Professors who teach classes on incentives and pay-for-performance almost univerally point out that incentive systems usually work *exactly* as set up. Unfortunately, this doesn’t mean that the system will reach the intended goal, since the mechanics of the incentives may or may not be in line with the manager’s overall objective, or they may be off in terms of the strength of the carrot on the stick. (Those of you computer programmers that insist that “the computer isn’t doing what it’s told” have a good idea of what I’m talking about here…like it or not, the computer is doing exactly as it was told- it can’t help it if the instructions were erroneous!)
In my classes, I try to drive home the point that it’s important to think carefully about incentive design, since people *will* figure out how to game the system for their own benefit. To do so, I illustrate via a personal example. When I was in kindergarten (full disclosure: I was probably a difficult child), my teacher tried to reward students for good work with a hand stamp of some sort. (I later learned that most of the stamps were stars. This becomes important later.) Now, I really don’t like hand stamps- even now, I get very annoyed when I go to a club or a concert and the bouncer insists on the hand stamp policy. As such, I tried to lick off the first stamp I was given. My mother became a bit suspicious when she saw that my tongue was blue when I got home from school, kind of like a chow chow or something. I think my mother told me to suck it up and deal at that point. Little did she know…
My mother had been very careful to teach me that when someone is violating my personal space in a way that makes me uncomfortable, I am to say “no” in my sternest voice possible and basically make a fuss to draw attention. (This is what you are taught when you are the smallest one on the school bus, apparently.) Add in the fact that the teacher tried the hand stamp bit again the next day, and it shouldn’t surprise you that I chose that moment to actually do what I was told. The other kids thought about my behavior for a bit and figured that there must be a reason that I didn’t want the hand stamp, and a mutiny began. Now, my mother was not pleased that she got called in for a parent-teacher conference, but she’s also not the type to lay down the law and pull the “because I said so” bit. Instead, she offered me a quarter for each time I came home with a hand stamp. Apparently I liked quarters more than I disliked hand stamps, so this went well for a good three weeks. (I say three weeks because my mom is still a little bitter about the $3.75 she spent.)
The problem with this system was revealed when my mom ran into my teacher while picking me up from school. My mom mentioned how well the incentive was working, since I came home every day with a hand stamp no problem. My cover was unfortunately blown, since the teacher politely explained that she had stopped with the hand stamps two weeks prior. Obviously I had found a friend that had a stamp and make sure that she stamped my hand before I went home each day.
I find it important to point out that, while not in keeping with the spirit of my mother’s system, I hadn’t actually broken any rules. So next time you need to incent someone, try to step into their shoes for a second and think about how you would go about “gaming” or “breaking” the system. After all, if a 4 year-old can figure it out, what on earth is an adult employee going to do? Lest my students ever start to forget this concept, they get a nice reminder to look at while I write on the board:
This cartoon also gets the point across, albeit in a somewhat creepy way…after all, a picture really is worth a thousand words. (Click for full-size) Thanks to Jeff for the link. 
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5 responses so far ↓
1 Krzysztof Wiszniewski // Jun 12, 2009 at 6:31 pm
The story may also clue us in on why you went into economics…
2 Paul // Jul 10, 2009 at 1:53 pm
This post is a little coy on whether the image shows a tattoo, one that went on “your permanent record.” But if you did go perm with the hand star, that’s one of the more artistic transformations of a quasi-Skinner kinder-economy.
3 econgirl // Jul 26, 2009 at 3:06 pm
Hm, you’re right. Yes, it’s a tattoo. Also, I may have argued to my mother at one point that the present discounted value of said tattoo was somewhere in the neighborhood of $1600. She didn’t go for it, which is not surprising given that she is less than pleased about the $3.75 she shelled out already.
4 Jim Welke // Aug 30, 2009 at 5:15 pm
You figured out a way to beat the system. What was your mothers response after you got home? It proves you are very clever and can look at things from several viewpoints. The real questions is, how will you be with your own kids?
5 Justin // Jun 12, 2010 at 10:33 am
This is one of my favorite lessons to talk about with Econ and HR majors. There is a great HR article tittled “The folly of rewarding A when you desire B” that I make reference to at least once-a-month.
Personally, I was pretty good with computers…so I would print my own progress reports on school letterhead and mail them home after I removed the original one out of the mailbox. You would think if I put that much effort into it i would just have done well in class…but playing outside was so much more fun!
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