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By Root 1034 0

they should be paid that are hard to manipulate. But consider, for example, that in the United States women get paid on average only 90 percent as much as men who do exactly the same jobs, or that European CEOs get paid considerably less than their US counterparts.23 In either case, could you really argue that the lower-paid group works less hard or does a worse job than the higher-paid group? Or imagine if next year, your boss unexpectedly doubled your annual pay—how much harder would you actually work? Or imagine a parallel universe in which bankers got paid half of what they get in ours. No doubt some of them might have chosen to go into other professions, but for those who remained in banking, would they really work less hard or do a worse job? The outcome of our experiment suggests that they would not. But if so, then you have to wonder how much influence employers can have on worker performance simply by changing financial incentives.

A number of studies, in fact, have found that financial incentives can actually undermine performance. When a task is multifaceted or hard to measure, for example, workers tend to focus only on those aspects of their jobs that are actively measured, thereby overlooking other important aspects of the job—like teachers emphasizing the material that will be covered in standardized tests at the expense of overall learning. Financial rewards can also generate a “choking” effect, when the psychological pressure of the reward cancels out the increased desire to perform. Finally, in environments where individual contributions are hard to separate from those of the team, financial rewards can encourage workers to ride on the coattails of the efforts of others, or to avoid taking risks, thereby hampering innovation. The upshot of all these confusing and often contradictory findings is that although virtually everyone agrees that people respond to financial incentives in some manner, it’s unclear how to use them in practice to elicit the desired result. Some management scholars have even concluded after decades of studies that financial incentives are largely irrelevant to performance.24

No matter how many times this lesson is pointed out, however, managers, economists, and politicians continue to act as if they can direct human behavior via the application of incentives. As Levitt and Dubner write, “The typical economist believes that the world has not yet invented a problem that he cannot fix if given a free hand to design the proper incentive scheme.… An incentive is a bullet, a lever, a key: an often tiny object with astonishing power to change a situation.”25 Well, maybe, but that doesn’t mean that the incentives we create will bring about the changes we intended. Indeed, one of Levitt and Dubner’s own vignettes—of the high-school teachers cheating on the tests—was an attempt by policy makers to improve teaching through explicit performance-based incentives. That it backfired, producing outright cheating and all manner of lesser gaming, like “teaching to the test,” and focusing exclusively on marginal students for whom a small improvement could generate an additional passing grade, should give one pause about the feasibility of designing incentive schemes to elicit desired behavior.26

And yet common sense does not pause. Rather, once we realize that some particular incentive scheme did not work, we conclude simply that it got the incentives wrong. Once they know the answer, in other words, policy makers can always persuade themselves that all they need to do is to design the correct incentive scheme—overlooking, of course, that this was precisely what they thought they were doing previously as well. Nor are policy makers uniquely susceptible to this particular oversight—we all are. For example, a recent news story about the perennial problem of politicians failing to take long-term fiscal responsibility seriously concluded blithely, “Like bankers, politicians respond to incentives.” The article’s solution? “To align the interests of the country with those of the politicians who are guiding