The paradox of incentives

Banker bashing has become something of a national pastime, and politicians have been quick to join in. But rather than devoting their energy to avenging past sins, our political leaders might be better off learning the lessons of Dan Ariely’s book, The Upside of Irrationality.

In this valuable work, Ariely shows that the incentive of big bonuses can actually damage performance, not improve it.

He cites a century-old experiment in which rats were placed in a cage with two pathways. One led to a reward, the other to a device which gave the rats an electric shock. The aim of the experiment was to see how quickly the rats learned which path to take.

As an added twist, the scientists varied the size of the electric shock. Some rats who took the wrong pathway received a low level shock, which produced a tickling sensation. Others received a medium shock, while a third group received a high level shock, which was almost fatal.