A look @ #Freakonomics

#Freakonomics - in general the book gets to the heart of interactions from all walks of life to reveal unexpected and often irrational factors at play.

It's answered a particular question of interest to me - What factors should take into account when assessing incentives and their impact?

In general everyone wants to affect your behaviour - politicians, brands, police, your boss, parents, spouse..... and I'm hoping at the end of the article you join the suggested discussion around how the government could influence our behaviour to follow the COVID-19 advice.

All attempts of influence rely on incentives or disincentives which fall into three categories:

1. economic
2. social and,
3. moral

The most successful incentives include all three of these groups.

Introducing incentives can have unintended consequences on behaviour, from a parent offering treats to do school work, to employer giving bonuses for hitting sales targets.  some of these consequences will been seen in the short terms, others take time to emerge.  However, what was evident form this book was incentives are more complicated than we think.....

Incentives are complicated:

A study of day-care centres in Israel looked at how they could reduce the numbers of parents arriving late to pick-up their children.  The process looked like this:

Economic disincentive - they introduced a circa ￡2.40 late fee for parents picking up their kids

Results - it doubled the volume of late pick-ups, so HOW did this disincentive encourage more late pick-ups

Potential reason why - was the amount not big enough signalling to parents that late pick-ups were not really a problem?

Actual reason - the small economic disincentive replaced the existing moral disincentive, the guilt parents felt when they were late.  This was a stronger disincentive.....

Consequence – parents now felt they could buy off their guilt with a few ￡’s

Knock-on effect - once the signal had been sent the effect could not be undone, the removal of the fines had no immediate effect on the number of late pick ups

Key take away - you need to understand the current incentives/disincentives in play before introducing another one.  Will a new one displaces an existing stronger one.

 Incentives are 'context' depending:

Different people react to different incentives, but also the same person will react differently to the same incentives on different occasions.

Data collected by Paul Feldman, who ran a business that supplied bagels to office snack rooms in different locations around the city, where he left an unattended cash box for customers to pay in.  He picked up the cash and left overs at the end of each day.  Each customer had the same incentives to pay, the desire to look and be honest (social and moral).  So the variations from payments left from the different location gave some interesting insight into honesty and changing conditions.

The key contributing factor in how honest his customers were seemed to be personal mood, which was in turn effected by other factors:

• weather - higher payment rates on unseasonably warm days and lower on unseasonably cold days
• holidays - stressful holiday periods like Christmas decreased payments and relaxed holiday periods push rates up, also,
• office morale - happy office more likely to pay….

Incentives that work for people on some days, may not work for the same people of different days.

Incentives sometimes benefit the wrong person:

Sometimes, an incentive that has been put in place to benefit the client is actually working against their goals.

Estate agency sector – their commission (in most cases) is based on the final sale price, with the client’s goal to maximise the sold price. However, the financial impact on the agent’s commission from the first offer to encouraging a second higher offer higher is relatively small to just closing the deal now. 

The agent’s incentive to make a first deal quickly outweighs the incentive that is mean't to be aligned to the client’s goal, achieving the best price for their property.

Interestingly, a survey on estate agents own property saw they left their house on the market for longer and achieve a higher price, compared to their clients.  So when you are encouraged to take the first offer it’s not always to maximise your profit but their own.

However, now apply this to newer business models in this sector.  Some agents now take no commission on sale and completion, just an upfront circa ￡1000 listing fee. Whilst to the consumer this seems like a better deal, the sales negotiator now trying to sell your property is even less interested in what it sells for as they are already receiving their commission from the listing fee…. To quote an estate agent operating under this model where I was trying to buy a property “it’s doesn’t matter to me what this sells for, I’ve already been paid on it.”

Customers need to weigh up the different incentive models to ensure it is working for their needs.

Debate:

It would be great to see if I can spark some debate from this post – taking into account the three incentive group, economic, social and moral, how could the government encourage us to listen to their advice? Stay at Home, Protect the NHS, Save Lives 

Remember the best incentives have all three groups.  So, what would be your answer to?

• Economic - 
• Social - 
• Moral -