The Upside of Irrationality – Chapter 1: Paying More for Less

In the spirit of disseminating information I’m going to start posting notes from the books I’m reading, in addition, to the semi-regular blog posts I’ve been writing.

I just started reading a behavioral economics book: The Upside of Irrationality by Dan Ariely. In a nutshell Dan Ariely conducts experiments to understand the ways in which humans act irrational everyday. Traditional economics formulates theories on the premise that people behave rationally in their own best interest, however, a new wave of studies are coming out to show that this is not the case.

In the first chapter Ariely is making the case that using bonuses to incentivize productivity and returns in the work setting only works up to a point. After conducting several tests he found that if the bonuses are too high – people are distracted by the stress of achieving the high bonus and are unable to concentrate on the problem at hand.

He also finds that performance declines if there is social pressure involved. For example, delivering an awesome speech at home in front of your mirror is usually much easier than delivering an awesome speech in front of a large group of people. The same holds true for other cognitively challenging tasks that a person is required to complete in front of a group of people.

The main point he makes is that pressure and stress to motivate only works to a point and at some level if the pressure and stress are very high (either caused by high bonuses, social pressure, or self imposed pressure) performance will decline.

I think most of his points make sense to me. What I do find interesting is how self imposed pressure/stress is effecting my daily life. There are times where I put a lot of pressure on myself when having to present something at a meeting, or preparing something to share for others, or even writing a blog post. It’s funny to think that this pressure might be contributing to worse performance.

However, by trying to be mindful it helps put these daily tasks into perspective which definitely helps reduce the feelings of stress and pressure.

Notes –

  • U shaped curve when it comes to performance vs. incentive
  • When bonuses are so high they distract from the task at hand adversely affecting performance
  • In situations where you want great performance you end up performing worse due to the stress caused by the need to perform well
    • Think about giving a speech
    • Taking an examination – oftentimes perform better during practice sessions
    • Any activity in front of people will result in performance going down
  • People shouldn’t be compensated based on bonus structure
  • Loss Aversion – The experience of losing something produces more misery than the happiness obtained from gaining something
  • Social Pressure – Also causes worse performance
  • Net result – The more pressure and stress a person feels to do something that requires some cognition will reduce performance – A little pressure is a challenge a lot of pressure crowds judgment and everything
  • Questions
    • If Bonuses are expected part of the pay do we still see the relationship
    • Performance today and bonus in December are so far off that are our decisions today really reflect the bonuses paid out in the future
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