October 25, 2014

Study shows incentives help people make better decisions

A study by finance professors at the University of Iowa shows people who get incentives — even small ones, tend to make better decisions. Professor Thomas Rietz, says their research modified studies on risk that are commonly used by psychologists.

“For a long time people have been bringing in subjects and asking them to choose between two different gambles or bets, and observing which of two bets in a pair they prefer. Then they separately ask them how much they value the two,” Rietz explains. “And sometimes people value the bet that they chose less than the one that they didn’t choose, and that seems at least counterintuitive, if not irrational.”

Rietz and his fellow researchers added something to the study. He says in their study they asked if the subjects would make more rational decisions by seeing the outcomes of their choices. “In effect they do, it’s almost like keeping score by observing the outcomes of your choices is enough to create a decision pattern that seems a lot more rational,” Rietz says.

Rietz says the value of incentives can be seen in many areas. He says for instance, video games on-line keep scores with points that are meaningless in the real world, yet they are highly motivating for people who play.

“A lot of times in the real world we try and motivate people through contests like ‘the employee of the month’, even though there’s not any monetary gain for it, people being able to see how they’re doing, seeing if they’re achieving a goal in that respect, may help them make better decisions,” Rietz says.

Rietz says his personal view of the study is that knowing there’s an outcome makes you look at the whole thing differently. “Instead of something being purely hypothetical, having an outcome asks you — or forces you I guess — to think about what those outcomes might be, what those outcomes mean to you, and how to effectively place a value on whatever those outcomes are,” Rietz says.

Rietz says people still make mistakes when they are provided incentives, but they seem to do things in a more rational manner.

He wrote a paper on the study with fellow U-I accounting professor Joyce Berg, and the late John W. Dickhaut, professor of economics and accounting at Chapman University.