Welcome to Episode 594
Melina Palmer: Welcome to episode 594 of The Brainy Business, Understanding the Psychology of Why People Buy. In today’s episode, I’m excited to introduce you to Uri Gneezy, author of Mixed Signals. Ready? Let’s get started.
Announcer: 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.
Melina Palmer: Hello. Hello everyone. My name is Melina Palmer and I want to welcome you to The Brainy Business Podcast. Have you ever seen a company’s campaign and thought “who approved that?” or immediately saw the glaring loophole in a new process? Either because you spotted it yourself or saw others exploiting it and wondered, “They had to know this was going to happen, right?” The age of social media makes it so we see these sorts of misses every day. Our feeds are filled with people making fun of these errors or stories of ads gone wrong or outraged people who say the company they’re mad at did something so obviously insensitive it had to be intentional.
In today’s episode, which originally aired in March of 2023, I’m joined by Uri Gneezy. Uri is an economist, behavioral scientist, innovative strategist, entrepreneur, professor, and co-author of the critically acclaimed book The Why Axis, which he wrote with John List, who’s another friend of the show. He’s particularly interested in the ways habits are formed and the effectiveness of incentives, which led to the book we’re discussing today, Mixed Signals: How Incentives Really Work. It is full of some great examples, and I absolutely love this conversation, so I’m excited to reshare it with you today.
Really quickly, before we get into the conversation, I want to be sure you know that there are links in the show notes for my top related past episodes and books, ways to get in touch, and more. It’s all waiting for you in the app you’re listening to and at thebrainybusiness.com/594. Now let’s jump right in.
Introduction to Uri Gneezy and Behavioral Economics
Melina Palmer: Dr. Uri Gneezy, welcome to The Brainy Business Podcast.
Uri Gneezy: Thank you. Glad to be here.
Melina Palmer: 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 Fishbach, who have been on the show before. Colleagues, friends, 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?
Uri Gneezy: 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. I look at data and try to understand what motivates us.
Melina Palmer: Yeah. So how did you get interested in incentives? How did that come about?
Uri Gneezy: I think that incentives really shape the world. Everything is basically a result or product of our incentives. As a kid, I was already fascinated by it—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 a situation, many situations or interactions between people, government, family—everything that you think about is governed by the incentives that we have. Incentives could be money, could be something else—could be honor, could be status, could be whatever you want it to be. Understanding it can really help us understand the world.
Melina Palmer: 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? You know, might as well. It couldn’t be that bad. It’ll at least help motivate some people, right?” But that’s wrong.
How Incentives Shape the Narrative
Melina Palmer: So do you want to expand a little bit on that?
Uri Gneezy: There are actually two camps, if you like. The first one is, “Yeah, let’s just throw incentives.” That’s what economists do, right? “Let me just throw an incentive into this.” What this book is about, and what my work in general is about, is showing that when you give incentives, it’s not just the money or the reward or the recognition that you give. You’re also sending a message. You’re telling a story. If you don’t really understand how the incentive changes and shapes the story, you might send the wrong message, and people will get the wrong message out of this.
Let me give you an example. Imagine that you see your friend going to the recycling center on a cold, rainy day—let’s make it dramatic—with a large bag of 100 soda cans. You’ll probably say, “Wow, she’s a good person. She really cares about the environment.” She might feel good about herself because she’s doing the right thing, right? So those are good signals.
Now imagine that you live in a world in which you get 10 cents for every soda can that you recycle. Now you see your friend—it’s raining again—walking with this and you say, “Wow, for $10? He’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,” right?
Introduce incentives and you change the story. That’s basically what I’m trying to talk about: how incentives actually shape the story. If you understand how to use them, you can do better.
The other camp is the camp that says, “Oh, we tried incentives; incentives don’t work,” right? That’s just as stupid, I think, because it’s like going to a Japanese restaurant, having bad food, and concluding from that that Japanese food is bad, right? No, you went to a bad restaurant. You tried bad incentives. That doesn’t mean that incentives are wrong. There is a balance. Incentives are not good or wrong or bad; it really depends on how you use them.
Melina Palmer: Right. I love that example of 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.” I love that in the book you use it as not even a friend, but your neighbor, right? The person across the street. That’s where you aren’t even friends, and then you would be peeking through the blinds maybe and going, “Oh, how cheap! How ridiculous are they?”
Uri Gneezy: The same thing where before that we thought, “Oh, she is great.”
Melina Palmer: Right. Yeah, and so it’s such an interesting story. There’s a similar piece on that, but it’s a little bit different where you talk about blood donation in the book.
Social and Self-Signaling in Blood Donation
Melina Palmer: Can you talk about that?
Uri Gneezy: Right, sure. Think about yourself. Maybe you donate blood. Some of us do—many of us do, actually millions of people do. I think that we do it because we think that it’s the right thing to do, and you feel good when you’re doing it.
The example with recycling was also about sending signals to others (what other people will think about you) and sending signals to yourself (self-image, if you like). With recycling, we saw how that changes. 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 a signal to yourself that you’re a good person.
Now imagine, like with recycling, that I pay you $10 for donating blood. Now you’ll say, “Well, for $10 I can stay home and do some work instead of this.” So I’m not going to do it for $10, because the signal that I send myself is going to be diluted basically by that. So I don’t want to actually be paid.
In this case, 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 bank “Thank You” 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 and say, “Oh wow, I’m a good person.” When you look at the mug, you say, “I’m a good person; I donated blood.” Maybe even people who come into your office will see it and 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.
Melina Palmer: Yeah, and it’s good too because it costs less than any incentive you would need to give. You know, you talk about a mug here; I know you talked about a pen in the book, which costs even less than what a mug would cost. But with both, you get to show off to others that you give blood and that says something about you. You get 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.
Uri Gneezy: Exactly. If you pay me enough money, I’ll do it, right? It’s not that I won’t do it for money. We have an old paper with Aldo Rustichini called “Pay Enough or Don’t Pay at All.” In this case, if you pay me $10,000 to donate blood, I’ll be there every week, right? But small amounts of money are the ones sending the wrong message.
If you pay me $10,000, I will not feel good about myself, but the money will override this. 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. Also, now you don’t have to tell people to show off, “I donated blood.” You can just drink your coffee and show them.
Melina Palmer: You don’t even have to say it! People can just see it. It’s not like I’m bragging; it’s just a cool mug, right?
Yeah. So with that, it’s so important where you’re saying, “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, like an intern at the office. You might end up getting basically the same amount of people if you pay; it’ll just cost you more, and everyone feels worse about it.
Uri Gneezy: Right. There is a 50-year-old book by an economist named Richard Titmuss. 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 U.S., you got paid for donating blood, and in the U.K., you didn’t. He claimed that created self-selection. In the U.S., you got drug addicts to give blood, which at the time was a bigger problem than today because they couldn’t really test them. The quality of blood was bad. In the U.K., you got normal people—everybody donated blood. So you got a different type of people to give blood. Now, it could be that if I pay you enough, you’ll get more people in, but you might get different people than before. That’s something that you don’t necessarily want to have, right?
Melina Palmer: It just costs more, it doesn’t really guarantee you’ll get a lot more people, and it doesn’t have that good feeling, which is important.
Uri Gneezy: Right. Blood is actually interesting in the sense that the blood 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.
Melina Palmer: Oh, I know! Reading just a little bit about that in the book, you think, “Oh, that is so interesting about how they sell it for a lot, and then the insurance piece and who pays for what, and you have to give it for free.” It’s a very interesting mix of incentives.
The Story of the Toyota Prius vs. Honda Civic
Melina Palmer: When we look at a business, these are all examples from the beginning of the book—there’s so much great stuff in there—I think the Prius was such a great example for businesses to learn from. When you think about what the common idea would have been if you were creating a hybrid vehicle, most people at a car company at the time would have thought you wanted it to look as close to everything else as possible. You want to be able to be just like everything else, even if it’s a hybrid. But that was not the winning strategy because of these underlying self-signaling and social signaling incentives. Can you explain how that worked for Honda and Toyota?
Uri Gneezy: Sure. In the late ’90s, hybrid cars started to pop up. The technology became usable, but those were really bad cars in the sense that for the same money you could get a much better car, or you could pay less and get the same quality of car. They were expensive and didn’t make economic sense, which was actually great if you think about signaling!
If you drive a Tesla today, or even a Prius today, you don’t necessarily signal that you care about the environment; you signal that Tesla is a great car without considering the environment. But at the time, the hybrid car was so bad that the only reason to drive it was that you cared about the environment, right? So you 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.”
That was true for Toyota and Honda initially. But then in 2003, Toyota did something really dramatic: they redesigned the car to look like what we know the Prius looks like today—completely different from anything before. Honda basically listened to the engineers who said, “Look, we have the Honda Civic. It’s a good car. Let’s make some adjustments and use the same parts. We have lots of economies of scale and can really benefit from using the same platform.”
As a result, no one knew that you were 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 social signaling that you send if you’re driving a bad car: when I enter the parking lot, I really want my coworkers to know, “He’s a good guy, he cares about the environment.” That’s what we like! Honda didn’t send this message because you didn’t know someone was driving a hybrid car. By changing the car such that it signaled “I’m driving a hybrid car, I care about the environment,” Toyota basically won the market. The Honda CEO himself said later on that it was a mistake not to do it this way, and that’s why Toyota won the market.
The two signals—”Look, it’s a bad car, which means I care about the environment,” and “Look, you can actually see it”—made a huge difference in success, right?
Melina Palmer: Yeah. Even if people couldn’t articulate it and wouldn’t say it in a focus group, right? You’re not sitting down and asking market research, “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!
Uri Gneezy: They do! They do!
Target Audiences and Cognitive Semiotics
Uri Gneezy: I think that’s a good place to talk about how different incentives work on different people, right? Think about the guys who only want pickup trucks—the big Hummer type of people. They couldn’t care less about the hybrid car. That’s not your target. When you’re designing your car and thinking about the incentives you want to put out and the story you want to make, it doesn’t have to fit everyone. If this guy has driven his F-150 for the last 30 years, you’re not going to convert him to driving a Toyota Prius, right? You really have to understand the segment that you’re targeting. That’s true with all incentives that you have.
Melina Palmer: Yeah. Having had quite a few guests recently focused on cognitive semiotics and semiotics in general, looking at the science and symbolism of things, Rachel Lawes said on the show, “Where there’s choice, there’s meaning.” Really, there’s choice in everything we’re doing. What does it say about me to choose this vehicle? What does it say 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? It’s important to understand those signals when you are setting up incentive programs.
Uri Gneezy: Exactly, exactly. You’re telling a story by your choices. Our brain sees an incomplete picture, and everyone’s brain completes it with things that help us do that. The role of incentives should be to push the story in the direction that you want.
Even if you don’t care, incentives are going to change the story. If you don’t control it, you might send the wrong message, and then it’s not going to work. If you control it and send the right message, you change the story in the way that you want. With blood donation, if you change the story from “I’m going to bribe you” to “I’m going to give you a thank-you mug or pen,” that’s the story 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, and I want to reward you for being a good person by giving you this mug.” This mug could actually help you later on by signaling. Every choice that you make indeed sends a message, and the incentive should align with the story you want to tell.
Quantity vs. Quality: Avoiding Multitasking Pitfalls
Melina Palmer: The book is called Mixed Signals for a reason. In general, we humans tend to say we want one thing and then incentivize something completely different. We say we want performance and quality, but the thing that is easy to track and put numbers to is quantity-based. Or you talk about team versus individual incentives within businesses. Why is it that we do this? What sort of examples can you share?
Uri Gneezy: Let’s talk about quantity versus quality, right? Economists call it multitasking, and there are theoretical issues with incentivizing it. The conceptual one is: imagine that you work in a factory and produce shirts, right? You can do it better or worse depending on how much attention you pay, and you can also increase the quantity. There’s always a tension between quantity and quality.
In this case, it might be easier to measure the quantity—I can just count how many shirts you produced. It’s much harder in many cases to judge the quality. If I want to incentivize you, I’m going to give you incentives to produce many shirts. The right reaction from your side is to lower the quality, right? That’s what you’re supposed to do! It’s not because you’re a bad person; it’s because I basically told you, “Look, what I care about is quantity.” Even if I’m a good worker who wants to do whatever the company wants me to do…
Think about academia: we are judged by the papers that we publish. 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 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, send them to less good journals, and the papers will be worse, but I’ll have more of them because quality is much harder to control and evaluate. Quality is sometimes subjective.
How do you incentivize people without damaging quality? In some cases you can say, “Look, I don’t care about quality, I really want to have quantity.” Then that should be the message that you give to your employee and to your client: “Look, we are the cheapest, low-cost option. Come to us, you’ll get the cheapest thing; it’s not going to be great.” The problem is that in most companies, the message is “We care about quality, we care about doing it really well,” and then you incentivize 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, and you’re not going to get what you want, right?
Make sure that you decide what it is that you care about. If you care about quantity, go ahead and incentivize that. If you care about quality, be more careful with this type of incentive.
There are some funny examples of this. I think IBM paid its programmers at the beginning according to how many lines of code they wrote! So instead of writing a short, efficient code, people started writing really long ones. There are examples all over the place with this, right? Don’t just incentivize one aspect.
Short-Term vs. Long-Term Goals and Safe-to-Fail Innovation
Uri Gneezy: Another example in the book is short-term versus long-term goals. Think about a president, a CEO, or anyone that you evaluate. In many cases, you tell them, “Look, we care about the long run.” But if the CEO invests in a project that will be ready in five years, puts all the resources there, and says that’s the right thing to do, they’re not going to be there to see the fruits because they’ll be fired when short-run goals are not met!
Think about the governor in California deciding about an efficient train. A high-speed train is a 20-year project. If the governor decides to put all the required money into it today, when he goes up for re-election in a couple of years, he will have less money invested in other projects that could have yielded immediate fruits, and he will not be re-elected. There is a nice quote saying, “We all know what’s the right thing to do; we just don’t know how to get re-elected after doing it.”
We want to do things for the long run to be good for the state or the company, but we give incentives based on the short run. We need a politician to be elected in a couple of years—that’s their incentive. We need the CEO to stay in their job. So we really have to be careful in the incentives that we give. We might decide, “Look, we really care about this quarter, go ahead,” or we might say, “Look, we care about a five-year horizon. We’re going to guarantee that during this time, the person is safe in their job so they can actually do that.”
Melina Palmer: 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 you also brought up a little bit in the book when talking about innovation. You said we care about innovation, but then it doesn’t feel safe to fail, nor does it help incentivize people to quit things early. Do you want to share a little bit about that?
Uri Gneezy: Sure. That’s a great example of not understanding what we are saying when we say, “You need to be creative, you need to innovate.” Innovation means increasing variance: you are more likely to do better stuff, but also more likely to fail. That’s what innovation is.
If I keep doing what exists—imagine again my world of writing papers—I can write some minor tweak on an existing paper, publish it in a mediocre journal, and no one will care. Or I can try to go for a larger, more original project. By “more original,” it means that I might run a few experiments or pilots and see, “No, it doesn’t work,” and then I’ll have to move on.
The problem is that in many cases, you punish people for failing. If I tried a new idea and failed, you’re going to fire me or punish me. Now, when you evaluate it, you need to make sure that they didn’t fail because they didn’t care or didn’t know what they were doing. Sometimes you roll the die: if it works, great; if it doesn’t, you should be able to go to your boss and say, “Look, that was the idea, it had great potential, we ran the pilot, and it turns out it doesn’t work. We want to close it and move on.” A good manager should say in this case, “Thank you for trying! That’s great, keep up the good work, next time it’s going to work.” 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 firing them. If you really want innovation, you need to make sure that you actually don’t punish people when they fail.
Melina Palmer: Yeah. I liked that there were examples in your book—and I’ve seen some of these around recently—where companies gave awards for things that didn’t work to celebrate the attempt. “Here’s the big fail that we’re going to celebrate.” Those are brave CEOs who really care about innovation!
Uri Gneezy: For sure.
Melina Palmer: People love to say that they care about these sorts of things because they feel like they should, but whether it’s status quo bias or seeing everybody else act one way, people feel like they can’t. It’s good to say that you care about innovation and failing fast, but people don’t actually do that a lot of the time.
Uri Gneezy: That’s a great summary of the book! We say great things: we care about the long run, we care about quality, we care about teamwork. But then we give individual incentives, incentives for the short run, or incentives for quantity. We just send a mixed signal. As a worker, I don’t know what you want from me! I try to follow the incentives because that’s not just words; that’s what you really care about. But I don’t really know, I’m confused, and that’s not good. Think for yourself what story you want to make.
How to Audit and Revamp Business Incentives
Melina Palmer: For someone who is an executive or a manager tasked with incentivizing their teams—you have the example of the call center in the book, and there are plenty of other times where people are told, “Hey, go throw out some incentives”—what is your advice for people in business if they need to start looking to see what incentives already exist? Do you start with an audit to see what’s going wrong, or do you start with what you want to achieve? What’s the best approach to revamp incentive programs?
Uri Gneezy: That’s a great question. First of all, the companies that can really benefit from a change are the companies that are doing well. Companies that are failing usually think about how they can improve and what they can do better; they are already getting all the attention. The companies that are doing well—the Blockbusters of the ’90s, Nikon, Kodak—were very happy with where they were, and they shouldn’t have been. Those are the companies that should pay more attention to this.
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 it’s just an incentive—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 long-term.
Then you can also think about new incentives that you can introduce. What kind of behavior would you like your customers or employees to change? Do you want them to click more on something? How can you make it more attractive? 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 from that, you can start thinking about incentives.
Really think about the Japanese restaurant example: the fact that you tried incentives and they didn’t work doesn’t mean incentives don’t work! It means the one that you tried was just bad. Maybe you designed it well, but it just didn’t work—it happens!
Another important thing is that you actually try to measure the success of it. Try to find a KPI that you can use. If you can do an experiment with a control group like A/B testing, that’s the best: a control group that doesn’t get this incentive, and a group that gets the incentive, and then measure the difference in their behavior.
The best incentive system would be dynamic. Suddenly COVID hits or the world changes—you need to make it dynamic, keep having some kind of control group, and see what incentives are best for now and how you can improve them.
Melina Palmer: For stuff that’s harder to measure, like quantity versus quality, if somebody says, “We really do care about quality or service levels,” where do you encourage people to look as far as ways to track other than just satisfaction scores?
Uri Gneezy: Some of it could be subjective, but you can also think about objective measures. An example from the book that I like is driving a minibus or a bus. Think about two types of drivers:
- One is paid per hour. They’re going to be polite, give you good service, wait until you sit down, and drive carefully because they have no reason to drive fast and no reason to be impolite.
- Compare them with a driver paid per passenger. They’re going to drive like crazy, not wait until you sit down, and try to pick up as many passengers as possible.
If you’re the owner of the company, you might say, “We are competing with cheaper companies, we need to utilize the driver and bus more, so quantity is what we care about.” Then go ahead and pay them per passenger. Or you might think, “We want to be the ones that give a safe and comfortable ride,” so pay the driver per hour. That’s the story you need to align with.
On top of that, you can add ways of measuring it: satisfaction scores, how many people use the service, how many complaints you get, or driver turnover.
Uber and Lyft have a great way of rewarding drivers without money: ratings. At the end of the ride, the rider rates the driver, and the driver rates the rider. There is a reputation system. Money doesn’t have as much meaning there—a driver has to be horrible to get kicked out—but people still care about their rating! Drivers certainly do. As a result, when I ride in an Uber, the drivers are usually much nicer than taxi drivers who don’t care about you after dropping you off. They keep the car clean and have nice conversations. Uber drivers are incentivized to get as many rides as possible, but with the check that if they drive like crazy or act impolitely, they’re going to be punished with bad ratings. It balances quantity and quality.
Melina Palmer: I think one of the big lessons from the book is that it doesn’t have to be a single mechanism; multiple dimensions can help combat problems that arise if you only track one metric. I did an episode on the Cobra Effect recently, showing there’s always a loophole or something you missed.
Uri Gneezy: That’s a great example, yes!
Melina Palmer: I will link to that in the show notes for everyone who hasn’t listened yet.
Cartoons, Framing, and the Coca-Cola Surge Pricing Fiasco
Melina Palmer: You mentioned the cartoons or sketches in the book, which are very fun. Why did you decide to include cartoons? Were they made specifically for the book?
Uri Gneezy: I like New Yorker cartoons! Very often, they deliver the message better than reading a long description. For economists, it can be boring, but think about the example with the drivers: you can visualize the driver driving like crazy versus the calm, polite driver. It makes you think about stuff in a more vivid way. The illustrator, Luigi, did a great job. I tried to incentivize him to do it just right! It makes the book a bit less boring—economists tend to be boring.
Melina Palmer: I love incorporating fun, and that was a really nice touch. I remember the illustration about surge pricing on soda with Coca-Cola on a hot day. Can you share that framing example?
Uri Gneezy: That’s another example of engineers or economists designing the world—the worst thing you can have!
Some 20 years ago, Coca-Cola developed a new technology: a thermometer in vending machines that could tell whether it was a hot day or a cold day. The CEO, who probably took undergrad economics, had a “great” idea: “Usually the price is $1.00, but on a hot day, demand is higher, so let’s increase the price to $1.50 on hot days!”
It makes economic sense: people are willing to pay more for a cold can when it’s hot. Of course, people hated it! They felt Coca-Cola was taking advantage of them when they needed it most.
What they should have done is the exact opposite: say, “The regular price is $1.50, but on cold days we give you a discount and charge you only $1.00.” It’s the exact same economic incentive if you write the equation, but it tells a very different story! In one case, I’m taking advantage of you when it’s hot; in the other case, I’m being nice to you on a cold day. A very different message and story that would actually work! It’s a great example of how framing an incentive sends a completely different story.
Melina Palmer: That reminds me of a friend who moved to Maine. He mentioned an ice cream shop that gives discounts based on how many degrees below zero it is outside. When it’s freezing, you get 10%, 20%, or more off your ice cream!
Uri Gneezy: I live in San Diego, so it’s hard for me to imagine people freezing, but those store owners are smart! They understood the economics of price discrimination (charging different prices on different days) and the psychology of how to frame it correctly.
Practical Tips: Mental Accounting and Non-Monetary Rewards
Melina Palmer: What top takeaways or tips do you want people to keep in mind when using incentives in life and business?
Uri Gneezy: First, not all incentives are created equal. Second, you can understand, predict, and design incentives much better if you understand the story they tell and the message they send. Don’t say one thing and set incentives for another. When designing incentives, think about:
- Self-Signaling: What will people learn about themselves?
- Social Signaling: What will others learn about them, or what do they think is expected of them?
Make sure you understand these signals, and you’ll have a much more successful recipe for incentives.
Melina Palmer: Do you have any additional tips for finding those stories or using behavioral concepts?
Uri Gneezy: Consider mental accounting, which Richard Thaler wrote about 40 years ago. The idea is that we have different mental accounts in our brain. Economists think money is fungible—a dollar is a dollar whether it pays a utility bill or a vacation. In reality, we categorize money into different mental buckets.
An example in the book comes from Edmunds.com, a car research website. After researching cars, you enter your zip code to get a list of nearby dealerships. Edmunds wants you to click through to the dealership so they get a referral fee. At one point, they offered a $400 discount on a $20,000 car if you clicked through. $400 is a lot of money, but relative to $20,000, it feels small.
Daniel Kahneman and Amos Tversky showed this years ago: if you buy an $80 computer mouse and the salesperson says it’s $40 off at their other store 15 minutes away, you’ll go. But if you’re buying a $3,000 computer and it’s $40 off at the other store, you say, “It’s not worth the drive.” It’s the same $40!
We worked with Edmunds—specifically with Katie Baca—to test giving people a $400 gas card instead of a $400 price discount. Fueling a car is painful, and getting several months of free gas feels tangible and valuable. We found that a $200 gas card had a bigger impact on behavior than a $400 cash discount on the car! That’s how you leverage mental accounting: understanding what clients actually care about yields much more action for your money.
Melina Palmer: I will definitely link to our episode on mental accounting in the show notes! It’s such an important concept that people take for granted.
When Tim Houlihan was on the show, we talked about non-monetary incentives. When a team at a company wins a pizza party, it’s amazing how hard people work for a couple of slices of pizza compared to being handed $10. $10 cash doesn’t feel the same.
Uri Gneezy: It’s a very different message! If you go on vacation over the weekend, ask your assistant to stay late working on a project, and then come back Monday and hand them $10 cash, they’ll be insulted! You’re telling them that’s what their weekend was worth. But if you give them $10 worth of nice chocolate or a souvenir from your trip, that’s a thoughtful gesture.
If you ask a friend to help you move a sofa and pay them $10 cash, they’ll be insulted. But if you buy them a beer, it works! How you pay is very important.
Navigating Norms and Transitioning Away from Extrinsic Rewards
Melina Palmer: And you can’t easily undo it once you set a monetary expectation, right?
Uri Gneezy: You change the reference point and the social norm! Imagine you give an employee a generous $500 Christmas gift. They didn’t expect it, so they are thrilled. Next Christmas, their expectation is no longer zero—they expect $500! If you give them $500 again, they say “thank you.” If you give them $200, they are disappointed because you changed their reference level and expectations. You have to consider the dynamic aspect of incentives over time.
Melina Palmer: As we close out, what tips do you have for a business model full of extrinsic cash motivators that wants to transition toward intrinsic motivation without causing the workforce to quit?
Uri Gneezy: Removing incentives might cause some people to leave, and that might actually be a good thing! I talk about “incentives to quit” in the book. Some companies offer employees $2,000 or $5,000 to quit today. If the person chooses to stay, you know they are truly motivated, and they convince themselves they want to be there because they turned down cash to leave.
To transition:
- Simplify: Consolidate your incentives. Having too many complex incentives definitely doesn’t work.
- Align: Ensure what you do matches the message you want to send. If you claim to value innovation, don’t punish failure. When a project fails, conduct a debrief to ensure it wasn’t due to laziness, and then tell them, “Good job attempting this, keep up the good work.”
Align the incentive structure with your core narrative.
Melina Palmer: Thank you so much for all these tips, insights, and for writing Mixed Signals. Where can listeners connect with you and learn more?
Uri Gneezy: My email is easy to find—just Google Uri Gneezy and you’ll find my website and contact info. I’m happy to hear comments, suggestions, or help with ideas!
Melina Palmer: Wonderful! Thank you so much, Uri. It was amazing chatting with you today.
Uri Gneezy: Thank you very much! I had a lot of fun, too.
Wrap-Up and Final Thoughts
Melina Palmer: Thank you again to Uri Gneezy for joining me on the show today! What got your brain buzzing in today’s conversation?
For me, I love the abundance of great examples in his book, like the Cobra Effect and Coca-Cola’s surge pricing fiasco. It’s so obvious when you take a step back that people will react negatively if they feel exploited. But re-framing it as a baseline price with discounts on cold days changes everything! It creates a win-win scenario.
I also love the example of the recycling neighbor. Throwing money at a problem can backfire by ruining intrinsic motivation, leaving you with an expensive program that produces worse results. Identity signaling is crucial. Incentives are powerful, expensive, and hard to undo, so thoughtfulness is key. I highly recommend picking up a copy of Mixed Signals.
Have you seen a company send mixed signals or miss the mark with incentives? Share it with me on social media! You can find me as @TheBrainyBiz across platforms and as Melina Palmer on LinkedIn.
All relevant links, past episodes, and book recommendations are waiting for you in your podcast app or at thebrainybusiness.com/594.
Thank you again to Uri Gneezy for a great conversation, and thank you for listening! Join me next time for another episode of The Brainy Business Podcast. Until then, remember to be thoughtful!
Announcer: Thank you for listening to The Brainy Business Podcast. Melina offers virtual strategy sessions, workshops, and other services to help businesses be more brain-friendly. For more free resources, visit thebrainybusiness.com.
