Sunday, January 15, 2012

The Upside Of Irrationality: Chapter 1

Through a series of experiments, Dan Ariely documents the many ways in which humans behave irrationally. By understanding these human tendencies, we can both learn to behave more rationally when it is to our benefit, and better understand why those around us are behaving in the way they are.

One way our intuition doesn't quite match up with data has to do with how bonuses affect performance. In a number of experiments, Ariely demonstrates that large bonuses (e.g. 5 months of salary) actually hurt performance for cognitive tasks. (This is not the same for mechanical tasks, where high bonuses increase performance.)

Ariely surmises that this may be due to the the fact that the receivers of the bonuses become nervous, start fixating on the bonus and find it harder to concentrate. An analogous situation can be found in public speaking, where an overwhelming desire to do well (because of social pressure) actually causes people to perform tasks worse in front of a group than on their own. The financial pressures caused by large bonuses may have the same effect.

The implications of this are closely related to how executives are paid. If they were being paid to lay bricks (a mechanical task), high bonuses would encourage higher performance. However, seeing as how executives are expected to use cognitive skills, high bonuses may actually be hurting the results of the companies which pay them.

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