The Why Axis: Hidden Motives and the Undiscovered Economics of Everyday Life (4 page)

Another question we’ve explored is:
How can we get people to donate more money to charity?
Beyond our desire to be good citizens, we each had selfish reasons for our curiosity.

For his part, John has been interested in the economics of charity since he was a wet-behind-the-ears professor at the University of Central Florida, where he discovered that an integral part of our economy—the charitable sector—was largely driven by anecdotes and outdated rules of thumb devoid of scientific validation. Along
the way, he came to know Brian Mullaney, the founder and CEO of Smile Train and
WonderWork.org
—whose ubiquitous magazine ads and direct-mail envelopes appeal for donations that can correct cleft lips and palates (and, through
WonderWork.org
, other maladies) with a simple surgery.

A large-scale field experiment touching roughly 800,000 direct-mail recipients revealed something about giving that no one would have guessed: allowing people to check a box saying “never contact me again” actually lead to
higher
levels of gifts, not lower. Many fundraising experts thought the idea was crazy; why on earth would any charity invite people to
stop
contributing? But as it turned out, people loved it. We raised much more money using the opt-out rather than the standard treatment, and only 39 percent of recipients opted out. Smile Train and
WonderWork.org
ended up saving money on postage, because they only needed to re-mail to those who were interested in giving in the future. It was a true win-win.

For his part, Uri became intrigued by the idea of getting people to give more to charity while experimenting with a new pricing mechanism at various companies—“pay what you want.” Under pay-what-you-want pricing, a company tells its customers that they can have the goods or services they need for any price they set (including $0). We were able to convince Disney to test this new and unusual pricing mechanism in one of its large theme parks. We found that when a charitable donation is combined with pay-what-you-want pricing, people pay a lot—much more, in fact, than they do according to the traditional pricing models.

And, as we discovered, human beings have more complicated and, yes, more complex reasons to give than simple altruism. When we looked at all kinds of techniques—door-to-door campaigns, direct-mail solicitations, matching grants, and so on—we found out what works best in setting the right incentives and convincing
people to open their hearts and wallets. As you will see, a running theme throughout the book is this: once we discover what people value, then we can design useful policies that influence their behavior and induce change.

Here’s another dilemma that has grabbed us:
How can you use incentives to keep kids in school and curtail youth gun violence?

This question is anything but abstract. Public schools in some areas of Chicago have horrendous attrition rates, in some cases as high as 50 percent, and one out of every thousand public school student gets shot. When the mayor of Chicago Heights asked John for some help, John responded as any good citizen would—and he brought the tool kit of an economist to the job. The large-scale experiments we describe in this book—the first of their kind anywhere in the country—are demonstrating that certain kinds of incentives, offered in the right way, can go a long way toward improving student performance. They can save lives, too.

In investigating student performance, we had to delve deep into motivation. What really happens when you use money as an incentive? When do incentives work and when don’t they? These questions first started to bother us years ago, when our children were in day care. The principal of the preschool, frustrated by parents who failed to pick up their kids at the appointed time, decided to impose a small fine for late pickups. The fine actually acted as a counterincentive, because it put a price—and a fairly low one at that—on inconveniencing the teachers and staff. Parents might have felt guilty about being late before, but once the fine was instituted, they decided it was downright silly to show up on time. Why rush through traffic like a crazy person for the sake of saving a few bucks? We did more research, and concluded that if you want someone to do something, you had better be pretty careful about the details—the who, what, when, where, why, and how much you motivate. Money works, but only at the right levels.

As you might have gathered by now, we’re not like most economists. While we use important insights from economic theories, we didn’t develop our thinking in intellectual hothouses.

For example, John, as we mention above, took his first forays into the business world as a hungry college student, when he learned to buy, sell, and trade sports memorabilia. He received an unforgettable lesson about cutthroat competition and capitalism when he traded a valuable collection of his own sports cards for a set of worthless counterfeits. But through the process he learned how to bargain more effectively, and even how to price his goods correctly. To his surprise, he later observed that most firms—even international corporations—haven’t the foggiest idea about how to set prices for their goods and services.

Uri loves good California wine. Often, when visiting wineries, he wondered how owners priced their wines—a particularly tricky task, since quality is hard to judge objectively. When a vintner asked him to help with just that, Uri told him that he had no clue how much the wine should cost—but he did have a tool that could do the job of finding out simply and cheaply. We conducted a small field experiment in the winery, and few weeks later we were able to find the best price—one that raised the winery’s profits considerably. Our field experiments in companies have shown how to raise both productivity and profits in a way that increases everyone’s share of the pie.

Often, businesspeople think that running experiments is a costly undertaking, but we believe it’s prohibitively costly
not
to experiment. How many product and pricing failures can be laid at the feet of insufficient investigations and tests? Just ask the people at Netflix,
who blundered badly in 2011 when they introduced new pricing that substantially damaged both their brand and their stock value.

Every transaction is an opportunity to learn something about customers. Companies that learn to run field experiments, and run them well, will lead in their markets. In the past, skilled managers could rely on intuition and received wisdom from their predecessors. But tomorrow’s successful manager will generate her own data via field experiments and use those insights to drive the bottom line.

So there you have it. By the time you finish this book, we hope you will come away with a much better idea of what works—and what doesn’t. We also hope that you will see economics as a
passionate
science, not a “dismal science,” the name conferred on it by Victorian historian Thomas Carlyle.
⁵

To us, economics is a discipline fully engaged with the entire spectrum of human emotions, with a laboratory as big as the whole world, and with the capacity to produce results that can change society for the better. We believe you’ll find that our field experiments are not just eye-opening, but fun and full of surprises. We hope you’ll discover that economics is not boring or dismal at all. We think you’ll come away with new understanding of the hidden motives that drive people to behave the way they do and of how we can all achieve better outcomes for ourselves, our companies, our customers, and society in general.

Finally, we hope you’ll come to a new understanding of how incentives can be used as a way of framing questions and gathering insights that are not only interesting, but important and useful.

We hope you enjoy the adventure.

          
CHAPTER ONE

       
How Can You Get People to Do What You Want?

          
When Incentives (Don’t) Work and Why
¹

If you want people to do what you want, incentives can be incredibly handy. When you were little and your mom promised you a toy for cleaning your room, you probably cleaned your room. And if you didn’t clean it the next week, she took away the toy until you did. Much of what we learn from the time we can say our first words is largely based on an application of carrots to reward and sticks to punish. Negative incentives in the form of punishments and fines can steer people away from undesirable behaviors. Positive incentives—often in the form of monetary enticements—can cause people to move mountains, clean up their acts, and do the “right” things.

But incentives are trickier than they seem. They are sophisticated tools, and they don’t always operate the way we think they will. Before putting an incentive scheme into place, you first need to understand
how
it works and then use it to understand
why
people behave as they do. Once we understand what people value and why, we can develop effective incentives and use them to
change our kids’ behavior, motivate employees, attract customers, and even convince ourselves to do things. Field experiments are a powerful tool to understand how and why incentives work.

In some cases, incentives can even backfire, causing people to behave in the opposite way you would expect them to.

This lesson hit home some years ago when Ayelet (Uri’s wife) and Uri were late in picking up their kids from day care. Ayelet and Uri had enjoyed a beautiful day at the beach in Tel Aviv, a nice lunch, and good conversation that caused them to lose track of time. It was almost four o’clock, and they had less than fifteen minutes to pick up their daughters from the day-care center a good half an hour away. When they finally got there, their girls greeted them like excited puppies. Then they saw Rebecca.

Dear Rebecca. She was a kind, warm woman, the owner, principal, and matriarch of the day-care center. For years, she had worked hard and saved her money until she had enough to open her own center, situated in a beautiful old suburban house, about twenty minutes from Tel Aviv. Each room was colorful and filled with light, and the kids shrieked with happiness in the play yard. Rebecca had hired a dream team of teachers to look after the little ones, and the center quickly gained a reputation as one of the best in the city. She was proud of her center, and for good reason.

But when she saw Uri and Ayelet, she pursed her lips.

“I’m so sorry we’re late,” Uri ventured. “The traffic. . . .”

Rebecca nodded her head. She said nothing as Uri and Ayelet scooped up their daughters. What was she thinking? They knew she had to be upset, but
how
upset was she? It was hard to figure out, as Rebecca was always so nice. Uri and Ayelet felt awful for showing up late, wondering whether she might even treat their kids a little more poorly because of their tardiness.

Rebecca gave Uri and Ayelet a little insight into how she felt about their tardiness when, a few weeks later, she announced that
her day care would begin charging a NIS10 (about $3) fine to parents who picked up a child more than ten minutes late. In saying this, she made it clear exactly how bad it was to be late: $3.

So how did Rebecca’s incentive work? Not very well. Since she only charged $3 for coming late, Uri and Ayelet figured that was a pretty good deal for some extra day care. Next time they were at work or enjoying a day at the beach and knew they would be late, they didn’t drive like crazy to get to the center as soon as possible. After all, they didn’t have to face the wrath of Rebecca. Now that she’d imposed a $3 late fee, they would gladly pay it and continue with what they were doing without worrying or feeling guilty.

The experience with Rebecca and her fine for tardiness inspired us to work, together with Aldo Rustichini, with ten day-care centers in Israel to measure the effect of a small fine on late-coming parents over a period of twenty weeks. First we measured what happened when there was no fine. Then, in six of the centers, we introduced a flat $3 fine for parents who were more than ten minutes late. As you might have guessed by now, the number of parents who came late
increased
drastically. Even after the day-care centers removed the fine, the number of parents coming late remained higher in the centers that had initially introduced it.
²