Executive Summary
When people are given a financial incentive for performance, it is widely accepted that they will work harder to make sure their performance is of the highest caliber. When that incentive is linked to making choices or judgments, greater accuracy is expected. The current work takes that premise as a starting point but asks what other consequences might come about when people are given a financial incentive?
In a series of three studies, the authors show that one of the consequences of giving people money is that mood may become enhanced, which can lead to degraded decision making accuracy. In Studies 1 and 2, the authors show that though being paid for greater accuracy leads to greater effort, it also leads to more biased decision making. Specifically, they examine a particular decision bias known as “predecisional distortion,” in which as soon as people begin to prefer one brand over another in a choice between two alternatives, they systematically interpret the information about the tentatively preferred option in an overly positive way.
This bolsters the support given to the initially preferred option and leads to biased choice. By comparing the amount of predecisional distortion exhibited by people with and without an incentive, the authors show that distortion doubles when people are given a financial incentive. This is true regardless of whether the incentive is framed as a reward for an accurate final choice or as a penalty imposed for inaccuracy (Study 2). In Study 3, they extend the context in which the problem arises by showing that overconfidence is elevated when financial incentives are provided. In each study, although time spent on the task was greater when financial incentives were provided, the elevated mood that resulted swamped the benefits of that greater effort, leading to degraded performance.
This research has implications for the use of incentives to get people to work harder. Firms that provide financial incentives certainly would not expect decision-making performance to decline, and they typically do not have parallel groups of people working on the same tasks in a no-incentive capacity to provide a point of comparison. However, the result of these studies advocate that firms should do this, particularly when the outcomes are critical. To be effective, an incentive should only be provided when the chance of a good mood resulting from it will not adversely affect the accuracy of the choice process.
Biography
Margaret (Meg) G. Meloy joined the faculty in Penn State’s Smeal College of Business in August 2002. Previously, she was an assistant professor in the Department of Applied Economics and Management at Cornell University and in the R.B. Pamplin College of Business at Virginia Tech. Meg received her PhD from Cornell University and holds undergraduate and graduate degrees in Agricultural Economics from Penn State and Cornell, respectively. Her research examines consumer and managerial decision-making biases and heuristics, with a special emphasis on how moods influence consumer information processing, preference construction, and choice behavior. Her work has been published in Journal of Consumer Research, Journal of Marketing Research, Management Science, and Organizational Behavior and Human Decision Processes. Meg and a coauthor have been the recipients of a grant from the National Science Foundation to study the causes of predecisional distortion, a decision-making bias.
J. Edward Russo holds a master’s degree in Probability and Statistics and a doctoral degree in Cognitive Psychology. He has consulted for numerous public and private organizations. His research centers on manager and consumer decision making. His published work has examined advertising, behavioral methodologies, consumer information aids, decision processes strategies, the distortion of information during a decision, and product knowledge. He is the coauthor of Winning Decisions (Doubleday 2002), a book for managers about the behavioral aspects of decision making. He was on the faculty at the University of Chicago and the University of California, San Diego, and has held visiting positions at Bocconi University (Milan), Carnegie-Mellon, Duke, and Wharton. He is a fellow of the American Psychological Society.
Elizabeth Gelfand Miller received her PhD from the Wharton School at the University of Pennsylvania and a BA from Cornell University. Her research focuses on how information presentation influences interpretation and decisions and how these processes are affected by mood and/or stress. Her research has been presented at numerous conferences, including the Association for Consumer Research, Society of Consumer Psychology, and Marketing Science conferences, and has been accepted for publication in Journal of Consumer Research. Her current projects include investigating how various aspects of an experience influence evaluations and how people make decisions about their health (e.g., whether to obtain screening tests).
J Marketing Research, Volume 43, Number 2, May 2006
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