Why would an otherwise honest, decent, well-loved, ethical and devoutly religious man have no qualms about coming into the office late one evening to make a whole stack of photocopies for a homework assignment for his child?
Some people find it strange that people who give to charity, and are genuinely repulsed by those who take bribes, still engage in behaviour that others would find unethical and inappropriate. Why do successful sports stars cheat? Why would teachers, who know they serve as role models for the children in their charge, cheat? Why would ethical individuals take office supplies home? Interestingly, most of these questions have been asked and answered by researchers in economics and psychology.
One leading researcher in how economic tools can be used to answer questions on human behaviour is Steven Levitt at the University of Chicago. According to Levitt, most human behaviour can be explained by understanding the incentive structure pertaining to those behaviours. All of us are driven by moral, economic and social incentives, both positive and negative. If we can understand the incentive structure operating on individuals at any given point in time, we can predict their behaviour.
Organizational actions or environmental factors may sometimes have the unintended consequence of changing the incentives perceived by individuals and result in a host of unexpected behavioural changes. In one study, described in Levitt’s book Freakonomics, a day-care centre was having trouble with some parents coming in late to pick up their children. In order to discourage this practice, the centre made a policy decision to start charging parents who arrived more than 10 minutes late to pick up their child. Imagine their chagrin when the rate of late pickups after the policy was instituted actually doubled! The problem here was that before the fine, there was a strong moral incentive for people to pick up children on time. They felt guilty when circumstances caused a late pickup.
When the late charge was introduced, the moral incentive was replaced with an economic incentive. Now, the small late charge was paid, and parents were absolved of the guilt. Instead of having a build-up of guilt for coming late twice in a week, parents simply “paid off” their guilt by paying the relatively low late charge. This incentive-transference effect is the root cause of many behavioural changes on the part of individuals. Social and moral incentives (or disincentives) serve to regulate a great deal of human behaviour, and when these incentives are changed as a result of incentive transference, people’s behaviour is changed.
At times, external factors eliminate some of the moral and social incentives that influence behaviour. When successful sports stars are constantly put on a pedestal for their accomplishments, their incentive to engage in improper activities to maintain or heighten their performance is significantly increased. Again, people who would never take performance-enhancing drugs may find their incentive structure shift when they find themselves in the company of elite athletes with whom they have to compete, and then discover that these athletes use these drugs on a regular basis. The subtle shifts in moral, social and economic incentives can drive even the best people to do terrible things. This is also why so many people who think those who take bribes are disgusting don’t feel any guilt when handing out bribes to get their job done.
Not only can incentives influence basically good people to cheat or lie or commit crime, they can also be used effectively by managers for modifying undesirable behaviour on the part of their employees. Whenever you see employee behaviour inconsistent with your organizational goals, look at their incentives. What can you do to change their incentive structures? Is there something structural in your organization that is actually encouraging the deviant behaviour? You may change a company rule to severely penalize employees who come to work late and then realize that this has resulted in incentive transference such that you have provided a strong incentive for employees to cheat on their time cards. A crackdown on carrying over-budget surpluses into future years may cause a significant increase in wasteful spending. It is critical for savvy managers to understand how their decisions may be impacting the incentive structures of employees within the organization to avoid falling victim to the incentive-transference effect.
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Praveen Aggarwal is an associate professor of marketing at the Labovitz School of Business & Economics at the University of Minnesota Duluth and Rajiv Vaidyanathan is a professor of marketing and director of MBA programmes at the University of Minnesota Duluth