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What is behavioral economics? Why does it matter to you?

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Podcast Episodes

What is behavioral economics? Why does it matter to you?

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

In today’s conversation, I am joined by Dr. Uri Gneezy. Uri’s research focus is on putting behavioral economics to work in the real world, where theory can meet application. He is looking for basic research as well as more applied approaches to topics like incentives-based interventions to increase good habits and decrease bad ones, Pay-What-You-Want pricing, and the detrimental effects of small and large incentives. In addition to the traditional laboratory 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 nontraditional ways.

You may be familiar with Uri’s name because he coauthored the wildly popular book, The Why Axis with John List, who was on the show last year talking about his book The Voltage Effect. 

I have a feeling you’re going to really enjoy this conversation as it is about a topic people in business are thinking, talking and asking about all the time: incentives. Most specifically, Uri 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 will talk about a few of them today in the episode.

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SHOW NOTES:

  • [00:42] In today’s conversation, I am joined by Dr. Uri Gneezy. Uri’s research puts behavioral economics to work in the real world where theory can meet applications.
  • [03:15] Uri shares his background and the work he does in behavioral science. He is a behavioral economist and most of his work is around how incentives really work and how they can change the world. 
  • [05:19] When you give the incentives it is not just the money, reward, or recognition that you give, you are also sending a message and telling a story. If you don’t really understand how the incentive can shape or change the story you might send the wrong message. 
  • [07:03] Incentives are not good, wrong, or bad. It really depends on how you use them. 
  • [09:25] By changing the incentives from money to an item like a mug or pen you change the message that supports the signal that you want to send. 
  • [11:45] Uri shares about research around donating blood.
  • [14:01] In the late ’90s hybrid cars started to pop up. Toyota won the market with the signal they sent. 
  • [16:39] Different incentives work on different people. The incentives don’t have to apply to everyone. 
  • [18:25] The role of incentives should be to push the story in the direction you want. Incentives are going to change the story. 
  • [21:27] Quality is much harder to control than value and sometimes it is subjective. How do you incentivize without damaging the quality?
  • [24:30] We really need to be careful about the incentives we give. 
  • [27:00] If we want innovation we have to make sure we don’t punish failure. 
  • [29:59] If you have an incentive in place, try to think about it and see if it really sends the message that you want to send. 
  • [30:51] The fact that you tried incentives and they didn’t work doesn’t mean that incentives don’t work. It means that what you tried didn’t work and it is time to try something else. 
  • [33:26] You need ways to measure your incentives and how they are working. 
  • [36:00] He decided to add cartoons to his book because they deliver the message better than just reading a long description and it makes it fun and less boring. 
  • [38:48] The Coca-Cola story is a very good example of how the framing of the incentive can give a completely different experience. 
  • [40:26] Not all incentives are created equal and you can understand more about them and predict how they will work if you understand the message they are sending. 
  • [41:55] Our brains have mental accounts.  
  • [44:30] If you find out what your clients care about you can use that to create your incentives. 
  • [46:51] The amount of money really sends a signal but gifts send a very different signal and meaning.  
  • [49:36] Make incentives simple. If you have many incentives, consolidate them. Make sure you align what you do with the message you want to give. 
  • [50:52] Melina’s closing thoughts

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