273. Mixed Signals: How Incentives Really Work, with Uri Gneezy

Welcome to episode 273 of the Brainy Business Understanding the Psychology of why People Buy. In today's episode, I'm excited to introduce you to Dr. Ui Nizzy, author of Mixed Signals. Ready? Let's get started.

You are listening to the Brainy Business Podcast where we dig into the psychology of why people buy and help you incorporate behavioral economics into your business, making it more brain friendly. Now, here's your host, Melina Palmer.

Hello. Hello everyone.

My name is Melina Palmer and I want to welcome you to the Brainy Business Podcast. In today's conversation I'm joined by Dr. Ui Nizzy. Ui's research is on putting behavioral economics to work in the real world, where theory can meet application. He's looking for basic research as well.

As more applied approaches to topics like.

Incentives based interventions to increase good habits and decrease bad ones, as well as pay what you want pricing and the detrimental effects of small and large incentives. In addition to the traditional lab and field studies, he currently works with several firms conducting experiments which use basic findings from behavioral economics to help companies achieve their traditional goals in non traditional ways. You may be familiar with ui's name because he co authored the wildly popular book the Y Axis Wh y with John List who was on the show last year talking about his book the Voltage Effect. But John wasn't the one to introduce us. It was once again Ayelet Fishback, another.

Friend of the show whose book get.

It Done was featured in the most downloaded episode of 2022. John's episode was the seventh most downloaded of the year.

So I have very high expectations for.

This conversation and I have a feeling.

You'Re all going to really enjoy this.

One as it's about a topic pie people in business are thinking and talking about all the time. Incentives. Most specifically, UI talks about what happens when we mix our messages. It happens a lot more often than you realize and how that impacts behavior. There are tons of fascinating and practical examples in the book and we'll talk about a few of them today in the episode.

Before we get into everything, I want.

To be sure you know there are links in the show notes for everything, including books and contact information and related past episodes, all with the app you're listening to and@the brainybusiness.com 273. Now let's jump right in. Dr. Ui Nizi, welcome to the Brainy Business podcast.

Thank you. Glad to be here.

Yeah, absolutely. Well, I'm so excited to have you as this is our first time meeting, but I've definitely met Some of your colleagues, including John List and Ayelet Fishback, who have been on the show before, colleagues, friends, you know, what have you. For everyone who is not yet familiar with you, can you share a little bit about your background and the work that you do in behavioral science?

Sure. I'm a behavioral economist from UC San Diego. I'm at the business school over there. Most of my work is around how incentives work, how incentives really work, how they can change the world. And I do it with behavioral tools, meaning mostly, in my case, empirical tools, experiments, field experiments. We look at data and try to understand what motivates us.

Yeah. So how did you get interested in incentives? How did that come about?

I think that incentives really shape the world. So everything is basically a result of a product of our incentives. And as a kid, I was already fascinated by what it means. What are the hidden incentives that we have that people don't really understand, that we don't understand? When we look at the situation, they think that many situations, interactions between people, government, family, you know, everything that you think about is governed by the incentives that we have. And incentives could be money, could be something else, could be, you know, honor, could be status, could be whatever you want it to be. And understanding it can really help us understand the world.

Yeah.

And I think when we look at incentives, especially when it gets talked about in business, everyone just jumps to monetary incentives and that's it. Right. People don't even think about a lot of the other incentives, which are so important, and especially, like you were saying, the push and pull here. So if you just throw incentives at something, as people tend to do, and they say, well, what could it hurt? Right. You know, might as well. It couldn't be that bad. It at least helped motivate some people. Right. But that's wrong. So do you want to expand a little bit on that?

So there are actually two camps, if you like. So the first one is, yeah, let's just throw incentives. That's what economists do, Right? Let's just throw incentive into this. And what this book is about, and what my work in general is about, is showing that when you give the incentives, it's not just the money or the reward or whatever. It is the recognition that you give. It's also that you're also sending a message, you're telling a story. And if you don't really understand how the incentive changed the story and shape the story, you might send the wrong message. And people will get the wrong message out of this. We give you an example. Imagine that you see Your friends going to the recycle center in a cold day, cold rainy day, let's make it dramatic. With a large bag, with a hundred soda cans, you'll probably say, wow, she's a good person, that she really cares about the environment. She might feel good about herself because she's doing the right thing, right? So that's. That those are good signals. But now imagine that you live in a world in which you get 10 cents for every sotokan that you. That you recycle. Now you see your friend, it's raining again. You see your friends walking with this and say, wow, for $10. She's doing it for $10. What a cheap loser. Right? And she might feel differently about what she's doing. Before that she knew, okay, I'm doing it because I'm a nice person. Now she thinks, well, it's only $10. It's not worth it. So introduce incentives and you change the story. That's basically what I'm trying to talk about, about how incentives actually shape the story. And if you understand how to use them, you can do better. The other camp is the camp that says, we try incentives. Incentives don't work. Right. And that's just as stupid, I think, because it's like going to a Japanese restaurant and having bad food and concluding from that that Japanese food is bad. No, you went to a bad restaurant, right? No, you tried bad incentives. That doesn't mean that your incentives are wrong. So there is. There is a balance. Incentives are not good or wrong or bad. Really depends on how you use them. Right.

And I love that example of the recycling, because we can all see that, right? You understand seeing somebody where they're not getting paid for it and thinking, wow, they care about the environment. And I love that in the book, you use it as not even a friend, but I think it's your neighbor, right? The person across. And so that's where the person you aren't even friends with. And then you would be peeking through the lines maybe, and go, oh, how cheap. How. You know, how ridiculous are they that.

They'Re doing the same thing that before that we thought, oh, she is great, right?

Yeah. And so it's such an interesting story. There a similar piece on that, but it's, you know, a little bit different where you talk about blood donations in, in the book. Can you talk about that?

Right, sure. So think about yourself. Maybe you donate blood. Some of us do. Many of us do. Actually, millions of people do. And I think that we do it because we think that it's it's the right thing to do and you feel good when you're doing it. So you get. So the example with the reciting was also about sending signals to others what you. What other people will think about you, and sending signals to yourself. Self image, if you like. Right. So with the recycling we saw, we changed you over here with blood donation. You're doing it because maybe you're going to tell other people and that will get you some social signaling, but mostly because it makes you feel good about yourself. You're sending signal to yourself that you're a good person. Now imagine, like with the recycling. Imagine that I'll pay you $10 for donating blood. Now you'll say, well, for $10, I can stay in and do some work instead of this. Right. So I'm not going to do it for $10, because the signal that I send myself is not going to be the same. It's going to be diluted basically by that. So I don't want to actually be paid. Now, in this case, you can get. I think it's a great place to show how you can use incentives in a smart way. Imagine that instead of $10, I give you a mug with the blood donation, blood bank, thank you kind of message on it. That's not going to crowd out your motivation because now it's not money. You just get this reward that's nice. Each time you drink coffee in the morning, you'll see it. You'll say, oh, wow, I'm a good person. Right. I. When you look at the mag, you say, wow, I'm a good person. I donated blood. Maybe even people that come into your office will see it and will think about you as a good person. By changing the incentives from $10 to a mug that can cost less than $10, but with a message that really supports the signal that you want to send, you can do a much better job.

Yeah, and it's good too, because it costs less than any incentive you would need to give. Again, you talk about a mug here. I know you talked about a pen in which you know even less than what a mug would cost. But that both. That you get to kind of show off to others that you give blood and that, that's something. That's. It says something about you. You know, you got that identity that's reinforcing for it. But if you were to pay $10 or $50, it feels very different than the little gift at the end.

Exactly. If you pay me money, maybe I'll do it. You'll pay Me enough money, I'll do it, right? It's not that I won't do it for money. We have a paper, an old paper with Aldo Rustochini called Pay enough or don't pay at all. So in this case, you know, if you'll pay me $10,000 to donate blood, I'll be there every week. Right? But the small amounts of money are the ones that sending the wrong message. In both cases, if you pay me to give blood, if you'll pay me $10,000, I will not feel good about myself. But the money will override this in a sense. I think that the pen or a mug or something like this is great because of the signaling that you'll get in the future from it. And also now you don't have to tell people, you know, I to show off, you know, I donated blood. You can just, you know, drink your coffee and show them the right.

You don't even have to say it. People can just be able to. It's not like I'm bragging, it's just a cool mug, right? Yeah. So with that too, you know, it's so important where you're saying too, it's like, so there was the attorney who gives blood who does it because of how it helps her to feel, and then there may be somebody that doesn't have the time, that was, you know, the intern or something at the office. So you might end up getting basically the same amount of people. If you pay, it'll just like cost you more and everyone feels worse about it kind of.

Right. So there is a 50 year old book by a guy called Thitamus, an economist, and basically what he claimed over there is that he tried to compare the U.S. system and the British system. At the time in the US you got paid for donating blood and in the UK you didn't. And he claimed that that created self selection. So in the US you got drug addict to give blood, which at the time was a bigger problem than today because they couldn't really test them. So the quality of blood was bad. And in the UK you got normal people, everybody, you know, donated blood. So you got different type of people to give blood. And now it could be that if I pay you enough data you'll get in more people, but you might get different people than before. And that's something that you don't necessarily want to have, right?

It just costs more and it doesn't really make it that you're going to get a lot more people in there. And it doesn't have that good feeling, which is important.

Right. Blood is actually interesting in the sense that the bank after that sells your blood. So there is a whole market with this blood that they took from you, but they're not allowed to pay you. Right. So it's a very interesting combination of volunteering and market.

Right. Oh, I know it's reading just a little bit about that in the book, you know, then you think, oh, that is so interesting about how, you know, they sell it for a lot and then the insurance piece and who pays for what have you and who's, you know, like, yeah, you have to give it for free. It's yeah. Very interesting mix of incentives.

Yeah.

So when we look at a business, I think one other, and these are all examples that are just from the beginning of the book, there's so much great stuff in there. But with this, I think the Prius was such a great example for things for businesses to learn as well. Because when you think about what the common idea would have been if you were creating a hybrid vehicle, probably most people, if they had been at a car company at the time, would have thought that you want it to look as close to everything else as possible. You don't, you know, you want to be able to be just like everything else. And it's a little, you know, it's a hybrid, so it's, you know, a little bit different. But that was not the winning strategy because of these kind of underlying and self signaling incentives. So can you explain how that worked for Honda and for Toyota?

Sure. So in the late 90s, hybrid cars started to pop up. Right. So the technology became usable already. But those were really bad cars. Right? So bad in the sense that you, for the same money, you can get a much better car or you can pay less and get the same quality of car. They were expensive and not really didn't make any economic sense. Which was actually great because if you think about signaling, if I want to signal, you know, if you drive Tesla today, or even the previous today, you don't necessarily signal that you care about the environment. You signal that, you know, Tesla is a great car without considering the environment. But at the time, the car was so bad that the only reason to drive it was that you care about the environment. Right. So you really sent a signal, look, I'm willing to pay more and drive a less good car in order to signal that I'm a good person. But then, so that that was true for Toyota and Honda. But then in 2003, Toyota did something really dramatic. So they redesigned the car to look like what we know Prius looks like today, completely different than anything that was before. Honda basically listened to the engineers and said, who told her, look, we have the Honda Civic. It's a good car. Let's make some adjustment. Then we can use the same parts. We can have, we have lots of economy of scale. We can really benefit from using the same platform as a result, no one knew that you're driving a hybrid car if you drove the Honda, but if you drove the Toyota, everyone knew, oh, this guy is driving a hybrid car. Now think about the signaling, the social signaling that you send. You know, if you're driving a bad car, I really want, you know, when I enter the parking lot that my co workers will know he's a good guy, he cares about the environment. Right. That's what we like. Honda didn't send this message because you didn't know that they drive a hybrid car. So by actually changing the car such that it will signal I'm driving a hybrid car, I care about the environment. Basically, Toyota won the market. And Honda CEO himself said it later on that it was a mistake not to do it this way. That's why Toyota won the market. So the two signals, look, it's a bad car, which means that I care about the environment. And look, you can actually see it made a huge difference in success, Right?

Yeah. People liked, even if they couldn't articulate it and wouldn't go and say it in a focus group, that you're not sitting down and asking for the market, market research to say, do you want to drive a car that looks like a hamster to show that you care about the environment. Most people would not say yes. But they do, right?

They do. They do. And I think that that's a good place to talk about how different incentives work on different people. Think about the guys that only want pickup trucks, the big Hummer, whatever type of people, they couldn't care less about the hybrid car. That's not your target when you're using, when you're designing your car and you think about the incentives that you want to put the story that you want to make, it doesn't have to fit everyone. It's not going. If this Guy drives his F150 for the last 30 years, you're not going to convert him to driving your Toyota Prius. Right. So you really have to understand the segment that you're targeting. That's true with all incentives that we have.

Yeah. And so been having quite a few guests recently. I'm really Focused on cognitive semiotics and just semiotics in general as we're looking at the symbolism of things like you're talking here in the signaling and what it means. Rachel Laws, when she was on the show, you know, it said, you know, where there's choice, there's meaning, and really there's choice in everything that it is that we're doing. And with something like that, what does it say about me to choose this vehicle? What does it say for about me that I work at this company? What does it say about me that I donate blood? What is it that you're putting out into the world? And it's important to understand those, you know, whether you think about it as semiotics or you're talking about it as signals. It's really important to keep that in mind when you are setting up those incentive programs.

Exactly, exactly. You're telling a story by your choices. You're telling a story, the story is incomplete. Our brain, you know, you see something, incomplete picture. And your brain, my brain, everyone's brain basically completes it with some, some things that really helped us, help us to do that. And the role of incentive should be to push the story in the direction that you want. But even if you don't care about incentives are going to change the story. If you don't control it, you're going to send the wrong message maybe, and then it's not going to work. If you control it and you send the right message, you change the story in the way that you want. So with the blood donation, if you change the story from oh, I'm going to bribe you to I'm going to give you a thank you mug or pen, that's the story that you want to have. We are not having a relationship in which I have to pay you to donate blood. No, you want to come here because you're a good person. I want to reward you for being a good person by giving you this mug. And this mug could actually help you later on by signaling, like I said. So every choice that you make indeed sends a message. And the incentive should be such that you'll make choices that will be aligned with the story you want to tell. Yeah.

Well, the book is called Mixed Signals for a reason. Right. That in general, it seems we humans tend to say we want one thing and then incentivize something completely different. Just sort of in the, you know, we want the performance. And so we talk about how important quality is. But the thing that is easy to track and to be able to put numbers to would be quantity based. Or you talk about, you know, team versus individual incentives and all these different things with, within businesses. Why is it that we do this? You know, what sort of examples can you share? And maybe, you know, we'll get to, of course, you know, your tips, Right?

Right, right, right, right. So you mentioned a couple. Let's, let's talk about quantity versus quality, right? So economists call it multitasking. And there are theoretical issues with that to incentivize. But the conceptual one is that imagine that you, that you work in a factory and produce shirts, right? And you can, you can do it better or worse, right? Depending on how much attention you put. And you can, you can also increase the quality, the quantity. There's always a tension between quantity and quality. In this case, where it could be easier to measure the quantity. I can just count how many shirts you, you produced. It's much harder in many cases to judge the quality. So if I'll give you, if I want to incentivize you, that's why we got it here. So I'm going to give you incentives to actually produce many shirts. The right reaction from your side is to lower the quality, right? That's, that's what you're supposed to do. It's, and it's not because you're a bad person. It's also because I basically told you, look, what I care about is quantity. So even if, you know, I'm a good worker, I really want to do whatever the company wants me to do. In my case, whatever my school wants to do, right? So think about the academia and we are judged by papers that we publish so that my dean can tell me, look, I really care about the quality of your papers. That's what she's telling me, and that's the message that she sends. But then she's going to reward me based on the number of papers that I have. Then I'll write more papers. I'll send them to less good journals. The papers will be worse, but I'll have more of them because the quality is much harder to control and evaluate. The quality is sometimes subjective. Now the question is, how do you, how do you do the, how do you incentivize people without damaging the quality? So in some cases you can say, look, I don't care about quality. I really want to have the quantity. Then that should be the message that you give to the, to your employee or. And to your client says, look, we are the cheapest, we are the low cost, whatever, right? Come to us, you'll get the cheapest thing, it's not going to be great. The problem is that in most companies what you get the message is we care about quality, we care about doing it really well, really correctly and then incentivizing your people to produce low quality stuff. That's wrong. Because your workers are going to be confused. They won't really know what you want to have and you're not going to get what you want, right? So make sure that you decide what is it that you care about. If you care about quantity, go ahead and incentivize this. If you care about quality, be more careful with this type of incentive and you can think about basically any job that you have. There are some funny examples of this of I think it was IBM that paid its programmers at the beginning according to how many lines they have they had in their codes. So instead of having a short efficient code, people started writing really long ones. And there are examples all over the place with this, right? And be careful, don't just incentivize one aspect, right? So that's the quantity versus quality. Another example that you raised is, or that's in a book is the short versus the long term, right? So think about the president, think about your CEO, think about anyone that you evaluate. In many cases you tell them, look, we care about the long run. You tell the CEO look, we care about the long run. But then if the CEO will invest in a project that will be ready in five years, put all the resources, say that that's the right thing to do. If they'll do it now, they're not going to be there to see the fruits because they'll be fired because the short run goals will not be met. Think about my governor in California deciding about the train efficient train. Train is a 20 year project. If the governor now decides to put all the money that is required in it today, when it'll go up to re election in a couple of years, he will have less money that he invested in other projects that could have roots immediately and will not be re elected. So there is a nice quote saying we all know what's the right thing to do. We just don't know how to get elected according to them. We want to to do things for the long run to be good for the state. In the example that I gave with the trend it could be for the company, but we give incentives based on the short run. We need the politician to be elected in a couple of years. That's their incentives. We need the CEO to stay in his job or her job so we really have to be careful in the incentives that we give. So we might decide, look, we really care about this quarter, go ahead. Or we might say, look, we care about five Year Horizon. We're going to guarantee that during this time the person is safe in their job and we can actually let them do that.

Yeah. When Annie Duke was on the show, she was talking about the train in California and all the issues with the train and the value of quitting, which also you brought up a little bit in the book where you're talking about innovation and saying we care about innovation, but then also it doesn't feel like it's safe to fail and helping to incentivize people to quit things early and whatnot. Do you want to share a little bit about that?

Sure. So I think that that's a great example of not understanding what we are saying when we are saying you need to be creative, you need to innovate, because that means that basically you're increasing the variance. You're more likely to do better stuff, but also more likely to fail. That's what innovation is. If I keep doing what I did. So imagine again my world of writing papers. I can write some tweak on an existing paper. I'll be able to publish it in a not so good journal. No one will care about it. But I can have, or I can try and go for a larger project, more original by more original means that I might run few experiments, pilots and see, no, it doesn't work. And then I'll have to move forward. Right. Maybe say not. The problem is that in many cases you punish people for failing. So if I did something, I tried a new idea and I failed, you're going to fire me, you're going to punish me? I'm not going to get a PhD. Whatever it is now, when you evaluate it, you need to make sure that they didn't fail because I didn't care or I didn't know what I'm doing. It didn't make any sense at the beginning, but sometimes you roll the die. If it works, great. If it doesn't, you should be able to go to your boss and say, if you work in a company and says, look, that was the idea, it had a great potential, we tried it, we ran the pilot, turns out that it doesn't work, you want to close it and move on. And a good manager should say, in this case, thank you for trying. It's great. Keep on the good work. Next time it's going to work. Right. That's the Right approach. Instead of saying, why did you do this? Why did you fail? You're no good at all. And maybe even fire you. So if you really want innovation, you need to make sure that you actually don't punish people when they fail.

Yeah, and I liked that there were some examples both in your book and I've been seeing some of these around recently, where it was awards for the things that didn't work right. That we're going to celebrate the thing that you tried that was the big fail or whatever it was. But yeah, I think Those are brave.

CEOs that make that really care about innovation.

For sure. Yeah. And, you know, people love to say that they care about these sorts of things and maybe because they feel like they should, but then, you know, whether it's status quo or hurting and seeing everybody else's acting one way, and so we feel like we can't. It's good to say that you care about innovation and failing fast or whatever it is. But then. And people don't actually do that a lot of the time.

That's exactly the book. Exactly. I think that's a great summary of the book. So we say great things. We care about the long run, we care about quality, we care about teamwork. But then we give you individual incentives, we give you incentives for the short run, incentives for quantity. We just send a mixed signal. And you as a worker, I, as a worker, I don't know, what do you want from me? Why are you doing this? I try to follow the incentives because I think that that's, you know, that's not just words. That's what you really care about. But I don't really know. I'm confused. And that's. That's not good. So think for yourself what the story that you want to make.

Right.

So for someone who is, we'll say, an executive or, you know, a manager that's tasked with incentivizing their teams, you know, you have a, you know, example of a call center in the book. And there are plenty of other times where people are told, hey, you know, go throw out some incentives. Which is probably not the best approach in general. You know, there should be a lot more intentionality behind incentive programs because as you show when they can go, they can go wrong very easily and it can be really detrimental for an organization. But because they're not all monetary, even though that's what people maybe tend to think about, is there? What's your advice for people in business if they need to start looking to see what incentives already exist? You know, do you start with an IT to see what's maybe going wrong, or do you start with what you want to do? And then what's the best approach to revamp incentive programs?

Right. That's a great question. I think first of all that the companies that can really benefit from a change are the companies that do well, companies that are failing. Usually everyone thinks about how can we improve, what can we do better? Those are usually really getting all the attention. The companies that do well, you know, the blockbuster of the 90s. Right. And whatever, Nikon, Right. Kodak, all of them were very happy with where they were and they shouldn't have been. Right. So those are the companies that I think should actually pay more attention to this. It's really, if you have an incentive in place, try to think about it and see whether it really sends the message that you want. Don't assume that it's just incentives. It sends a message. Does it send the message that you actually want to send? If it does, great. If not, maybe you want to change it. Even if it works, maybe you want to change it because it might not work the way you want. And then you can also think about the new incentives that you can introduce. What kind of behavior would you like your customers to change? Do you want them to click more on something? How can you make it more attractive? Right. So what can I make this offer more? How can I get your attention?

Right.

Attention is a big thing that is very hard to get. Everyone is competing over it now. And maybe you can incentivize people to get their attention. Think about what you want and then from that you can actually start thinking about incentives. But really think about the Japanese restaurant example. So the fact that you tried incentives and they didn't work doesn't mean that incentives don't work. It means that the one that you tried was just bad. Could be, maybe you designed it well, but you just. It just didn't work. Happens. Right. But make sure. So another important thing is that you actually try to measure the success of it. So try to find some KPI that you can use and say if you can do an experiment with a control group like a B testing, that's the best. So I have a control group that doesn't get this incentive. I have a group that gets the incentives. What's the difference in their behavior? And then you can change it. And the best incentive would be dynamic. It changes. Suddenly Covid hits. Or suddenly whatever happens and the world is changing, you need to to actually try and make it dynamic. Keep Having some kind of control and see what kind of incentives are best for now and how can you improve them.

So for the stuff that's harder to measure, just to go with the quantity versus quality aspect. Right. So if somebody says we really do care about quality or we care about service levels. Right. We care about providing really great service, where do you encourage people to look as far as ways to be tracking other than just, you know, satisfaction scores?

Right, right. So some of it could be subjective. Right. But you can think about objectives. So an example that I have, I like the illustration in the book. So that's why I like the example I think is driving a minibus or a bus. Think about two types of drivers. One of them is paid per hour. They're going to be polite and they're going to give you some service. They're going to wait until you sit and drive carefully, probably because they have no reason to drive fast and no reason to be impolite. Now compare them with the driver that is paid per passenger. They're going to drive like crazy. They're going to, they're not going to wait until you sit. They're really not going to drive that slowly and they're going to get more passengers at the end. Now, if you're the owner of the company, you can say, look, we are competing with other companies, other cheaper companies. We need to, to get the driver and the bus utilized more. So we need them to drive faster and quantity is what we care about. Then go ahead with paying them this way. Or you can think, you know, we want to be the ones that actually give the safe and comfortable ride, then pay the driver per hour. Right. So that's the story that you need to fill with this. And on top of that, you can also add some kind of ways of measuring it so you can see satisfaction. Like you said, you can see how many people actually use it, how many complaints you get, how many drivers you lose and so on. And you can think about adding some other incentives on top of it. So Uber Lyft, they have a great, a great way of rewarding without even money, which is the ratings at the end of the ride, the rider is going to give you some kind of rating, is going to be asked at least to do that. And the same goes for the driver. Right? So now there is some reputation that is kind of funny. Money doesn't have that much of meaning. As a driver, you really need to be horrible in order to be kicked out. And as a rider, I don't think that you can get Kicked out. But still I care about my, my rating. Right. And many other people do, and the drivers certainly do. So now as a result, my experience at least I don't know about yours, but, but when I ride in Uber, the drivers are usually much nicer than taxi drivers who don't care about you. The second they're going to drop you, won't care about you anymore. They do care about you, the car is clean, you have a nice conversation, you know, they pick you up. Well, I think that that's a great example of non monetary incentives. That's, you know, on top of. So Uber drivers are incentivized to get as many rides as possible, but with the check that if they'll drive like crazy, if they want to be polite, if they'll do something wrong, they're going to be punished with ratings and they don't want it. So it's kind of creating a way to balance the quantity incentives. Right.

So I think that one of the big lessons from the book being it doesn't have to be a single thing that happens, but there are some kind of multiple dimensions that can help to combat some of the problems that may come about. If you're, you know, it's just quantity, then there's always kind of another side. I did an episode on the Cobra effect recently and you know, there's, there's always a loophole, there's something you're missing that's going to get.

Right, Right, right. That's a great example.

Right. I will of course link to that in the show notes for everyone who hasn't listened to that episode yet because it's kind of a, it's definitely a fascinating and fun example and there are some others in that episode. So one of the other things you mentioned, the cartoons or the sketches in the book, which I think are very fun, why did you decide to include cartoons? And did you have them, it looks like you had them made specifically for the book. So what's the story of those?

I like cartoons. So the New Yorker, you know, I like, because of the cartoons, I think that very often they deliver the message better than, you know, just reading along a long description of it. Especially for economists, it's, it's boring. But think about the example that I gave with the drivers. You can think about, you can imagine it, maybe visualize it. The driver that drives like crazy and the driver that is very calm and, and polite and just think about the incentives. Right. It really makes you think about stuff in a more vivid way. And the guy that did it, his name is Luigi, is a great illustrator and I enjoyed working with, with him, try to incentivize him to do it like I want it to be. And I think that it's a good way to make the book a bit less boring. You know, economists tend to be boring.

Yeah. I love incorporating fun and I think that that is something that was really nice. And I remember specifically an example and I liked the two, you know, illustrations of it. But talking about the, I guess what, the surge pricing on soda, the Coca Cola on the hot day. Can you share a little bit? So it has great illustrations along with it. And can you share a little bit about the. I think this is such a great framing example and the way that we, you know, look at the anchors and stuff, so.

Right, right, right. And that's another example of engineers or economists designing the world. That's, that's the worst you can have. And there's, here's the example. So Coca Cola some 20 years ago had the new technology, a thermometer in the vending machine that could tell them whether it's a hot day or cold day. So they defined as hot as above a certain whatever. And then the CEO probably took undergrad in economics, had a great idea. How about usually the price is a dollar, but on a hot day the demand is going to be higher. Right. So let's increase the price to 150 on hot days. Right. So that's. Usually it's a dollar. Today it's hot. You're going to pay a dollar and a half. Makes a lot of economic sense. People are willing to pay more for the can when it's hot. Great. Of course, people hated it. Right. They are taking advantage of us when we need it. That's, that's really not nice of you. What he should have done is the opposite to say, look, the regular price is $50. Now on a cold day, we're going to give you a discount and charge you only a dollar. Exactly the same incentives, if you write the function right, like the equation, like economists like to do, it looks exactly the same, but that's very different story. In one case, I'm taking advantage of you when it's hot. In the other case, I'm nice to you when it's cold. Very different message, very different story around it. That would work. Right. So that's, I think, a good example of how the framing of the incentives send a very different story.

Yeah.

Reminds me of, I have a friend who lives in Maine and I remember them saying, and he had moved There recently when we were having this conversation that there is an ice cream shop and you get very cold days in Maine where potentially people aren't really excited to go get ice cream. And it was some sort of percentage discount that you get from, for the degrees under, I think under zero or something. You know, I mean, when it's really, really cold. And so, you know, you can get, you know, 5, 10, 20, whatever percent off of, of your ice cream if you go on.

I live in San Diego. It's hard for me to imagine people freezing now, but.

Yeah, or, you know, going to even eat ice cream when it's freezing out. But, you know, it was. He was saying how, oh, we got to go to the ice cream place because it'll be, you know, 20% off today or whatever it was. So that's that.

So these store owners are smart. They understood the economics of it and the psychology of it, Right. So they understood the economics of price discrimination, charge different prices on different days, and they understood the psychology of how to do it, Right?

Yeah, for sure.

So what are some additional tips you have as you look at using incentives in life and in business especially? What is it that you would really want people to be able to know and understand? What's the top thing for them to take away from listening to this today?

So first of all, that not all incentives are created equal. And second, that you can understand much more about and predict and design them in a better way if you understand the story that they're telling, the message that they're sending. Don't say one thing and set different incentives, but make sure that you really, when you design the incentive, think about the signal and the story that they send. And think about it in terms of self signaling, what people will learn about themselves and social signaling, what they learn that you're expecting them to do, or it is expected in general. And just make sure that you understand it and follow it and then you'll get a much more successful recipe for your incentives.

Yeah. As far as looking for the story, do you have any advice there? I know you talked about understanding your segments and knowing that it's not the same story for everyone. So knowing who you're speaking to and what you want them to do. But any other tips? As you know, people are looking to find some of those stories.

So here's an example about mental accounting. Mental accounting is something that Richard Taylor wrote about 40 years ago already. And the idea is that we have different accounts in our brain. Economists think about money as fungible. I can use if I want buy ice cream with this. I can use it to buy whatever soda, right? So. And I shouldn't really care whether it goes to pay the utility bill or if it goes to pay for vacation. Should be the same. Turns out that in our brain we have mental accounts. One goes to vacation, one goes to paying the utility and so on. Right? So there are many cool examples with this and you can actually use it for understand the way to incentivize people. The example that I give in the book is from Edmonds.com they are a car, a website that is basically you can go online, read about cars, search, do your research about it and then once you're ready, you put in your zip code and they give you a list of of cars from dealerships in your neighborhood. They of course want you to click on that, go to the dealership from their website because then they can get something from the stores, right from the dealerships. So what they did is at some point they gave you $400 discount if you clicked on it. So imagine that you buy a $20,000 car and if you'll get to it through Edmunds, you'll get $400 off. Now $400 is a lot of money, but not compared to $20,000. There are many examples of this. I think Aman and Tversky were the first to show it that let's say that you go to buy a mouse for your computer and you need a special mouse that cost $80. Say and salesperson tells you, you know what, if you go 15 minutes to our other store, they have it half off over there. So you can save $40. You'll probably do it if you're buying a computer that costs $3,000. And it's like, you know what, you can go to our other store 15 minutes away and over there it's going to cost you 2900, $960 and you'll save the $40. You'll say, Ah, it's not worth it, right? Because you look at it in relative terms. Same is True over here. $400 is a lot of money, but not a lot of money relative to $20,000. So we worked with them to design an experiment in which we, we tried to instead of paying with dollars, give people gas tickets. I worked on it with Katie Baca and basically the idea was that you click and instead of $400, you get $400 in a gas card to fill up your car. Now that's something that is really painful. No one likes fueling their car, right? And you can think, wow, that can be enough for a month or a couple of months even to fill up my car. That's a lot of money and you're really going to care about it. And that's what we found. The $400 in gas card had much more impact. Actually $200 in gas card had more impact than $400 in discount. Right. So that's an example of how you use mental accounting. So a behavioral finding that is out there for at least 40 years that we understand. If you understand it, you can actually use it to design your incentives to find out what is it that my clients care about. In this case, they care about gas cards, for example, example. We can pay them with that. We can incentivize them with this instead of just giving them a discount with money. And then you'll get much more action for your money. Right.

And I'll definitely link, there is an episode of the show on mental accounting. So it's a good one. It doesn't get brought up all that often. So that's fun that I get to link to that one in the show notes. It's such an important concept that people take for granted. I think, you know, that we don't consider it enough. And when you look at things like incentives and understanding those little things that make a really big difference, that is something, you know, if you're asking them to, you know, pay with a credit card versus cash or whatever these days, who has cash anyway? But you know that that used to be a little bit of a different experience for people. And like you said, the gas card versus a discount which. And even if you're getting less, it just feels like so much more. And when you can give. I remember so when Tim Houlihan was on the show and I'll link to this episode too, he was talking about these, a lot of non monetary incentives and talking about, you know, that when the team wins a pizza party, you know, that happens in business. You know, like we used to. I worked at a financial institution so the branches are competing and someone gets a pizza party. And it is amazing how hard people work for a pizza party when you could just, you know, it's a couple of slices of pizza. But it makes a big difference than being given 10 bucks. Right. It doesn't feel the same. Right.

It's a very different message. Right. If the, you know, your CEO gives you 10 bucks because you met it. So think about going on vacation over the weekend and asking your secretary to stay and work some overtime because you really need to finish a project, then showing up back in the office on Monday and giving your secretary $10 for this, he'll be insulted. Right. That's basically you're telling him, you know what, that's what your weekend is worth. If you give him a ten dollar worth of chocolate or some kind of souvenir that you brought, that would be nice. Right. And that's a case where if instead of $10, you give him $10,000, he'll be very happy with the money. The amount of money really sends a signal, but the gift sent a very different signal. And in many cases, when it's not monetary, it has very different meanings. So if you ask your friend to help you move the sofa and then you pay them $10, that's a really, they're going to be really insulted by that. But if you invite them for beer, that, that will work. Right. You know, your friend invites you for dinner, you're going to bring, you plan to bring a bottle of wine, you don't have time to buy it. So when you enter, you give them $20. That's, that's not the way. Right. The wine has a different message and so on. Right. So how you pay is very important.

Yeah. And you can't undo like. So you talk about giving the $10,000 for working the weekend the one time. Right. Then they'll never do it for free.

Right. The problem is that you're changing the norm. Right? So imagine that you have someone who works for you and you give that person a gift, a generous gift, in for Christmas now, next year. So maybe this person did not expect to get anything and now they're going to be very happy.

Wow.

They gave me, I don't know, 500 gift. That's amazing. That's really great. They're going to be happy next Christmas. Their expectation will not be zero. Now they expect 500. So if you give them 500, they'll say oh, thank you, and they'll be fine. But if you'll give them less, they're going to be disappointed. You change the reference level, you change their expectations and you have to be careful that you think about it. So that's the dynamic aspect of it. It's not just, I'm not just going to give you a bonus or whatever a gift for Christmas this year. I need to do it for the following X years in the future. That's going to be now the reference level and you need to think about it.

Yeah. So as we close out the show, for any of the people who have A business model that is full of extrinsic motivators and they want to remove some or all of them and try and help their team to be more intrinsically motivated where there are already, say, a lot of cash incentives to do their work. Any tips on removing incentives that already exist? That's not going to cause your whole workforce to leave, Right?

So it might cause some people to leave and that might be actually good. Right? So that's the. I talk about incentives to quit. Basically, some people, some companies pay people to, you know, if you want to, you can either sign for another year or you can quit today. If you quit today, we'll give you $20,000. It might be good because then you can really know if the person decided to stay. That person really is really motivated and that person is going to convince themselves that they need to work harder because they gave up $20,000. So make the incentives simple. That's one thing. If you have many incentives consolidate, that's having too many is definitely not going to work. Probably, you know, definitely, probably make sure that you make it simple and that you align what you do with the message that you want to give.

Right.

So if we talked about failing, not punishing, failing, then after you, after sound fail, you make sure that you do a debrief and that it's not because they were lazy or they were stupid. And if not, then just tell them, good job. Please keep on the good job. So make sure that you align it with the story that you have.

Awesome.

Well, thank you so much for all the tips and insights and of course, for your book. We'll be linking to it in the show notes. And for everyone who is excited to go learn more about you and to follow or connect or anything, what's their best path to do that?

Well, my email is easy to find. Just Google my name and you'll find it and I'll be happy to hear any comments, suggestions, or if you need help with some ideas. I'll be happy to do that.

Oh, fun.

Well, thank you so much, ui. It was amazing to chat with you today. A lot of fun and I appreciate.

You coming onto the podcast.

Thank you very much. I had a lot of fun too.

Thank you again to Dr. Ui Gneizi for joining me on the show today. What got your brain buzzing in today's conversation? For me, I think it is so important to show just how easily the best laid plans can go awry when it comes to incentives and why it's so important to consider all the angles before implementing anything in life or in business, and that you need to do this even more than you think you should, or that you need to way more. Because the points where things go wrong are usually with something that you as the creator don't see. The things that matter to you are often not what matter to the end user. And there's always so much subtext to whatever incentive plan you're putting in place. Sometimes a simple reframe can make all the difference, like with the Coke machines on the hot days, that simple adjustment to having the full price be A$50 and the deal when it's cold out feels so much better for people than if the regular price is a dollar and you have surge pricing of $1.50 on hot days and this allows you to raise your overall price so it's actually better for the company as well, which is something I always like to look for with clients. And it's something that if you take this step back, look for those win wins. Where are the both and opportunities, to use some language of Wendy Smith, who was on the show a couple of weeks ago, where's the value, where is the opportunity? And where can things go wrong? What aren't you thinking about? Really, really dig deep on incentives and know that that it's not one of those things that you know it's always going to be creating value and that you know you can't be creating any harm or it can't be that bad. With incentives you really can be creating problems even with the best of intentions. So it's important to think about it. So that Coca Cola example and everything we talked about today are just some of the many, many, many great and interesting and fascinating examples in Mixed Signals, which I highly recommend you check out.

There's a link for it and the Y axis and the Voltage Effect by.

John List and get it done by Ayelet Fishback, which I've mentioned at the beginning of the episode, as well as the conversations I've had with them on the show. Those episodes, along with many others that we either talked about today and called out by name or some that we didn't, they're all waiting for you in the show Notes, which are both in the app, your list listening to and@thebrainybusiness.com 273. And thank you again to Dr. Ui Gneissy for joining me on the show today.

It was a delight to chat with.

And learn from you. Join me Tuesday for another Brainy episode of the Brainy Business Podcast.

It's going to be a lot of fun.

You won't want to miss it. Until then, thanks again for listening and learning with me. And remember to be be thoughtful.

Thank you for listening to the Brainy Business Podcast. Molina offers virtual strategy sessions, workshops and other services to help businesses be more brain friendly. For more free resources, visit thebrainybusiness.com.