Reading Room Material: Misbehaving

Your Tank is Empty

You glance down at your gas gauge. You're coasting on fumes. Time to fill 'er up! There are two gas stations across the street from each other. Which gas station would you choose? 

Gas Station A: The price for gas is $2.45 if you pay with cash, and a $0.05 surcharge for using a credit card.

Gas Station B: The price for gas is $2.50 for using a credit card, and a $0.05 discount for paying with cash. 

What is "Behavioral Economics?"

I'm not sure if this is apocryphal or not, but I believe Hitler famously asked, "Guns or butter?" [1] At first glance, his statement seems like a false dichotomy. But if you dig a little deeper, you find that the common denominator is nitrogen. You can either turn nitrates into gun powder or you can convert them into fertilizer [2].

What does "guns and butter" have to do with Economics? Simply put, Economics is the scientific examination of making decisions when resources are scarce. In a world of finite resources, you have to pick. Do you want guns and tanks, or do you want plows and tractors? You can't have both, so you have to choose.

Where, then, does the "behavioral" aspect of behavioral economics come into play? I'm glad you asked because Dr. Richard Thaler, author of the book Misbehaving, has a terrific answer [3].

What's the Big Idea? 

Before delving into Dr. Thaler's big idea, a little context is necessary. Every scientific theory is based on a few core assumptions. Economics is no different. Neoclassical Economics assumes that people are rational and are able to make optimal decisions to further their own agenda. In other words, I know what makes my life worth living. It might be different from yours, but we both are able to decide what's best for ourselves. In economic jargon, we are experts at maximizing our own utility (read: "happiness"). For simplicity, Thaler refers to these rational types of people as Econs.

Assuming people are rational, various factors are deemed irrelevant when making decisions. In the scenario that opened this post, both options should be equally appealing to an Econ. If we observed Econs filling up their cars, about half of them would choose Station A and the other half would choose Station B. 

But what do we observe when we watch Humans purchase gas? Which gas station would you purchase gas from? Gas stations that offered a surcharge on credit cards quickly learn that humans overwhelmingly prefer discounts.

Thaler's book is chocked full of big ideas. Probably the biggest among them is the idea that economic theory is based on the faulty assumption that we are Econs instead of Humans. Unfortunately for Neoclassical Economics, humans are swayed by supposedly irrelevant factors, or "SIFs" for short.

The Big SIF: The Sunk Cost Fallacy

What's an example of a SIF? Personally, one of the hardest lessons for me to learn was to ignore "sunk costs." I bet this has happened to you, so I'm sure you can sympathize. A couple of years ago, I bought a ticket to a brew festival. The lineup of craft brewers was incredible, and I was excited to try some new libations. But on the day of the beer fest, I came down with fever. I tried to coax myself to go. I couldn't let all that money go to waste! But then a lesson from college came back to haunt me. That money is gone. I can't jeopardize my health because that would be considered, "throwing good money after bad." In the end, I had to stay home (and ignore the sunk cost of my ticket!). 

The sunk cost fallacy is just one example of many SIFs that Dr. Thaler describes and had a hand in discovering. By the end of the book, you are left wondering how Economist can continue to believe in a rational individual. More importantly, How must economic theory change to accommodate these SIFs? I guess it's up to us misbehaving Humans to figure it out. 


Share and Enjoy!

Dr. Bob

More Material

[1] According to the all-knowing wikipedia, it looks like Hitler didn't coin the term, but the Nazis did use the concept of "guns or butter" in their propaganda. 

[2] Making decisions on a stingy planet also calls to mind our discussion on Opportunity Costs.

[3] Thaler, R. H. (2015). Misbehaving: The making of behavioral economics. WW Norton & Company.

Getting Off the Couch: Motivation

In the movie Office Space, the main character is struggling to figure out what he wants to be when he grows up. He recalls a procedure from high school for determining what his profession should be:

Our high school guidance counselor used to ask us what you'd do if you had a million dollars and you didn't have to work. And invariably what you'd say was supposed to be your career. So, if you wanted to fix old cars then you're supposed to be an auto mechanic.

Suppose you didn't have to get up and go to work tomorrow. How would you spend your time? What would motivate you to get out of bed?

"It's a problem of motivation, all right?" -Peter Gibbons

Motivation is a slippery subject. To help clarify our discussion, let's start with a definition. I am using the word motivation to describe your own private rationale for engaging in some activity. In other words, motivation is your internal mechanism for figuring out how to spend your time. You might be motivated to engage in an activity because it will result in some concrete output (e.g., earning a paycheck, painting a picture, or writing a poem), builds a new memory or skill (e.g., going sight-seeing, attending a top-rope course, or skateboarding), or just passes the time (e.g., watching television or playing a game).

What are the sources of motivation? Off the top of my head, I can think of a few:

• Power
• Money
• Prestige
• Fame
• Impressing a potential mate
• Demonstrating mastery
• Contributing to something bigger than yourself (meaning)
• The promise of a better future
• Someone in power tells you what you must do (authority)
• Your or someone’s life depends on you completing a task (survival)

Some of these sources are better motivators that others [1]. For example, seeing a grizzly bear is a powerful motivator to leave the situation (i.e., survival). On the other hand, some sources are more nuanced, and they might ebb and flow. On some days you might feel like practicing the piano, while other days you just can't bring yourself to sit down in front of the keys and practice your scales (i.e., demonstrate mastery).

Thanks for all your hard work...bzzz!

Now that we have a working definition, let's talk about what the data say about motivation. One of my favorite motivation studies was led by the behavioral economist Dan Ariely [2]. The study included two experiments. The first of which asked undergraduate participants (who we will call "laborers") to find duplicate letters (e.g., "ss") on a sheet of paper filled with hundreds of letters. There were three different experimental conditions. In the Acknowledged condition, the laborers turned in their work to the experimenter. The experimenter then checked the work to see if the laborer found all the duplicate letters. In the Ignored condition, the experimenter took the sheet and, without checking the accuracy of the completed work, placed it on a very tall ream of paper. In the Shredded condition, the experimenter took the laborer's sheet and promptly ran it through a paper shredder. Bzzt!

After completing the first sheet, the laborer had to make a choice. Does she want to fill out another sheet or stop? Of course, there was a catch. The first sheet paid a "salary" of $0.55; but for each sheet thereafter, the salary decreased by $0.05. There was a diminishing return on the laborer's time. The experimenters were interested to see if manipulating the meaning of the work had any impact on how many sheets the laborers completed in the three experimental conditions. What would you predict? 

If you mentally placed yourself in the participant's shoes, you may have predicted that the Acknowledged condition completed far more sheets. And you would be correct. On average, they completed about 9 sheets, which was many more than the participants in the Ignored (~7 sheets) and Shredded (~6 sheets) conditions. By the way, there was no statistical difference between the Ignored and Shredded conditions.

In the second experiment, participants were asked to assemble Bionicle Lego robots. What could be more fun than getting paid to play with Legos!? In the Meaningful condition, the robots were placed on the experimenter's table, so the laborer could see the fruits of her labor. In the Sisyphus condition, when the laborer turned in a robot, the experimenter promptly disassembled it. Like the previous study, the laborer could decide to stop at any time. Laborers in the Meaningful condition assembled an average of 10.6 robots, while the Sisyphus condition only assembled an average of 7.2 robots.

What is the implication for motivation? It demonstrates that when you hold money constant, people are willing to work much longer on tasks that they find even the tiniest bit meaningful. The meaning in this experiment, of course, was derived from the acknowledgement from another person. The person in charge had to acknowledge that the work had been completed. Looked at another way, the worst thing a manager can possibly do is fail to acknowledge that an employee has done a task. Instead, a manager should help employees see how their work is in some way connected to a greater purpose or project. In other words, don't run your employee's work through the proverbial paper shredder once they are done.

The STEM Connection

The danger in education is that in-class assignments and homework can feel like busy work. Unfortunately, students can't fall back on rationalizing the time they spend by thinking, "Well, at least I'm getting paid." Instead, students need to find motivation elsewhere. Teachers and guidance counselors might have to periodically remind students that they are investing their time in the promise of a better future. 

Some students, however, are more concrete and live for the moment. How do we help this type of student find motivation to study? Offering rewards won't work because studying is, by its very nature, a deferred investment. Offering an external reward can also easily undermine students' intrinsic motivation [3]. Instead, the Lego study suggests that students might be motivated by keeping track of their progress. Each completed assignment is an incremental step along a much greater path. If each assignment and exam can be quantified in some way, it is highly motivating to look back and see how far you've come.

Another source of inspiration for how to motivate people is the video-game industry. We all know how addictive video games can be. What is it about their design that draws us in and keeps us coming back? Keeping track of progress is almost universally used, and so is the idea of "leveling up." As you play the game, the user becomes more proficient. Like the idea of the flow channel, a game needs to be simultaneously accessible to beginners and challenging for expert players. Thus, games need to evolve to be commensurate with the user's improving skill. Video games allow kids to demonstrate their proficiency. Is there a way we can engineer the classroom experience so that demonstrating mastery is looked upon favorably (e.g., spelling bees, math competitions, debates)? 

In summary, motivation is fickle. Sometimes we have it; sometimes it is nowhere to be found. Probably the most reliable source of motivation is spending time on an activity that we chose for ourself, and that we find meaningful. If we can help our students find a connection to something beyond themselves, then we can tap into the same motivation that has built things like Wikipedia. 


Share and Enjoy!

Dr. Bob

For More Information

[1] Pink, D. H. (2011). Drive: The surprising truth about what motivates us. New York: Penguin.

[2] Ariely, D., Kamenica, E., & Prelec, D. (2008). Man's search for meaning: The case of Legos. Journal of Economic Behavior & Organization, 67(3), 671-677.

[3] Kohn, A. (1999). Punished by rewards: The trouble with gold stars, incentive plans, A's, praise, and other bribes. New York: Houghton Mifflin Harcourt.