Uri Gneezy Is Offering You an Incentive to Read His New Book: Greater Success

By Scott S. Smith | Friday, 09 June 2023 | Feature

Uri Gneezy's “Mixed Signals: How Incentives Really Work” explains how incentives to adopt new behaviors, whether employees working more productively or customers signing up for a rewards program, often have the opposite effect. He also suggests how to design incentives that avoid such problems and maximize the return on your investment.

Uri Gneezy Shows Clients How to Make Decisions Based on the Science of Motivating Customers and Employees

Uri Gneezy is recognized as a pioneer in motivating all kinds of human behavior. He holds the Epstein Atkinson Endowed Chair in Behavioral Economics at the Rady School of Management at the University of California, San Diego. He also co-authored the bestseller “The Why Axis: Hidden Motives and the Undiscovered Economics of Everyday Life.”

In his new book, “Mixed Signals: How Incentives Really Work,” he turns his reporting to the research (often his own experiments) that shows how often seemingly intuitive ideas about incentives turn out to be wrong. Understanding how incentives really work can empower businesses to rethink how they are designed and implemented.

"Companies say they want excellent teamwork, but prioritize rewards for individual success. For example, executives are supposed to do mentoring, but that would take time out from producing their own individual success; why are they surprised that there is not more collaboration?" Gneezy told Startup Savant. 

“Likewise, executives are often rewarded for short-term results by which their performance is actually measured, so instead of focusing on long-term success, they just maximize short-term profits. Or consider innovation, which is viewed as central to many companies. Being innovative requires taking risks; but if failure is punished, employees will be more conservative in their effort and will avoid trying to be creative. These are examples of how the official message of the company is not in line with the incentives it provides. Understanding how to avoid sending such mixed signals about what exactly is that you care about can be an important part of achieving success for organizations of any size in every industry."

Gneezy notes that the 20th century provided the biggest economic experiments with incentives in history. The Soviet Union collapsed in 1991 because of the lack of motivation for individuals to work hard and efficiently. We just don’t work hard if the incentives are not there. Other communist systems survived by transforming the incentive system. For example, the Chinese Communist Party discovered the advantages of farmers being allowed to keep part of their harvests starting in 1978. This small change motivated the farmers to work harder than they had to, and resulted in a huge economic growth. 

Gneezy points to models of how to incentivize the right way, such as the rewards programs of airlines, which are based on building loyalty by raising the switching costs. "Your typical business traveler has an incentive to choose the airline that they have a frequent flyer program with, regardless of cost," he wrote."This illustrates a major rule that incentive designers should abide by: know who pays for the product and who enjoys the incentives, and keep in mind that the two may be different."

And professional sports like the National Football League found that to get both individual excellence and teamwork from their players, contracts tie individual performance incentives to game statistics like yardage, yards per attempt, and touchdowns.

Gneezy also provides lots of examples of failures to design incentives in the right way. In 1997, Wells Fargo launched an initiative that urged employees to sign up customers for an average of eight bank products. The sales goals were so hard to reach that workers were motivated to keep their jobs by cheating, ordering everything from insurance policies to credit cards without customers' knowledge. The scandal broke in 2016, and the bank reformed its practices, but Wells Fargo is still recovering from the blow to its reputation.

Physicians claim that they put their patients' health first, yet they are incentivized to bill as much as possible because they are compensated on a fee-for-service formula that leads to excessive testing and treatment unrelated to outcomes, as 85% of ER doctors admitted in one survey, he reports.

Self-Signaling, Social Signals, and Incentive Design

Gneezy cites a 2007 survey of owners of early Toyota Prius hybrid cars which found that 58% said they bought it to let others know they cared about the environment. In line with this finding, sales really took off after the vehicle was given a distinctive design in 2003. Only 36% said they bought it because of fuel efficiency, and 25% due to the low emissions.

It is an example of both self-signaling — that people want to do things that make them feel good about themselves--and social signaling, impressing others with their values, abilities, and preferences.

"The right signals could captivate consumers and win markets, while wrong signals could backfire and lead to adverse outcomes," he wrote. 

Price is often considered a signal of quality. Peloton found that its exercise bikes sold much better at $2,000 than at $1,200 after feedback from customers that the higher price convinced them that it must be a high-quality bike compared with others. In this spirit, Gneezy conducted an experiment at a winery, where the same cabernet sold much better when it was priced at $20 than $10. Presumably, customers equate price and quality. When the price is higher, they assume that the quality is also higher. 

Financial incentives help get people who did not go to a gym regularly get started. A study by Gneezy found that continuing them for four weeks helped many participants to continue past the initial soreness and need to change habits.

"The first visits to a gym aren't much fun, but the cost-benefit ratio changes," he explained. "So paying people to start going to the gym for four weeks can make them do it even if they suffer. After we stopped paying participants during weeks five to 12, people were on average twice as likely to continue. This result implies that incentives can help people in creating new habits."

Mental Accounting

Gneezy cites the case of Redfin, the real estate brokerage, which was giving a $450 refund of part of the agent's commission even though it discovered that this had zero impact on sales. Giving away hundreds of millions of dollars was supposed to, according to the CEO, demonstrate that it was living up to its mission of looking out for the customer by ignoring "the rational thing to do."

The problem was that the $450 was too small in the context of the price of the house, and the offer was lost in the mountain of figures in the mortgage paperwork. Redfin could have made it meaningful, says Gneezy, by offering the same amount in another form. 

He draws on his experiments with a $450 discount given for used vehicles sold on Edmunds.com. When the company offered the incentive in the form of a prepaid gas card, it had more influence than the discount. This has to do with a 2017 Nobel Prize-winning discovery that the brain does separate"mental accounting." $450 as a discount on a car price doesn’t feel as large as the same amount in the form of paying for gas. It is easy to imagine how painful it is to face the pump and the good feeling of the discount. 

"Crafting an incentive around something people dislike paying for can improve its effectiveness," wrote Gneezy. "Redfin could have increased the effectiveness of its refund by offering it towards purchases at a home improvement store. Facts are dry and you should not leave them open to interpretation, but shape the story your incentives tell."

Gneezy offers many other insights and examples, some drawn from the history of the 100 years it took for seat belts to be fully adopted or how to "anchor" those you negotiate with an initial high offer. But to learn about those, you should be incentivized to buy the book by now.

About the Author

Scott S. Smith

Scott S. Smith has had over 2,000 articles and interviews published in nearly 200 media, including Los Angeles Magazine, American Airlines’ American Way, and Investor’s Business Daily. His interview subjects have included Bill Gates, Richard Branson, Meg Whitman, Reed Hastings, Howard Schultz, Larry Ellison, Kathy Ireland, and Quincy Jones.