Incentives are things that shape and influence our actions and behaviours. These are usually grouped as:
External incentives like money or internal incentives like the happiness we get from completing a project.
To really see how we may use incentives to cement habits we want and kill habits we do not want, we need to consider what determines the level of effort we are willing to put in to achieve or avoid a given habit, behaviour or action. Thinking about it in this way, there are three main levers that incentivise human effort:
- The price or money incentive – a sufficiently high payment will make it worth my while
- The interest incentive – my interest in this topic will make me put in the effort
- The identity incentive – I do or do not do certain things based on my identity (e.g. I am a vegetarian and therefore, I do not eat meat)
Price incentive is the lever that behavourial economists have focused on. Countless experiments have been conducted using monetary rewards or forfeits to influence things from school attendance and performance through to quitting smoking. There likely are multiple reasons for this. However, my opinion is that price is focused on by economists as it is a clear external incentive that can be used by an outside party seeking to change or influence the behaviour of another person or group of persons. It is much harder to control for or design experiments around the use of the interest or identity incentives.
It is important to choose the right incentive type. Using the wrong incentive type might in the best case scenario mean it does not have any effect and in a worst case scenario, could actually backfire and motivate people to do the opposite of what you want them to do. This is a phenomenon known as “crowding out”.
So, what incentives do you use when?
To stop a habit, using the price incentive is effective if it is a form of financial punishment. Signing up to a pact to lose a certain amount of money if they smoked within a certain timeframe seemed to have an impact on the long-term quitting rates of smokers. This plays on the psychological impact of loss aversion that we have and is more effective than paying someone to quit smoking which only lasts as long as the smokers were being paid.
If we want to encourage habits or behaviours, it is better to use the interest or identity incentive for longer term changes. Price seems to be less effective or even counter-productive in these instances. Why is this?
Firstly, it only seems to work if you are paying someone to do something which reinforces an interest or identity incentive they already have. In experiments on groups of students, paying them for better grades worked well for those who were already in the top performing quartile but actually made poor performing students perform worse.
Secondly, using price to encourage habits can also actually weaken the identity or interest incentives of a habit. Paying people to collect charitable contributions actually tend to lessen the effort they will put into the activity. This is likely because the payment dilutes or changes the identity incentive of being a good person who likes helping others. Payments seem to need to be set fairly high to compensate for the dilution of the identity or interest incentive. If not, the behaviour or habit stops as soon as the payment is stopped or even worse, the habit or behaviour is never fully taken up as the payment just is not a good enough incentive!
Lastly, there may be instances where using a price actually signals a conflict with an interest incentive or identity incentive and can produce opposing behaviours or habits. One example that is frequently quoted is that of governments wanting to set up nuclear plants to produce less carbon generating power. Offering monetary compensation to individuals whose homes or communities will be in proximity of these nuclear plants appear to send a signal that this is an undesirable or risky undertaking. This actually has the effect of strengthening the individual’s interest of not supporting the building of the plant. Another example is one from Israel where payments were given a small fine of $3 if they were late picking their children up from school. As the fine was so small, parents who were fined continued picking their children up late as they associated the small fine with it being acceptable to be late. Focusing on the collective interest of the communities or the identities of the individuals as responsible parents or even green citizens would likely have worked better in these instances.