Classical economics is based on the premise that people act rationally, making logical decisions about how and why they spend their money. Well, as we are currently sitting in the worst economic downturn since the Great Depression, maybe classical economics is a little flawed. The emerging field of behavioral economics, which incorporates insights from cognitive and social psychology and neuroscience, provides a more accurate analysis of our desires and actions. This post is an excerpt of an interview with George Loewenstein, a behavioral economist, from the January/February issue of Discover magazine:
Question: Some say high executive pay is needed to stimulate top performance, but you found something very different.
Loewenstein: Our belief was that very high levels of executive compensation couldn’t be justified on a motivational basis. We gave subjects seven different tasks some of which were simple but effort-dependent, like adding strings of numbers. For mundane tasks, high incentives motivate people in an almost unlimited fashion. But with tasks that require creative solutions, as well as with athletic endeavors, people actually started to do badly when compensation was increased. When stakes are high, the brain tends to narrow its focus. This impairs performance on the types of creative tasks that involve expansive thinking, such as drawing novel connections between disparate things. People can also become too focused on how much money they stand to gain or lose, to the detriment of focusing on the task itself.
Question: But shouldn’t we reward ambition – the “greed is good” argument?
Loewenstein: We view greed as a form of desperation. Hypermotivation, we call it. Greed is actually the antithesis of self-interest, because you’re so motivated to achieve some goal that you do it at the expense of other things that might be more important to you: values you cherish or your own long-term self-interest. We think that the reason is a phenomenon called loss aversion. In a lot of competitive situations, people look at others whom they perceive to be at a higher level, which forms their reference. They feel themselves to be in the domain of lossess, and they are desperate to get out. Much cheating, it seems, occurs not because people just want more but because they feel “in a hole” that they can get out of only by cheating.
Question: How we can we outwit our own self-destructive tendencies?
Loewenstein:In the last several years, behavioral economics has started to offer solutions for a wide range of problems: obesity, addiction, failure to take medications, even global climate change. People are very shortsighted; they have what behavioral economists call “present bias preference.” Nowadays there are a lot of wellness programs in which people are incentivized to engage in exercise and other healthy behaviors. Small incentives can have a large impact on behavior if they are immediate, because they play on present bias preferences. Or take what is called default effect: People tend to be lazy decision makers, taking the path of least resistance [...] We did field research at a fast-food restaurant showing that if you make the healthy options just slightly more convenient [...] you can get people to eat more healthily.