Working Hard?

There are many ways in which employers use incentives to encourage employees to work hard. I recently heard of one company with a particuarly ineffective one.

The firm in question is an exam board based in the UK. Each summer they employ hundreds of people to perform relatively simple tasks such as counting exam papers and checking that examiners have added up the marks correctly. The work is highly repetitive and each worker may see thousands of papers in total. The employees are initially hired for several weeks, but the company then keeps on the workers it wants for some weeks afterwards. Obviously, the incentive for most workers is to be kept on for the additional weeks.

So how, you may be wondering, does the company use this potential extra work as an incentive to encourage high productivity?

Not very well, it turns out.

Their only mechanism for measuring productivity is simple: The number of mistakes each employee makes on exam papers. This is flawed. Take an example: two people who each make one mistake per 10 papers they process. Derek is highly motivated to get the extra work and processes 500 papers in a day, while Herbert is not motivated and only processes 100. According to the company's measure, Derek has made the most mistakes and is thus less productive. Thus Herbert should be kept on.

According to my secret whistle-blower there is another flaw in the system. The line managers who decide whom to keep on are largely motivated to keep fun, interesting people in the office (being surrounded by boring people for weeks on end is no fun at all). Who are they likely to think is fun and interesting? The people who stop working to have a nice chat with them on a regular basis. Thus those who are less productive because they are constantly seeking conversations with their bosses are more likely to be kept on than those working too hard to have a natter.

In conclusion, this is a clear case of tragically poor incentivisation that is unfair on those who work the hardest, not to mention bad for the company in question.

Book Review - Predictably Irrational

Predictably Irrational is a fantastic name for a book about behavioural economics. If you are looking for an easy read that will introduce you to many behavioural concepts using quirky yet illuminating stories, then this is the book for you. Dan Ariely takes us through all his research in a gripping tour of the wacky world of behavioural economics, finishing with an insightful take on the credit crunch. If nothing else, Predictably Irrational will convince you of the need for behavioural economics.

Predictably Irrational will not, however, give you a solid academic overview of the subject. The author's approach is to take us through his own wide-ranging research, but this means that genuinely ground-breaking stuff from other authors is sometimes omitted. For example, his chapter on anchors is well-written but illustrate matters with a flawed experiment (incentives were purely hypothetical - see Incentives - Ante Up). (Daniel Kahneman did not have this problem with his book.)

Ariely also includes the single most stupid experiment I've ever seen: it turn out that men, when sexually aroused, are less rational... well, DUH!

Another issue is one of his pieces of advice: hang around with a friend that is slightly less attractive than you in order to make yourself look more attractive (and whatever you do don't tell them, because that ends badly according to one of his readers). While this probably works, it is manipulative. I would not advise following all of the advice in Predictably Irrational. I do not advocate people using and manipulating their friends (or anyone)!

I will, however, end on a positive note. The chapters on cheating and honesty were genuinely new to me. Ariely's research showing that people cheat less shortly after being asked to recall the 10 commandments (or similar) is both credible and important.

Thus Predictably Irrational, while being occasionally frustrating, is well-written, easily accessible, often amusing and incredibly interesting. It is a good read, but it could be better.

Genre: Behavioural Economics
Accessibility: 9/10
Accuracy: 6/10
Readability: 9/10
Usefulness: 6/10
Verdict: A Good Read

PS Ariely has a blog, too: danariely.com

Late To The Football - Three Lions '98

As I sat waiting for my friends in a Guildford pub, I recalled many a similar experience of my youth. For years we played football every Saturday afternoon, but we had a serious problem with punctuality.

Every week we would agree to meet at 2pm on the park, but every week people would turn up slightly later than the week before. With hindsight I can see that this was a classic case of coordination failure, with a hint of the free-rider problem. Let me explain...

Us in our heyday

There was no intrinsic problem with 2pm (it wasn't as if it was too early for us to get up). The problem was that there was a disincentive to being the first one to arrive. Waiting on your own for everyone else to turn up is not especially fun. There was an incentive to turn up just after everyone else. Turning up at the same time would have been fine, but you'd have to wait for them to put their boots on (but you didn't want to come too late or you'd miss valuable footy time).

Thus if you suspected other people would show up at 2:00pm, your optimal strategy would be to turn up at 2:01pm. Because you turned up at 2:01pm this week, the others might arrive at 2:02pm next week. Thus you can see how things quickly got out of hand. Compounding this was the teenage tendency to be late anyway, and every time you were accidentally late you would give an incentive for your mates to be later the following Saturday.

Even though it was explicitly stated each week that we would start at 2pm, by the time we were in 6th Form kick-off was usually 2:45pm or later. Occasionally there would be a punctuality push and it would be announced that we'd all turn up and start at exactly 2pm - but this only brought things back to about 2:15pm!

Stoke Park (empty)

Economists call this coordination failure. The optimal solution for society would have been all of us turning up at 2:00pm, but individual incentives meant that we failed to coordinate effectively. The only way to mitigate this would have been to create a disincentive to turning up late, but creating and implementing this would have been hard given we were just a group of football-loving mates. The free-riding was insurmountable. Coordination failure is one reason why economists sometimes advocate government intervention - if there had been a higher power somehow encouraging us to turn up on time then we could have solved the problem.


Recommended listening:
Three Lions '98 by Baddiel, Skinner, Lightning Seeds

Experimental Dishonesty - Love The Way You Lie

I recently partook in a really interesting experiment at the CeDEx lab at the University of Nottingham and thought I would briefly describe it...

If you would like to, please feel free to skip to the punchline at the end for some interesting thoughts on dishonesty...

There were 16 participants: 8 "buyers" and 8 "sellers". We were told that we were trading a notional good which started in the seller's possession. There were 8 periods for trades. In each period I, a buyer, would be paired with a different seller. We would meet in a room and were allowed 3 minutes of conversation, during which we could talk about anything. We would both then go back to our original rooms and write down our buying/selling price. These would then be collected by the experimenters.

If the stated buying price was lower than than the stated selling price no trade was done. If the buying price equalled the selling price, it was the final trading price. If the buying price was higher than the selling price then the final trading price was halfway between them.

So far, so straightforward.

The interesting bit was that before each period each buyers was told what "value" the notional good was worth to them that period. Buyers either valued the good at £3 or £9. Also before each period the sellers were told what it "cost" them to provide the good; either £1 or £7. The buyers' value and sellers' cost were both decided by drawing a ball out of a hat. Each value (£3 or £9) had an equal chance of being picked (50%), and each cost (£1 or £7) had an equal chance of being picked (50%).

So I, as buyer, always knew my valuation of the good (which was decided by the hat before each period). BUT I was not informed of the sellers' cost, and neither were the sellers ever informed of my valuation.

I kept the difference between the final trading price and my value as "profit". The sellers kept the difference between the final price and their cost a profit too. Thus everyone could benefit from a trade most of the time. But that does not guarantee that the profit would be shared equally (I could get very little profit and the seller could get lots, and vice versa).

By now you should be starting to grasp the the essence of the experiment. The following scenarios are possible:

Value: £9 Cost: £7 - Potential deal, somewhere in the region of £7-£9
Value: £3 Cost: £7 - NO DEAL
Value: £3 Cost: £1 - Potential deal, somewhere in the region of £1-£3
Value: £9 Cost: £1 - Potential deal, somewhere in the region of £1-£9

However, there is an incentive to be dishonest in your 3 minute conversation with the other party. If I had the value of £9, I could gain more by persuading the seller that I actually had the value of £3, because then the price would be lower.

If the seller has the cost £1 they have an incentive to persuade me that their cost is £7, because then the price would be higher.

But remember, if the buying price is below the selling price then no trade is done and no-one benefits.

--------------------------------------------------------PUNCHLINE-------------------------------------------------------------

In this experiment, dishonesty pays.

Would you be dishonest? (remember this is real money...)

I completed the experiment without telling a lie (I did, however, use negotiating tactics to get a better deal). Over the 8 periods I earned £17.20 (about average, I suspect). Some sellers were honest to me about their cost, but most were not (a seller's final trading price can be revealing about their true cost). I ended the experiment with less faith in humanity!

However, in real life people tend to interact more than once. If someone is dishonest I will not trade with them again. Thus the experiment does not necessarily translate to real life.

I'll finish with an interesting question...

Why do humans value honesty? Why, deep down, do we know that we are doing "wrong" when we are dishonest? Survival of the fittest would surely favour dishonest behaviour...

Recommended listening:
Love The Way You Lie by Eminem, Rihanna

Incentives - Ante Up

In a recent blog I outlined a common experiment called the Ultimatum Game and asked people what they would do. Much thanks to one reader who hit on a big issue in behavioural economics, that of incentivisation.

She pointed out that the money was purely theoretical (sadly guruhogg has no real money to offer). Therefore, how can we be sure that the behaviour we observe is what would really happen? Individuals may say they will do one thing, but if the decision had real consequences they might act differently.

Real economics experiments are very careful to make sure that subjects have an incentive to answer honestly. This is done by making real money ride on the decisions people make. In the Ultimatum Game example there would be an incentive because of the £10 riding on it.

Experiments which do not involve adequate incentivisation tend not to be taken seriously in the academic world. However, there is a debate over what constitutes an adequate incentive. Some economists believe that experiments which offer only ten or twenty pounds aren't a good proxy for behaviour in real life, where important decisions can involve thousands of pounds. In response, it's argued that the few economists that have somehow found enough money to offer huge incentives tend not to find systematically different behaviour.

Anyway, I readily admit that the experiments on guruhogg do not offer adequate incentivisation, but that doesn't matter as I'm not collecting results. Incentives will have to wait until guruhogg has found some way of making money!

Recommended listening:
Ante Up by M.O.P.

That’s Just Not Cricket – It’s The End Of The World As We Know It

Something quite unexpected happened to me this afternoon. As I sat with an old friend watching his university play cricket against my university, I suddenly became really interested.

http://p.imgci.com/db/PICTURES/CMS/128500/128530.jpg

My usual view of cricket is not too different from that of Malcolm Tucker’s (see bottom), but today was different. As one of the fielders missed an easy catch, my friend remarked that he would probably get a fine. 

A fine? Surely not! Is not cricket the gentleman’s game, played purely for the respect of other gentlemen? Apparently not. All the players are given a ‘fine’ if they do something stupid. 

The fines are reportedly handed out by general consensus, but the captain has a veto. The fines are then counted up and the value of the fines is decided at the end of the season (so that no-one faces a bill too high). 

Thus there is uncertainty about what doing something stupid will cost you, but you do know it will cost you. The cricketers were being incentivised to play well.

https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh1toOrTq5-Ns3rKV2EbjkIK9ax_wR3DWc5iLXeayTTVxUk-SRiIi-ckknGNN1F9SjKUj2ZL20x9PhSSp1gwk0YJIOKKpmo-_Lm78stOo8Lx-Ghyqy3EFOFiYi4pnBqmnnWPUliBbc6uTk/s1600/england-11.jpg

Obviously, playing well already has the incentive of getting picked again, or winning the match, but clearly the university cricket powers think this is not enough. Apparently, the players needed more of an incentive to play well.

Monetary incentives are used all the time in Behavioural Economics (and all walks of life) to give people a motive for trying their best. It's interesting to see that even the venerable game of amateur cricket uses money likewise.

“Cricket? That’s the English equivalent of sport isn’t it? No actual physical contact; just glaring.” 

- Malcolm Tucker in The Thick Of It (BBC).

Recommended listening:

It’s The End Of The World As We Know It by R.E.M.