No.05‐11
LargeStakesandBigMistakes
DanAriely,UriGneezy,GeorgeLoewenstein,andNinaMazar
Abstract:
Mostupper‐managementandsalesforcepersonnel,aswellasworkersinmanyother
jobs,arepaidbasedonperformance,whichiswidelyperceivedasmotivatingeffortand
enhancingproductivityrelativetonon‐contingentpayschemes.However,psychological
researchsuggeststhatexcessiverewardscaninsomecasesproducesupra‐optimal
motivation,resultinginadeclineinperformance.Totestwhetherveryhighmonetary
rewardscandecreaseperformance,weconductedasetofexperimentsatMIT,the
UniversityofChicago,andruralIndia.Subjectsinourexperimentworkedondifferent
tasksandreceivedperformance‐contingentpaymentsthatvariedinamountfromsmall
tolargerelativetotheirtypicallevelsofpay.Withsomeimportantexceptions,we
observedthathighrewardlevelscanhavedetrimentaleffectsonperformance.
JELClassifications:D00microeconomics,general
Keywords:performance‐basedincentives
DanArielyisLuizAlvarezRentaProfessorofManagementScienceatMITandavisitingscholarat the
FederalReserveBankofBoston’sResearchCenterforBehavioralEconomicsandDecision‐Making.His
emailaddressisariely@mit.edu.UriGneezyisAssociateProfessorofBehavioralScienceattheUniversityof
ChicagoGraduateSchoolofBusiness.GeorgeLoewensteinisProfessorofEconomicsandPsychologyinthe
DepartmentofSocialandDecisionSciencesatCarnegieMellonUniversity.NinaMazarisPost‐Doctoral
AssociateandLecturerinMarketingattheSloan
SchoolofManagementatMIT.
Thispaper,whichmayberevised,isavailableonthewebsiteoftheFederalReserveBankofBostonat
http://www.bos.frb.org/economic/wp/index.htm
.
Theviewsexpressedinthispaperarethoseoftheauthorsanddonotnecessarilyrepresenttheviewsofthe
FederalReserveBankofBostonortheFederalReserveSystem.
TheauthorsaregratefulforthehelpofthefacultyandstudentsatNarayananCollegeinMaduraifortheir
helpincarryingouttheexperimentinIndia.Faculty:Dr.Srinivasan;Prof.A.Narasimhamurthy;Dr.K.
Ramasamy;Dr.M.Jayakuma.Students:J.MosesGnanakkan;P.Kalaignar;M.Ramesh;G.Selvakumar;K.
PrabakaraDOSS.OtherthanksgotoChristoherSimeoneandMarkPorterfortheirhelpwiththeexperiment
atMIT,
andtoJackieZiresforherhelpwiththeexperimentattheUniversityofChicago.Theauthorsare
alsoindebtedtoColinCamererforhishelpfulcomments.
Thisversion:July23,2005
Research Center for Behavioral Economics and Decision-Making
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I. Introduction
Workers in a wide variety of jobs are rewarded for their effort based on observed measures
of performance. The intuitive logic for performance-based compensation is to motivate
individuals to increase their efforts and the output of their labor. Some recent evidence suggests
that payment for performance can indeed increase performance. For example, Lazear (2000)
showed that a large company that, under new management, moved from hourly wages to piece-
rate pay, increased productivity by a dramatic 44 percent [see Prendergast (1999) for a survey].
The utilization of performance-based incentives can be observed not only in businesses, but
also in other areas, such as sports. Soccer federations, for example, offered rich rewards for
success in the World Cup 2002, with bonuses rising progressively by each round, including an
extra bonus for winning the title. Bonuses paid by national soccer federations have increased
dramatically over the past years, with the richest countries paying out millions of dollars for
success and even poor nations catching up with substantial monetary incentives (Slam! Sports,
May 14, 2002). While the ratcheting up of rewards seems to be premised on the belief that doing
so will improve performance, it does not provide positive evidence that magnifying the rewards
in this fashion actually has the intended effect.
The expectation that people will improve their performance when given high performance-
contingent incentives rests on two subsidiary assumptions: (1) that increasing performance-
contingent incentives will increase motivation and effort, and (2) that this increase in motivation
and effort will result in improved performance.
The first assumption, that transitory performance-based increase in pay is increasing
motivation and effort, is generally accepted [Prendergast (1999)], although there are some
notable exceptions. Gneezy and Rustichini (2000a), for example, have documented situations,
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both in laboratory and field experiments, in which people who were not paid at all exerted
greater effort than those who were paid a small amount. In one of their experiments, students
who were collecting donations door-to-door actually visited fewer houses and collected less
money when they were paid a small commission [Gneezy and Rustichini (2000a); see also Frey
and Jegen (2001); Heyman and Ariely (2004)]. Paying a small amount in such situations seems
to risk squelching intrinsic motivation, and, if the amount of pay is not sufficient to compensate
for the decline in intrinsic motivation, motivation and effort can decline.
Another situation in which effort may not respond in the expected fashion to a change in
transitory wages is when workers have an earnings target that they apply narrowly. For example,
Colin Camerer and coauthors (1997) found that New York City cab drivers quit early on days
when their hourly earnings were high and worked longer hours when their earnings were low.
They speculated that the cab drivers may have had a daily earnings target, beyond which their
motivation to continue working dropped off.
Although there appear to be reasons to question the generality of the first assumption
regarding the positive relationship between effort and pay, our focus in this paper is on the
second assumption. The experiments we report, therefore, address the question of whether
increased effort necessarily leads to improved performance. Providing subjects with different
levels of incentives, including ones that were very high relative to their normal income, we
examine whether, across different tasks, an increase in contingent pay leads to an improvement
or decline in performance.
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II. Prior Research on the Connection Between Effort and Performance
Unlike the relationship between motivation / effort and pay, the relationship between
motivation / effort and performance has not attracted much attention from economists, perhaps
because the belief that motivation improves performance is so deeply held. However, research by
psychologists has documented situations in which increased motivation can result in a decrement
in performance – a phenomenon known as “choking under pressure” [Baumeister (1984)].
The idea that excessive incentives could undermine task performance is embodied in the
“Yerkes-Dodson law” [Yerkes and Dodson (1908)], which posits that there is an optimal level of
arousal for executing tasks, and that departures from this level in either direction lead to a
decrement in performance. The first demonstration of the effect by Yerkes and Dodson involved
rats facing a test of discriminating safe from unsafe (that is, shock-inducing) areas in a cage. The
results showed that the rats learned to discriminate most quickly when the shocks were at an
intermediate level of intensity [for similar evidence in humans see Neiss (1988)]. Since arousal is
tightly linked to motivation and performance, these findings imply that increases in motivation
beyond an optimal level will tend to produce supra-optimal levels of arousal and hence
decrements in performance.
Extending the empirical regularity of the Yerkes-Dodson law, research by psychologists
has sought to identify the range of situations and psychological mechanisms that can produce a
perverse relationship between motivation and performance. For example, one mechanism via
which increased motivation can backfire is when it leads to greater self-consciousness. When
performance on a task relies on highly practiced, automatic skills [Baumeister (1984); Langer
and Imber (1979)], increasing awareness, competition, introducing a cash incentive or audience
or ego-relevant threats (the belief that a task is diagnostic of something that one cares about, such
4
as intelligence) can cause people, involuntarily, to consciously think about the task, shifting
control from ‘automatic’ to ‘controlled’ processes that are less effective [see Camerer,
Loewenstein, and Prelec (2004) for a detailed account of automatic and controlled processes].
Sports provide a prototypical example of such over-learned, automatic tasks. Thinking about
how one is swinging the golf club or bat, or about how to get the basketball into the net, can have
perverse effects on performance. In fact, there are numerous studies of choking under pressure in
sports, including one Australian study which found that free-throw shooting performance among
elite Australian basketball players was worse during games than during training [Dandy, Brewer,
and Tottman (2001)]. The same mechanisms of shifting from ‘automatic’ to ‘controlled’
processes can also account for why the presence of an audience, which tends to increase
motivation to perform well, and hence conscious monitoring and control on the process of task-
performance, can be so destructive [see also Zajonc (1965)].
A second mechanism by which increased motivation is also likely to have a negative effect
on performance relates to a general focus of attention. Attentional focus can be detrimental for
tasks that involve insight or creativity, since increased motivation tends to narrow individuals’
focus of attention [Easterbrook (1959)], and creativity and insight require drawing unusual
connections between elements. McGraw and McCullers (1978) provided support for this
mechanism by showing that the introduction of monetary rewards for tasks that involved
problem-solving had detrimental effects on performance. In addition to the narrowing of
attention, large incentives can simply occupy the mind and attention of the laborer, distracting
the individual from the task at hand.
In summary, psychological research has identified many sources [see Baumeister and
Showers (1986)] that can lead to choking under pressure; among them are competition and
