Uri Gneezy: The Art of Incentivizing People

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Foreign.

I'm Guy Kawasaki and this is Remarkable People. We're on a mission to make you remarkable. Helping me in this episode is Yuri Ganese. Yuri is a Professor of Economics and Strategic Management at the School of Management at the University of California at San Diego. He has taught at the University of Chicago and Technion in the past. Yuri is also the co founder of Genizi Consulting, a company specializing in behavioral economics. I have to say that if I were entering college today, I would major in Behavioral economics. Just FYI. Today we are discussing Yuri's new book, Mixed Signals How Incentives Really Work. In this book, Yuri dives into the.

Topic of effective and ethical incentives.

It is filled with great examples of incentive plans gone wrong that will amuse and educate you. My thanks to Katie Milkman, Wharton professor and author of the book how to Change. She's also the next Bob Cialdini. When I got pitched to have Yuri on the show, I asked her if I should and Katie was adamant that I interview Yuri. Over the course of the past two years, I have learned to just do whatever Katie says. So without further ado, let's dive into my conversation with Yuri Ganese and learn about the fascinating world of incentives and behavioral economics. I'm Guy Kawasaki. This is remarkable people.

I have to tell you, I have very fond memories of visiting Israel several times and one of the concepts that you talk about in your book is this contrast. And and one of the great contrasts that occurred to me after visiting Israel is you can complain all you like about the US airports and TSA and security and then you go to try to fly out of Tel Aviv and oh my God, it's 100x more difficult to get through security in Israel than freaking sfo, Right?

So then you're happy to go back to sfo. It seems easy. Yeah, I know the feeling.

I have to tell you one more funny visit to Israel story. So my first trip to Israel, and I noticed that everybody in Israel has at least three cell phones. So there's the personal phone, the business phone, and the phone just for you and your mistress or whatever. And so I'm listening to all these Israelis talk, and they're saying, ken, Ken, Ken. I'm thinking, how is it that so many people in Israel are named Ken? I'm like, what the hell is going on? And then finally somebody told me, oh, they're saying, yes, guy, you idiot. So anyway, right? You had to be.

So I have a similar. That maybe even more dramatic. When we moved to the us, we had a Swedish babysitter and she and our daughter still didn't speak English. So she asked us how to say stop in Hebrew. And stop in Hebrew is die. So she would run after her daughter and scream at them, die, die. You know, in the playground.

Oh, my God. That's better than Ken. Yes. I want you to know that this weekend, as I was driving my teenage son around, I considered not wearing a seatbelt after reading your book because. And I'll explain, people are listening, saying, what the hell is he talking about? And you make a very interesting point in your book that there's a false sense of safety and security when you have a helmet on or a seat belt on. And so maybe the safest condition is when you're riding in a car that the driver doesn't have a seatbelt on, because then the driver will be extra careful. Did I get that story right?

You got the story right. The conclusion is not that you should not wear a seat belt, you should wear a seatbelt. But the conclusion is exactly what you said. When we have more safety, things that help us, we feel safer. So we'll drive, for example, less carefully. Maybe. We know, for example, with HIV used to be a death sentence in the 80s 90s, and people became scared and really, really protected themselves with the advancement in medication. So now getting HIV is unpleasant, but it's a chronic disease that you can live it. You don't want it, but you can live with it. And we see when the health care gets better, the unprotected sex increases and infection increase. So whenever we feel safer, we do more dumb things. And in the book I write that the worst you can have in places like Vietnam, I was there in December. The law says that the driver must have a helmet, but the passenger doesn't. And that's the worst incentive you can have as a passenger, that the driver will feel safe and you will not. In many places, only the people in the front seat of the car have to wear seat belts. The people in the back don't. So then your driver feels protected and you are not protected. That's not a good incentive.

When I read that, I went to ChatGPT, which is the source of all knowledge now, right. And I went to ChatGPT and I asked it do rugby players get less concussions than football players because rugby players don't have the super duper helmets? I thought, oh, maybe rugby players are more cognizant of injuring their head. But Chat GPT said that it's not conclusive that there's less rugby concussions. I loved your discussion about the Prius. Toyota just announced the 2023 Prius and it is a very attractive looking car. And so there are fewer and fewer, if any trade offs in driving a Prius anymore. So do you think Toyota is shooting itself in the foot that you can't hold yourself as a green concerned, socially acceptable citizen because you're driving a Prius because nobody knows you're driving a Prius anymore?

No. It's also, now it's a good car, so it's a very competitive car. But back in the early 2000s when they just started, those were bad cars. So they were bad on any dimension. Meaning you could, for the same price, you could have gotten a much better car. So if you drove a prius back in 2004, that meant that you're a good guy that cares about the environment. Right. You sent a very strong signal that you care about the environment today anyway, you don't send this signal because it's a competitive car. So I don't know. We are driving Tesla. We just got a Tesla. We like it, it's a really good car. So are we driving it because we care about the environment or are we driving it because it's a good car? The signal that you had back in the days when the cars were really bad is not there anymore.

Since you brought up the word Tesla, I think Tesla had the same effect when it came out. If you bought a Tesla, to some people it signaled that you're a rich pain in the ass vc. But to other people it signaled that you were more concerned about the environment. But let's just say with Elon Musk going off the rails today, if you drive a Tesla, don't you think you're in Effect communicating that you're supporting white supremacy and basically craziness and anti vax and you're a Trumpist. I mean, I wouldn't buy a Tesla before, I am sure as hell not going to buy a Tesla now.

You sound like my son. That's what my son told me. Well, it's a good car. I definitely do not support white supremacy and all the other good stuff that you said. I definitely had a problem with the signal that you sent by buying a Tesla and my wife wanted the Tesla and I don't know if you're married. I'm married for more than 30 years now and I do what my wife wants. That's my rule. So it's her fault.

So if Mercedes called you up and said, listen, we're going to convert our entire line, or Volvo called you up and said we're going to convert our entire line. Volvo is now making all their cars in into plug in hybrids or electric. Mercedes is doing it also. But with the S Class, Mercedes did a very interesting thing. The S class, phev or ICE version looks like a traditional S class, but the electric S class looks very different. So is that how you would advise a car manufacturer today to convert to electricity?

So that goes back to the Prius. Why did Toyota win against Honda and they both came up with the similar car in the early 2000s. Honda made it based on the Civic, which is probably what the engineers told them. Look, we'll have the parts, everything is ready. We just need to change the engine. And Prius went all, you know, a completely different way. They redesigned the car such that when you entered the parking lot, everyone knew that you are driving an electric car. And I think that that's why they won the market completely. Not because they had a better car, but the car was bad and you wanted to signal that you're a good person by buying it and caring about the environment. So now if you drive on the Civic with the plaque on the back, same hybrid, no one sees it. If you drive a completely redesigned car, everyone sees your signal. Right? So that was good. And they think that that's what you're implying with Mercedes, that seems a smart thing to do.

A few more questions about signaling because I love the coverage of signaling in your book. So you mentioned that one of the signals that job candidates can send is the completion of college and a degree. That's a signal of quality and dedication and perseverance and all that. And yet I think recently we interviewed Ginny Rometti, who was the first female CEO of IBM and, and her whole thing now is that many positions in companies do not require an undergraduate degree at all. So she wiped out that undergraduate degree requirement for IBM. So today, 2023, do you still think that a college degree is the positive signal that it was when you wrote the book?

So we're talking about a model that was written in the 70s. And basically the idea over there was that, first of all, just entering. So if you enter Harvard as an undergrad, that means that you are very smart, even if all you do in the four years over there is have fun and learn nothing. That's a strong signal. That's a strong signal because everyone wants to go there and they were able to get it. Or for IBM, if you graduated from Caltech, that's really difficult. So if you endure this, that's a signal that I would not be able to graduate from Caltech. They don't have the technical abilities. So that's a way to select the right people. That's what this model says. It's a classic model in economics. It basically says, look, the fact that you did this is important. So think about. In the book I write about Navy SEALs going through Navy SEAL training has nothing to do with working in IBM later on, but it does tell you something about the character of the person. That person is not going to give up. That person is willing to invest a lot. So it sends some signals that, again, I would not be able to go through the Navy SEAL training, so I would not be able to send this signal. That's why the signal is still meaningful. In terms of what you learn over there, I could see that a good training at the company could cover much of this, much of what you learn in college.

Let's say your son says, you know, Dad, I think I'm gonna go get a Stanford or Harvard mba and he wants to go into tech. Would it even occur to both of you that in tech, and I think this is still true at Google, for example, or probably even Apple, that if you have an MBA on your resume, which I do, but you know, I'm much older, I think tech companies may look at the MBA and say, what's wrong with you? Didn't you have direction in life? Why did you waste two years and 150 grand getting an MBA? Could it be a negative signal?

So I teach in a business school, and I think that what we see is a different direction. We see people, we see engineers, lots of engineers. Or at ucsd we have lots of life science. So we see people with PhD that spend 15 years in the lab and now they say, okay, that's enough. I want to go out of the lab and see daylight. Right? So I think that's the right time to go to do your MBA. Not when you're 24, but after you had lots of experience. So in the tech company, when you get the experience, you know how to write a code, you understand the language, you understand the culture, then when you want to become an executive, it actually makes sense to go and get an mba. So I would recommend doing it later in life. So in your mid-30s I think is perfect, not in your mid-20s, then I think that that would be the advice I would give my son. Now.

Your book is just filled with absolutely stunning and funny examples of unintended consequences of incentives. And I had to laugh out loud several times. So if you had a hall of fame of the most unintended consequence of a so called planned incentive, what would be number one in. Oh my God, this is the dumbest thing I've ever heard.

First of all, thank you, that's great. You made my day. There are many candidates. So that one you mentioned with the helmet on the bike, that's a good one. There are lots of examples, historical examples. So when they build the railways in the US they pay them per mile. So what they did is just went around in circles almost in order to increase the number of miles that they actually laid of rails that they laid. There are many examples like this of people do it. But I think that the ones that I really like are the ones that send you a signal. So one of my early papers is about parents being late to pick up their kids in Israel together with Alder Rustakini. And what we did is introduced a small fine for being late. And what we saw is that once you introduce a small fine, you basically tell the parents, okay, now it's okay, now it's a matter of price. Before that it was, well, I don't know how bad it is, is the teacher really going to be mad at me or whatever? Now I know that it's very small problem because the fine is small. So you really signal to them that it's like that. A more recent example in Wales, they had a problem because parents took the kids out of school for vacations, not during vacation time. So imagine spring break if you want to go to Hawaii, it's going to cost much more, it's going to be much more crowded. It's not great. So what parents did took the kids out of school a week before or a week after. The schools didn't like it, so they introduced a 60 pound fine for doing this. Now the parents were, okay, if it's 60 pounds, that's clearly, it's going to save me 2,000 pounds and it's going to be a much more pleasant vacation. So instead of thinking about, oh, it's bad to do it now, you think about, oh, it's just a matter of money. And then you can look at it as a price. So I think that's my favorite one, the one in which a small fine really gets you the opposite of what you want.

So is the mistake that the fine was too small or. I mean, how would you, how would you encourage people to pick up their kids on time besides taking their kids to the police station?

Right. So that's what they do in some place in Paris. So if there was entrance to the daycare, there was a guy that would execute you if you come late. That would have definitely been very effective. Right. But then no one will register their kids to this daycare. It's a private daycare. It's competitive. Right. So they do have some limit to what they can do. But in the US there are places that the most, the steepest I thought I heard about was $10aminute. So for every minute that you are late, you have to pay $10. That's already significant. And I really think that high fines, so large punishment is effective as long as it doesn't make you say, okay, in this case, I'll just go to the daycare across the street.

As I read example after example in your book, kind of obvious like what you just said, three pounds or three euros or three dollars, what's the big deal? I'll be late. Why drive like a crazy man through Tel Aviv to get to the daycare on time and risk my life to save three shekels or three pounds or whatever. Although everybody in Tel Aviv drives like a crazy man. Anyway, that's standard operating precision.

Yes.

So I understood those, I understood the incentives for the taxicab driver being paid per hour, all that kind of stuff. But how does one possibly anticipate the unintended consequences to design great incentives?

So the first thing is to think about the signal that you're sending, what's the message that you're sending, and every incentive. That's basically what the book is about. Every incentive that you send, send the signal. Now, the most important thing that I think that in general companies are missing is what I like to call a common sense officer. They have a CEO, cfo, whatever they need a common sense officer. And the more engineers you have in your company, the more high tech you are, the more you need these kind of people that are, you know, just, just a minute. I don't know if you remember, that's quite a while ago in Silicon Valley they had this, the great tech had this great idea that women in their 30s that want to have kids, they will finance them freezing their eggs so they can concentrate on their career and don't have kids. Only there, of course, it got a huge pushback. First of all, if there were enough women over there in the board or someone with common sense, they would have told them, look, don't do it, it's stupid. I talk about an example with Coca Cola. So the CEO of Coca Cola came up with an idea. Put a thermometer in the vending machine and then if the usual price is a dollar, when it's a really hot day, charge $50. That's what the economics model tells you. Of course, huge pushback. No one wants to feel that they're taking advantage of when it's hot. What you should have done is just say the regular price is $1.50 on a cold day. We'll give you a 50 cent discount. Now, exactly the same numbers. But now you're a good guy, right? So understanding this, so have common sense about what you're doing is really important. Recently, AMC Theater came with something very similar. They decided to charge different prices for different seats. So if you want to sit in the middle, in a good row, you'll have to pay extra, which is done. You know, airlines do it. Many other places do it, but not this way. So now we are paying so much money and now they're also charging us more. What they should have done and said, look, there is inflation, labor costs more, we have to raise prices. But the good news is that we are going to give you discount. If you are willing to sit in the first row or on the side, we're going to give you a discount. Again, exactly the same prices, but framed very differently. So I think that the first and most important thing that companies should have is common sense to understand, look, we use these incentives. What are they going to say? What are they going to tell us about what's going on? What is going to tell our targets or say it's our employees or our customers. What are our customers going to see about this? If they're going to see that we are greedy and that we're trying to take advantage of them, that's bad. Let's See what we can do to improve it.

In much of these cases, it's really not the absolute dollar amount. It's the perception of whether you're losing something you have or you're gaining something you don't have. It's really spin, right? Or at least positioning.

First of all, incentives are not about money necessarily. We use money as examples. But there are many other things that I care about that are not money. And I think that I'm coming to it from a behavioral economist perspective in which we do try to take advantage of what we know about the way we do it. And a good way to think about it, like I said before, is that incentive send signals. Now, our brain basically gets some information and builds a story around it. So that's how we negotiate the world. That's how we know what to do. So I see something very partial information, and they build a story around it. And incentive help you to complete the story. Now, if you control it and you do it such that the story is, I'm a good guy, I'm giving you a discount instead of I'm a greedy guy. That is taking advantage of the fact that it's a hot day. That's the right way to do. And I don't think that it's manipulating in a bad way. I think that it's just understanding that you are telling a story. Your incentives are not going. They're not going into an empty space. I have 50 other signals about what's going on. Now comes the incentive, which is a very strong signal and can really change the way. The story that I'm telling myself in.

Your blood banking example, where you say that many people are motivated to donate blood out of social responsibility. And when you put a $50 price.

Tag on.

Changes the motivation and the perception of the person. Now you're selling your blood as opposed to trying to do good. Why don't blood banks say, okay, so you give us your blood, we'll pay you up to $50, but you don't have to take the money. Can't you just thread the needle and say, if you want to be motivated by just doing social good, don't take the money. If you want the money, take the money.

So I'm talking about. And what the blood bank example is about is two types of signal. One of them is I signal to you, to other people that see me, my neighbors, my friends from work. So we call that social signaling. And the other one is self signaling. I myself don't necessarily know why I'm doing some activities so if you think about example, imagine that in a cold day you see your neighbor walk into the recycle center with a big bag with 100 soda cans. You'll think, well, she's great. I mean she really cares about the environment. That's the social signal. And she's probably going to think that she's great because she could have thrown away the cans and she chose to do it. So both of you get great signals. Now imagine that you pay them 5 cents per can. That's the incentive that the state is giving. Now you're going to look at her and say really? For $5. Right. So your perception of what's going on is completely different. And her perception about why she's doing it can also change. Same is true with the blood bank. I'm giving blood because it makes me feel good because I think that people need it. You know, I spent few hours, almost half a day because you have to get there. They have needles. It's not a pleasant thing. The fact that it's not a pleasant thing, the fact that you're sacrificing time is actually good because it makes you feel better about yourself. It's a very strong self signaling. And you can tell your friends, well, I'm sorry I wasn't here in the morning. I donated blood to show off. That's great. If there is $50 reward for this, then you know, I'm not going to spend half a day for $50. My time is worth more. So that's the problem. Now you mentioned about, I don't have to take it. Another version of this would be you have $50 to donate. You can choose your charity and donate the $50. I think that would not crowd out the signal that you're sending. But another way is to give you some symbolic gift like a coffee mug with the blood bank logo on it. And that's first of all, it's nice, it's not money. Second, every morning when you get to the office you'll drink coffee and see the blood bank logo and say, well, I'm a good guy, I donated blood. And you don't have to tell your friends, you can go into the meeting with the mug and they'll see that you are a nice guy. So the right incentives could work. Like you said, you can have $50 that you give to charity or, or the coffee mug. But just paying you $50 won't work. If you pay me $50 million, I'll drop this interview and run over right, to donate blood. But given the money that they can offer. It's probably better to find a different way of doing it.

Speaking of $50 and giving it to a charity, I think a great point that people should hear is that let's say you buy, I don't know, $25,000 car and you can negotiate and buy it for 24,500, or you can buy the $25,000 car and they give you a $500 certificate for gas. And you're saying that the $500 certificate for gas is much more powerful and an incentive than knocking $500 off the price, right?

So $500 is a lot of money, but imagine that. So imagine that you go to Office Depot to buy a mouse and it costs $50. And the guy tells you if you walk 10 minutes, you can get it for 50% off, you can get it for $25. Many of us will do that. Now imagine that you're buying a laptop and you want to buy also a mouse. And he will tell you this, the laptop costs $20,000. Sorry, $2,000. You're buying an Apple laptop. Yeah, $2,000. And it'll tell you, well, you can get $25 off. If you'll go 10 minutes, it'll say, I'll stick with it. So you look at the $25 as part of the deal, and the same is true for this discount. So I worked with Edmond, the car online company that does this, and they wanted people to go to the dealership through their website. So they gave say $500 for a $20,000 car. $500 discount is a lot of money, but not relative to the $20,000 dollars when we gave them. Instead of $500, we gave them $500 to fill up their car with gas. Now that's a lot of money because you can imagine yourself at the pump for a few weeks, maybe even few months if you don't drive that much. Just using this. And that would be a great feeling, right? So this kind of mental accounting, that's what we call it in behavioral economics, could really make the incentives much more powerful. The same amount of incentives more powerful if you just frame them as gas card.

And in, in this real world situation with Edmunds, let's say the way they give you that $500 is they give you a MasterCard debit card that has 500 stored on it. There's also going to be breakage, right? So people gonna lose the card, not use the card, whatever. So that's even better, right?

Well, that's a cynical view of It. But that's definitely what you see, for example, with rebates. So people go and they buy something, get say that you buy this laptop that we talked about before and they get $200 rebate. For the rebate, they have to go home, go online, do something, maybe even mail something to you. You see that a very small fraction of the people actually do it. When you buy the laptop, you look at it, oh, it's 1800$. Well, I'll pay 2000, but I'll get the 200. Everything is okay, then you go home and you forget about it. So a large part of that business is actually based on that. But I think that it's powerful beyond this point that people really care about some things more than others. Money is not fungible.

In the section about entrepreneurship and innovation, you talk about the positive effects of trying a lot of things. Try them fast, rewarding people for risky innovation. But my interpretation of what you read is, so what happens if you have this unintended consequence of fostering innovation and quick failures and all that? What if people in the company start saying, let's just try shitty ideas? Because the more shitty ideas we try, the more we break, the more we get rewarded.

That's clearly not what you want to do. So as a background, when I'm talking about this mixed signal, basically everyone will tell you be creative, but then if you fail, they punish you. And that's a problem because creativity means that you increase the variance. Basically, there is a higher chance of success in something really interesting, but also a chance of failing. And when I'm saying that you should not punish people if they failed, I don't mean that people will come up with an idea, then go home, drink beer and do nothing. And then they'll come, oh, we failed, Right? So the three things you need to look what happened, why did it happen? And how can you do better in the future in failure, if you do the why did it happen? Because it was a stupid idea to begin with, then you have a problem, then you don't want to reward it. But as a behavioral economist, I run experiments very often with incentives. I look at incentives for many, many years now, and very often I predict wrongly. My intuition is wrong about what's going to happen. So I take it to the lab, I test it, I see that it didn't work. Maybe what I found is more interesting because it's counterintuitive. Or maybe I just need to redesign my experiment and so on. So failing is not bad. If what you did made Sense to begin with. And that takes me. You asked me before what you need to do. I talked about the common sense thing that you do need to do. The second thing that you really need to do with incentives is test them. So something like a B testing that you do for the color of the background of the screen, you should also do about with incentives. Try incentives, see how they work. If it works, great. If not, change them, adjust them until they do, and don't stop over there. Once you are happy with it, use it and then go back and test them very frequently. Because people are really creative in finding ways to game incentives. So even something that might work now, maybe in two months, people will find a way to game it. So make sure that you constantly test it because our intuition can take us only part of the way.

I think many men who are married to women have a built in common sense officer, which is ask your wife because your wife is gonna penetrate the and tell you. Have you freaking lost your mind? That's your incentive idea. Do you think women have better judgment and.

No, I think that spouses have better judgment than you. I would, I would put it this way. So I think that it works both way that someone else asks someone else that really cares about you but has a different perspective and they think that will work. Getting a different perspective of what you're saying can really work. So that's true. In general, I don't think that it's a gender thing. I really think that it's about just getting somebody else's perspective that helps you. I drive a Tesla, but I can't be politically correct.

Well, I'm not worried about being politically correct. I would also make the case that based on my relationships with Israelis, if your special friend who cares about you is Israeli, that's even better. Israelis really know how to cut through the.

So. So that's. And that's actually a very important point because when I talk about incentives and the signal that you send, it also very much depends on the culture from which you're coming. So what, what you said, you know, in Israel, if I'll give a talk, a presentation and my friend over there will come and say, yeah, it was okay, that's equivalent to an American coming to me and telling me that was fantastic. Right? So you need to adjust because the Israeli will give you a much harsher criticism. So you need to understand when you design the incentives and the signals and you think about it, you really need to understand the culture. And the culture doesn't have to be Israeli versus Japanese. Versus American. Because even within San Diego, where I live, you can think about taxi drivers in teachers and lawyers and whatever. Each one of them will have a different culture. So the work culture, finance people might have different than healthcare providers. You need to understand the culture in which you work. You need to understand that the incentives that you design for people that might buy the Prius is very different than the incentives that will work on someone who drives a pickup truck. So they are not your target. Don't think about them. Because very few people will switch from a large pickup truck to driving a Prius. You need to think about people who care about the environment to begin with and you can convince them.

As you can tell, I'm very fascinated with incentives and signaling and I majored in psychology. If I could do it all over again, I would major in behavioral economics. You and John list such interesting stuff based on my affection and just how much I love this topic. I want to do a speed round. Okay, this is a Guy Kawasaki Speed round. And let's just say that I want your advice in a few different areas just as fast as you can. Just give me the gist. So I want you to tell me your idea for the best incentive programs and I'm going to give you a list of things. All right? So number one is kids. What's the incentive program for kids?

That's a very hard thing because they understand the incentives better than you, so they know how to trick you faster. So don't try it on your kids. Don't try it at home. So here's one. So think about. You want to get your child to stop using diapers. You can bribe them with candies. And the nice thing about it is that they're not going to go back to diapers once they're done. If you stop giving them candies, they're not going to go back. So there are things that are really important that you want to change with kids, and it's once and done. Then you can use incentives. If your annoying teenager doesn't want to study for the sat. And you know how important the SAT is. If you can bribe them with something that's a good idea, don't try to bribe them to enjoy reading books. That's not going to work.

Okay, how about how do you incentivize the U.S. supreme Court?

I think that the fact that they're elected for life is a problem. I think that they are so old is a problem. So you care about tech. You get people that don't know the difference between Google and Facebook over there, because I'm only 55 and I'm completely out of it. I've never used TikTok. I'm not on social media. My son is like 2010, you need younger people over there. They need to have term limits and that way they'll be better incentivized, maybe to do well. I think that in general there is too much power given to old people.

Okay, how about the incentives for CEOs, like per share price, growth in sales? What do you do for CEO?

So if I would be the owner of a company and I'll choose a CEO, I will promise that person that their job is guaranteed for a while. So I'm not looking for the quarterly earnings. I don't care about that. I really want them to invest in the long run. That's one of the mixed signals that you send. Every owner tells that to the CEO, but then reward them or fire them based on quarterly earnings or annual earnings. And if you need to invest in infrastructure, you need to change the network and that's going to cost a lot of money today. So the next quarter is not going to do well. The company is not going to do well. But in the long run, that's the right thing to do. So I would just tell the CEO, look, you're on your own for maybe two years. I'm going to watch. I'm not going to talk with you about it.

Maybe Silicon Valley bank should have tried that. But I digress. How about programmers? Was it lines of code per day? What's the incentive?

No, definitely not lines for codes per day because we know that then they're going to write more lines for the same codes. My daughter is actually. That's what she does. She writes code. She's a software engineer. What kind of incentives can you give them to do? It's a good question. I don't know. Do you have a suggestion? What do they care about?

Well, I mean, what's so hard about a programmer is fundamentally what you want them to do is in conflict. You want them to create a great program really fast with no bugs and those three things, it's like you want something good, fast and cheap at a restaurant, you cannot get all three. Pick one, right?

No. So I think that the cheap part, we know that is problematic. So we know that one good programmer can be better than 100 mediocre programmers. Right? So I would definitely try to find the best one and reward them for being, if I can measure what does it mean to be fast and effective, then I would clearly Try to encourage them. And so here's one thing that could work. Increase their salary very fast. So because many of them, you come in and it takes you time to learn the job and then very often by the time you know the job, you leave. So just start. It's okay to start with the low salary, but then increase their salary by a lot if they're performing well, very fast. So they will be more committed to stay with you.

How about to use another of your theories. You say to the programmer or the team of programmers, we're going to give you each a hundred thousand dollar bonus if you ship by this date. If you don't, you lose it and their aversion to loss will kick in.

Right? So that's one of the things, by the way, by Kahneman, that we mentioned before, it talks about loss aversion. Imagine that. I tell you, look, you need to write this code. If you'll do it within three months, I'll give you $100,000 bonus. Or you tell them you need to exactly the same story. I'm going to give you the bonus now. But if you will not do it within three months, you'll have to pay it back. Turns out that the second one, the one in which you can lose the hundred thousand, that's much more painful. And people are more motivated when they have something like this, when they fear of the loss because they feel that now. They feel that 100,000 is theirs already to lose.

But in the real world, how do you take back money from a programmer or a teacher who fails?

No, you don't want to put it in escrow. You want them to actually have it. But you write a contract just like any other contract. It's enforceable by the courts, if not in any way else, any other way. So you write the right contract and you can do that.

Okay, so just as hard as programmers, how do we properly incentivize teachers?

So that's a very hard. So my life is very calm, you know, I'm professor, I don't get much conflict in my life apart from when I talk about incentives with educators. You go into educators and there you talk about incentives, they want to kill you, right? Because of, like we said, you shouldn't bribe kids. You need to get them to intrinsically be motivated in learning. Now the question is about teachers. If you incentivize them based on some kind of standardized test, we know what's going to happen. They're just going to teach the kids out to do well on the standardized test, they're not going to teach them to be better citizen to enjoy learning or anything like that. Right. But one thing that you can have, for example, is give them much more money, just pay them a much higher salary. Because now imagine that I can write code or I can go and teach. Some people should write code and not teach. Some people should teach and not write code, but some people can do both. And if you write code, you earn, say $200,000 a year. If you teach, you get 60 or $70,000 a year. So you lose many people that could have been great teachers and don't do it. Just give them enough money to have the selection to begin with of people that are more motivated. And I think that would be one way to really improve the people. It's not that the teachers that we have are not good. If I can think about one very hard job that you can have is to be a teacher to the kids, to stand in front of these kids. Some of them are annoying. Their parents are very annoying, usually. And you need to do this day in, day out. It's a very hard job. I think they should be compensated more.

As an aside, I read this and you're a college professor. So literally, do parents of kids call you up complaining about the difficulty of the subject and grades?

No. No. So that doesn't reach college, fortunately, not yet at least. So I never got a call or an email from a parent. I think that's reserved for the younger kids.

That's good to know. John List did this study in Chicago where they paid parents to keep their kids in school. And as I recall, he told me, all things considered, that was good, that people complained. That's buying off people and buying off education and all that. But to get them into the habit of going to school, it was worth the money. Do you agree with that?

Right. So we write about it in our joint book, the Y Axis. And the story is imagine. He's talking about very rough neighborhoods in Chicago, that the kids go out in the afternoon and they join gangs and they shoot each other. Then if you can pay them to just stay in school, even like we talked about Harvard, even if they learn nothing during this time, but they stay in school, they don't join a gang, they don't go out and get killed. That's already a huge success over there. So we're talking about a broken system. System that has lots of problems over there. And in a perfect world you wouldn't need to do that. But it's so far from perfect. The system that we have over There that something like that can really be useful.

You mentioned a very interesting real estate example. And my interpretation was that let's say you're the seller, so you want to price it, as you say, just this side of crazy, to signal quality. And then if you set it just this side of crazy, people are not necessarily going to try to really lowball you for social reasons, etc. Etc. So I understand all that, but where I live in Santa Cruz, at least, the theory that seems to be working here is you establish the selling price as reasonable, if not low. And what that happens is it attracts multiple bids that makes the price go higher than what you really wanted. And so I'd like to hear what you say about these two contrary theories. But the bigger question for me is I understand intellectually the theory of price, high signal quality. Put a stakeholder in the ground, so nobody tries to lowball you. I also understand the theory of put a low price, make people go into a buying frenzy and jack up the actual price. So these are two conflicting theories. How do you decide?

That's great. I think that's what makes my life interesting. Right, because that's a great example where you need to test it. My guess is that in a market like we had a couple of years ago, the choice of getting in low, I know about San Diego at least getting in low and getting 20 offers and then start playing them one against the other can work. Now the market is much colder, so it's not anymore a seller's market. And in this market, such a system won't necessarily work. So you might come up with a low number and get one person that will still try to negotiate you even lower. So you need to be careful. So I think that which system exactly works best depends on the market to a great extent. In the current market, I would say try to be above what you think you're going to get. Make it reasonable such that the other side will not say, no, no way, I'm not going to pay that much and won't even counter. But if you get the other side to play with you to counter your offer, then you did well. So if you are pushing it high and you don't get the offer or the counteroffer, then you push too much. I can give an example. A few years ago I was in Singapore and I wanted to buy a lens to my camera. There is an area in town in which there are like 50 stores, all of them by Indians that sell exactly the same cameras over there. So I went to the first place they asked me for $700, I said $300 and leave the store. I knew that I'm not going to get it for $300. Next one I tried $400. They didn't want it that way. When I said 450, it said no in the third store. And when I started walking out, he said, wait, wait, wait. So then I knew that I got to the price. So what I'm trying to say is that you need to find and once you got into a very low offer that is still acceptable to the other side, the other side is willing to talk with you. So when you want to buy, when you want to sell, if you give a very high asking price and you get the other side to buy it, then you're in good shape.

If I can push back on you, I can see how that could work. If you know exactly, you want a Sony E series, E mount, 50 millimeter, 1.8 prime, and all of those lenses are created equal. But if you go in the Grand Bazaar of Turkey and you say, okay, I want to negotiate for this carpet, all carpets are different, what do you do there?

Clearly you're in better shape. If you're talking about the product, something that I can go on Amazon, check how much it cost. But even in the bazaar, you can think about different ways of doing it. So you mentioned Israel a lot. So if we'll go in the market in Israel and I'll speak with them Hebrew, I will get a different price than is if you'll go and try to speak English with them. Right? So even there, there are different things that you can do that are like that. So if you have a house in a condo that there are three other apartments for sale, you can't really play this trick. If you have some kind of unique house that Zillow cannot give you good comps to it, then you're in a different situation. So if you sell a commodity, then negotiation and using the price, high price as a tactic won't work as well as if you're selling, like you said, a rug that only you have.

For the record, whether I'm in Turkey or Israel, I would never go shopping without a native with me. Just hold a sign on your head that says, I am a goy. I would just like you to summarize, you know, you sort of best practices about incentives and then give us a pitch for your book. I think people should read your book. It's so interesting and I think it'll open your eyes and help you avoid many mistakes. So give us Your best shot and maybe a good example, the Yuri hall of Fame. This company really understands incentives. This is what you should do, and this is why you should buy my book.

So few rules to remember. First of all, your incentive send a message, don't forget it, and use common sense. Don't just, oh, you know, all incentives are created equal. So very often I go to companies and they tell you, oh, we tried incentives and it didn't work. And my analogy to this is that you went to a bad Japanese restaurant and your conclusion was that Japanese food is bad. No, you were unlucky. You went to a bad Japanese restaurant, you should try something else. Same is true about incentives. You tried bad, you didn't think about it enough or you were unlucky. But that incentives work. There is no question about that. But they don't always work the way we think about. So think about it a lot. And then after you come to something that you think tells the story that you want to tell, test it, right? Like the A B testing that we discussed. Just go out and test it, see that it works. If it doesn't, improve it. Until you get to something that actually work, why should you buy the book? Because the book will tell you how to do it in a smart and funny way such that you will understand how incentives work. So incentive work. There is no question about it how they work. That's very complicated and somewhat simple if you understand what you're doing. So understand the signal that you're sending. Don't send mixed signals and just think.

About it and who's in the Yuri hall of Fame as yeah, these guys really know what they're doing.

So one example is airlines that came with the frequent flyer. So I fly a lot and someone else is paying for the flight ticket. I'm lucky in that respect that people invite me and imagine that I fly to San Francisco to visit you. There'll be two flights, one Southwest that will cost $300 or one by United that depart 10 minutes later and cost $500. I'm a United guy. I have frequent flyer miles. I will buy the United States one and you will pay the $500. I don't care how much it cost. So the airlines were smart enough to create incentives to individual that they don't pay the cost, but they get the benefit of it. And I think that was a very smart program to create.

So if I'm the company bringing you in, I should tell you that I'm going to pay you X and that includes your travel. And then you have to make the decision whether the difference is enough so that you fly Southwest versus United, even though you're not getting United.

Miles, there is no question that that's the right way of reimbursing people. So we are, you know, I work in a public university, and we fly in people and we give them all these restrictions, and then we need 70 people to sign off on this. It cost much more to reimburse you instead of this. There are some places that just tell me, okay, or you'll come to San Francisco. We'll for two days, we'll give you whatever X amount of dollars. You can buy the ticket, the hotel, do whatever you want. Take Uber or you can walk to the airport. We don't care. Then I'll be much more careful with the way I spend the money. That's by the way, with my flights and all, that's peanuts. The healthcare really suffers from this. When I first went to a dentist in the US it was in Chicago. The clinic had an amazing view to the lake. It was in a good place, the offices. The clinic was amazing. And I've never seen it in Israel. In Israel, you know, dentists are in the basement. And the reason is that in the US the insurance is paying for it. You can charge. And so they have to compete. They don't compete on being cheaper. So I don't care how much it costs because it's going to cost me the same whether I go to this beautiful clinic or to a less good clinic. And I want to live in a world in which I can decide, okay, I can afford myself to go to the nice clinic and pay three times more, or I can go to a basement and get just as good care. But it's going to be a bit less pleasant. The view is going to be less pleasant. Right.

Okay, thank you very much, and I hope your stomach feels better. And as the Japanese say, zeigazund.

Zeigazund. Yeah, very Japanese Yiddish word. Thank you very much. It was very interesting. It's very different than other podcasts that I've been on, so it was much more fun.

Why? What happens in the other podcasts?

They ask more structured questions, right? So they read the passage and they asked me to describe it or something like that. And this one was more exciting. So thank you.

You made my day, Yuri.

I hope this conversation with Yuri has provided you with valuable insights into the world of incentives and behavioral economics. Yuri's new book, Mixed Signals How Incentives Really Work, is a must read for anyone interested in understanding how incentives shape our behavior and decision making process. Again, my thanks to Katie Milkman for the directive to have Yuri on this show. And my thanks to the remarkable people team that would be Peg Fitzpatrick, Jeff C, Luis McGanna, Shannon Hernandez, Alexis Nishimura, and the drop in Queen of Madison Nismer who just moved into a new place.

I'm Guy Kawasaki.

This is Remarkable People. Until next time. Aloha.

Listeners of the Remarkable People podcast will learn from some of the most successful people in the world. They provide practical tips and inspiring stories that will help you be more remarkable if you live in the US or Canada. Text 831-609-0628 to get notified of each new episode. This is Remarkable People.