Ariely and his co-researchers use some cleverly designed experiments to study the relationship between . . . → Read More: The Downside of Bonus]]> Dan Ariely, the renowned behavioral economist and the author of the widely popular book “Predictably Irrational” has some interesting things to say about the effect of massive bonuses and their true effect on job performance in his New York Times article.

Ariely and his co-researchers use some cleverly designed experiments to study the relationship between the magnitude of a performance incentive and its effect on an individual’s performance. In one experiment, participants are presented with “an array of tasks that demanded attention, memory, concentration and creativity.” They are divided into three groups: One group of participants is told that they would get a small reward if they performed well in the tasks; The second group is promised a slightly larger reward, and the third group, a significantly larger reward. At the end of the experiment, when the researchers compare the relative performance of individuals from the three groups, they find some surprising results.

Ariely writes:

“The results defied conventional wisdom. The group offered the highest bonus did worse than the other two groups – in every single task. On top of that, the people offered medium bonuses performed no better or worse than those offered low bonuses.”

The researchers repeated similar experiments at MIT using tasks that required cognitive skills and those that required very repetitive mechanical effort, and found more interesting results. They conclude that for tasks that are very mechanical in nature and require little or no mental effort, higher incentives tend to motivate the individuals towards better performance. On the other hand, if the tasks required cognitive skills, then large incentives actually prove counterproductive. They reason that the lure of a large reward and the fear of not performing well enough to receive the reward distract individuals, and affects their focus on tasks requiring cognitive skills. Individuals working on menial and repetitive tasks may actually manage to get more things done because the prospect of the reward makes their effort seem worthwhile.

In Ariely’s words:

“Financial rewards are a double-edged sword. They provide motivation to work well, but they also cause stress and preoccupation with the reward that can actually hurt performance. If our tests mimic the real world, then higher bonuses may hinder executives from working to the best of their ability.”

“The assumption that more money leads to better performance is not true–at least not all the time. If it was, wouldn’t we expect that those who got tens of millions in annual bonuses would be optimal performers? Maybe even perfect? The fact that these high earners failed so miserably should add to the evidence against a direct link between higher rewards and better performances.”

In his second book, “The Upside of Irrationality,” Ariely writes about his experiments related to incentives and individual performance in greater detail. Here are some excerpts from his blog post:

“I tried another approach and asked for a volunteer from the audience to describe how the work atmosphere at his firm changes at the end of the year. “During November and December,” the fellow said, “very little work gets done. People mostly think about their bonuses and about what they will be able to afford.” In response, I asked the audience to try on the idea that the focus on their upcoming bonuses might have a negative effect on their performance, but they refused to see my point. Maybe it was the alcohol, but I suspect that those folks simply didn’t want to acknowledge the possibility that their bonuses were vastly oversized.”

To counteract the downside of bonus, he suggests:

“Could all this mean that sometimes we might actually behave less rationally when we try harder? If that’s so, what is the correct way to pay people without overstressing them? One simple solution is to keep bonuses low—something those bankers I met with might not appreciate. Another approach might be to pay employees on a straight salary basis. Though it would eliminate the consequences of over- motivation, it would also eradicate some of the benefits of performance-based payment. A better approach might be to keep the motivating element of performance-based payment but eliminate some of the nonproductive stress it creates. To achieve this, we could, for example, offer employees smaller and more frequent bonuses. Another approach might be to offer employees a performance-based payment that is averaged over time—say, the previous five years, rather than only the last year. This way, employees in their fifth year would know 80 percent of their bonus in advance (based on the previous four years), and the immediate effect of the present year’s performance would matter less.”

Ariely writes:

Predictably Irrational was first published in February 2008, and given the relative ease of modifying books these days, I decided to add some of my reflections on the stock market crisis — and create . . . → Read More: Predictably More Irrational?]]> I just read a post in Dan Ariely’s blog about the new expanded version of Predictably Irrational.

Ariely writes:

 

Predictably Irrational was first published in February 2008, and given the relative ease of modifying books these days, I decided to add some of my reflections on the stock market crisis — and create an expanded edition of Predictably Irrational.  Once I decided to add some material, I also realized that I have learned some new things in the last two years about some of the original chapters in Predictably Irrational, so I added some material about these topics as well.

The expanded edition will come out on May 19th, with a somewhat different cover (see below), more material, and also with a more aggressive stand against rational economics.

 

I look forward to reading or listening to the new book, hopefully sometime soon.

WePC.com is a social network that was recently launched by Intel and Asus, aimed at giving users an opportunity to share their ideas and insights on future designs as well . . . → Read More: Would This Be Design-2.0 Or Social-Designing?]]> Have you thought of a feature or an application that you wished your PC or Notebook  supported? What if you could design it yourself?

WePC.com is a social network that was recently launched by Intel and Asus, aimed at giving users an opportunity to share their ideas and insights on future designs as well as vote on some product ideas.

The intro page says:

“Imagine your perfect PC. Now imagine top engineers and innovators working around the clock to make that Dream PC a reality. That’s the dream WePC.com is all about.”

Sounds interesting? You can sign up for an account and join many others in the pursuit of creating your perfect PC.  You can share ideas about your dream PC, or create a description of it. You can view dozens of selected ideas and vote on them. Then there is a community-blog where you can talk about your ideas, your dreams products and gripes about existing ones,  and comment on others’ posts.

Does it really work? Apparently, it does; there are thousands of ideas for you to look at and vote on. And the number seems to be growing.

Why does it work? Presumably, there are tons of people who have good ideas that they would like to see implemented and developed into products, but don’t have the resources to do it on their own. So here they are, driving innovation by sharing their ideas with companies that are eager to listen, and find some hot ideas and features to stay ahead in their game.

This is another perfect example of what Malcolm Gladwell calls a “maven-trap” in his book The Tipping Point: a free forum that gives you the tools to create and share your product ideas, vote on others’ ideas and discuss them with other like-minded people. To a lot of people, that’s highly motivating.

This is likely to become a trend not just in the computer industry, but any other consumer-oriented industry as well: automotive, appliances, entertainment, toys and other kids’ products, etc. Would that be a win-win situation for the consumers and the producers? At the outset, it promises to be.

Would there be any challenges? How does it affect patenting? Won’t all competing companies have access to ideas being discussed in each other’s forums? What does it mean to them? Does this create a level playing field for ideas and innovation that’s accessible to everyone, and thus force companies to compete only on the basis “time-to-market,” i.e.,  how quickly they can translate these ideas into real products?

Those are questions for the lawyers to scratch their heads about, but I suspect that the mavens frequenting these forums wouldn’t want to waste their time on such boring issues.

I drive to work and turn my car’s ignition . . . → Read More: Have You Been Nudged Today?]]> As I am listening to the audio version of the book “Nudge: Improving Decisions About Health, Wealth, and Happiness” by Richard H. Thaler and Cass R. Sunstein, I am beginning to notice the numerous daily “nudges” we experience, and have become accustomed to.

I drive to work and turn my car’s ignition off, and I hear a beep indicating that my headlights are on. I go to the ATM on my way back home to withdraw some cash, and it insists that I take my card out before it puts money out.

These little things, seen as nudges as the authors describe, seem quite interesting from that perspective.

by Malcolm Gladwell

This is Malcolm Gladwell‘s second book after “The Tipping Point.”  In The Tipping Point, Gladwell writes about how sometimes things considered little and insignificant can unexpectedly cause big changes. Blink is about something very different; it is about how . . . → Read More: Book Review: "Blink" by Malcom Gladwell]]> Blink: The Power of Thinking Without Thinking

by Malcolm Gladwell

This is Malcolm Gladwell‘s second book after “The Tipping Point.”  In The Tipping Point, Gladwell writes about how sometimes things considered little and insignificant can unexpectedly cause big changes. Blink is about something very different; it is about how much information processing is done by our mind at a subconscious level, and how it can give us incredible answers in the blink of an eye.

Gladwell explains how we are quite unaware of the powers of our subconscious mind that works like a supercomputer behind the scenes. Every time we are faced with a challenge or a predicament, we try to use our conscious mind and think. For many day-to-day problems, we have  access to enough information and intelligence in that part of our mind and we solve them. But very often, we come across situations for which we can’t find answers in our conscious mind. Yet, we often act quickly in a crisis and avert a disaster by doing precisely the appropriate thing; Gladwell attributes this to our “adaptive unconscious” that processes an enormous amout of information in a flash and guides us to the correct action.

The books starts with a story about a museum that acquired a “rare piece of art” — a statue — from an individual after appointing a team to study it and verify its authenticity for over a year. Soon after, several art experts visiting the museum instinctively react with shock and repulsion. By taking just one look at it, they sense something wrong, something out of place. As it turns out, the museum does further investigation which confirms that the statue is indeed a fake. How did visiting art experts sense that the statue was not genuine within seconds of looking at it, while another team of experts concluded otherwise after a year-long study? Gladwell’s argument is that the experts who just looked at it for a moment had their adaptive unconscious working in their favor, while the team that studied it for long had reams and reams of documentation — too much information — that clouded their judgement. The visiting art experts did what Gladwell calls “thin slicing” — their minds focused on some critical aspects of the visual data when they looked at the statue, and fitered out the irrelevant.

Another interesting experiment that Gladwell describes illustrates a similar effect on reasoning. A group of young students are given about half-a-dozen brands of jam to taste, and asked to rank them. When compared with how a group of jam experts ranked them, the students’ ratings are almost identical. Next, another group of students are given the exact same task, but this time, they are asked to rank the jams, and also describe why they ranked them that way. This time, the students’ ratings are way off from the experts’ ratings. Gladwell’s explanation is that when the first group of students were asked to just taste the jams and rank them, they did it instinctively, but when the second group was asked to justify their rankings, their conscious minds tried to use reasoning for a task that they were not trained for, leading to almost random results. When people are presented with a lot of information and asked to make choices using all the information, they often get overwhelmed and make poor judgements. The author also alludes to another experiment where a store offering six types of jams sells much more jam than a store that offered twenty-four different types; having too many choices confuses people and often makes them postpone making a choice.

The book covers many other situations that show how trying to provide our conscious minds with a lot of information and expecting it to make quick decisions is often futile. Gladwell writes about how doctors in emergency rooms can get overwhelmed by patients who seem to have signs and symptoms of impending heart-attack, and feel compelled to admit them all to be kept under observation. He then explains how one doctor formulated a three-key-symptoms rule that allowed the doctors to focus on three necessary symptoms that would warrant immediate treatment or close observation, and not to be overloaded with other information and symptoms that were only adding to the confusion.

Another aspect of “blink of an eye” judgements that we all make are based on visual clues that our unconscious mind is collecting constantly, and we are not aware of. There is an interesting chapter that delves into facial micro-expressions and how they combine to form various complex expressions. These are visual clues that we all use when interpreting someone’s talk or actions, without being conscious about them. Gladwell cites experts who use  video tapes from court scenes, teachers in classrooms, and couples having a conversation, and their incredible conclusions, based on very specific expressions and other body language.

Gladwell also points out that there are cases when our adaptive unconscious can lead us astray. Our snap judgements can be clouded by our prejudices or by how we are primed at a given point in time, he writes. He explains how the Implicit Association Tests illustrate our bias towards various things in life. “Sensation transference” is another interesting psychological effect discussed in the book.

This book is packed with many examples, anecdotes and interesting observations. I listened to the audio version twice and flipped through the print version a few times before attempting  to write this review.

“What the article says is that a lot of the economics theories that are being used today haven’t advanced at all in the past 80 years or . . . → Read More: Did Research Fundings Influence Economic Policies?]]> In my post Irrational Economics, I quoted some surprising observations from an article in The Atlantic titled “Dismal scientists: how the crash is reshaping economics.” I wrote:

“What the article says is that a lot of the economics theories that are being used today haven’t advanced at all in the past 80 years or so. While some of these could have been very relevant in 1920s and 1930s, they are probably completely out of place in today’s context.”

Today, while browsing the Freakonomics blog, a post titled On the Failure of Macroeconomists caught my eye. The author Justin Wolfers writes:

“If you took your first economics class 50 years ago, you’ll recognize all this talk about marginal propensities, multipliers, and crowding out. Fifty years later, it’s still the same debate, and it’s still unresolved. Why are we so reliant on mid-century macro for understanding our current predicament? And why haven’t we developed better answers?”

Wolfers describes what his research found: there were typically about three times the number of research papers on  monetary policy,  compared to those on fiscal policy. What does this mean? This seems to suggest that while there was a lot of study on how the government and the central bank controls the supply of money, interest rates, etc., and its outcomes, there wasn’t as much study on government spending and taxation. Why this disparity? Wolfers speculates:

“Perhaps the problem is ideology, and pro-market economists don’t like any discussion that gives government a greater role. Or perhaps there are just too many temptations for young economists — monetary policy research pays off because there’s a comfortable career path running from monetary research to the money markets.

Another possibility is research funding: there are 12 regional Federal Reserve banks subsidizing research on monetary policy, and almost no one provides similar subsidies for fiscal research.”

This is something for the economics experts to debate, and far beyond what a layperson like me can comprehend. But if this is true, this would be a good example of how skewed educational funding can lead to disastrous long-term effects on a large scale.

The essence of this effect is to make us “love what we build.” It’s what you feel when you go to IKEA (or Home Depot, . . . → Read More: What You Create Is What You Love]]> In his book, “Predictably Irrational,” Dan Ariely describes what he calls the IKEA effect.  This concept has been selected as one of  Harvard Business Reviews’  Breakthrough Ideas for 2009.

The essence of this effect is to make us “love what we build.” It’s what you feel when you go to IKEA (or Home Depot, or whatever your favorite store is), buy some to-be-assembled furniture, drive back home, and spend the better part of the evening and night building it. The fact that you spent your time and effort building it makes it more precious to you than, let’s say, something that was already built at the store, or something that you paid someone to build for you. This is also why I think my blog is way better than any others that you may have seen out there.

In one of the posts in his blog, Ariely says:

Labor is not just a meaningful experience – it’s also a marketable one. When instant cake mixes were introduced, in the 1950s, housewives were initially resistant: The mixes were too easy, suggesting that their labor was undervalued. When manufacturers changed the recipe to require the addition of an egg, adoption rose dramatically. Ironically, increasing the labor involved – making the task more arduous – led to greater liking.

If you have ever gone to Build-A-Bear with your kid (or by yourself), and built one of the many variations of the stuffed toys, you would have felt a sense of attachment and pride towards your “creation.” After giving your “bear” a bath and printing its birth-certificate, you would feel very compelled to buy some nice dress from the big collection that you can’t miss. In the end, you would probably have spent $40 or more on “your own” new bear and all the accessories — even though you could have bought all that “ready-made” for much less.

He concludes:

Finally, the IKEA effect has broader implications for organizational dynamics: It contributes to the sunk cost effect, whereby managers continue to devote resources to (sometimes failing) projects in which they have invested their labor, and to the not-invented-here syndrome, whereby they discount good ideas developed elsewhere in favor of their (sometimes inferior) internally developed ideas. Managers should keep in mind that the ideas they have come to love, because they invested their own labor in them, may not be as highly valued by their coworkers – or their customers.

IKEA effect or not, I still maintain that my blog is really nice.