell those Nairobi students they can participate in the test again a year hence, and I predict you’ll have to contend with very large payouts.

This paper provides evidence for the human capital theory of cognition:

https://art.torvergata.it/retrieve/handle/2108/123037/248635/Mazzonna_Peracchi_2012_EER.pdf

I think I agree with this comment, though it hasn't been proven. Either way, I dont think that our paper shows that cognitive biases are immutable.

The conclusion would be more persuasive if 1) it was a repeated experiment, as suggested by Alex R, since one would naively expect that real life is more like a repeated experiment, and 2) the study were done across many distinct populations. Regardless of where you come down on nurture versus nature, nobody believes university students in Nairobi are indistinguishable from options traders in Nairobi, or even from university students in Fairfax, Virginia.

The blog post title ought to say 'Bigger' instead of 'Better'. The study measures differences in size, and the results point to the cliche bigger is not always better.

I am inclined to think of this in terms of Scott Adams' talent stacks in complex, evolving systems.

My interpretation of this research is that if you have a random portfolio of talent stacks tasked with achieving a desired outcome, incenting those talent stacks with high rewards will likely lead to more effort but not better results. The conclusion would be - don't waste money on incentives.

But that is only true if you consider it from the individual perspective and as a closed stable system.

If you think about it as a freely evolving system with system outcomes, then, over time, high incentives will encourage entry of talent stacks better matched to the achievement of the objectives.

The incentives don't make the individuals more productive, it makes the system more productive. The researchers seem to be looking at the wrong level of analysis.

It is worthwhile examining the question of whether incentives work on individuals in closed, static systems. Those conditions exist under some circumstances.

But you also want to know if incentives works in an open and freely evolving system as well. This research seems suggestive to me that incentives do work but not necessarily in the fashion one might assume.

Individual incentives make systems more productive and the better matched talents stacks share in that increased productivity.

But they don't improve productivity for random talent stacks in fixed systems. No increase in productivity means therefore no increase in prosperity for the random participants.

Great comment. In addition people keep using positive incentives. It's long been known that many low skilled people respond better to harsh negative incentives such as yelling or shame, rather than loss of future gain

"The incentives don't make the individuals more productive, it makes the system more productive. "

Higher incentives lure talented people away from less productive jobs into more productive jobs.

What is this study supposed to mean? Why is it cited? College students? who cares? Are these 4 biases persistent personality traits? If not, why should we expect that once these *children* have another 5, 10 or 20 years of experience and when they're actually in positions to improve things, that this study will be predictive? Is it even the case that those who get into positions of authority have the same strength of and persistence of these biases as these (not randomly selected) kids?

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