Lens 1: Incentives

Lens 1: Incentives

Behavioral economics results focus on the situations where agents don’t act rationally according to their interests. It’s very useful, but it shouldn’t make you ignore the incentives at play. In most situations, incentives will still outweigh any cognitive bias impacting the agents.

When mapping out the incentives, first distinguish between Positive and Negative incentives, and Certain/Uncertain incentives. That gives you 4 different incentive types indicated below:

Rewards (Positive & Certain)

Straightforward, but can be also Non-Monetary and Private, don’t forget those.

Potential Benefits (Positive & Uncertain)

Potential Benefits are the positive incentives that agents see as possible but not certain. Similarly, people will pool them with the certain incentives with an importance varying from person to person. They are also critical to uncover, but in some situations may be real to outsiders but not perceived by agents.

Costs (Negative & Certain)

Straightforward, but can be also Non-Monetary and Private, don’t forget those. Change is a huge non-monetary cost often underestimated.

Risks (Negative & Uncertain)

Risks are the negative incentives that agents see as possible but not certain. However, since most people are risk averse, they will be pooled by the agents with the certain incentives. Their importance will vary from person to person but will always be there. You need to find out what the perceived risks are in a situation, and there are almost always perceived risks in a behavioral change situation.

Drilling down within each type

Then for each Type, you can further refine by distinguishing between Monetary/Non-Monetary and Public/Private incentives.

Monetary / Non-Monetary

Monetary incentives are of course financial incentives. Paying people double to do behavior B compared to B will  in all cases increase the proportion of people switching from A to B.

Non-monetary incentives comprises positive social externalities like increased status or prestige. They also comprise non-monetary goals, especially in organizations, that result in increased power or long-term benefits. For example, if your company’s processes are changed from C to D, you have a non-monetary incentive (which we could call monetary in the long-term) to adopt D and not get in trouble.

Public / Private:

Public incentives are incentives that are clear for everyone involved. Double pay publicly announced is an example.

Detailed Incentives Analysis Matrix picture

Private incentives are incentives that are not clear to other actors in a situation, mostly because they don’t care enough to try and understand what is happening. People eligible for social benefits but not claiming them are a good example of implicit incentives. It may seem puzzling and irrational when looking at the situation as an outsider. The easy explanation, thankfully used less and less, is that these people are just stupid and not understanding they could get those benefits.

The reality is that when you analyze the explicit and implicit incentives for them, you begin to understand that for a number of reasons, including the complex process of claiming those benefits, the rational choice for them is to not claim them. If we want to change their behavior and make them claim then, the key is in understanding these incentives and changing them. Not trying to make them understand why they should assess the situation differently.

If you want to work through each category systematically to be sure not to forget anything, then you can use the Detailed Incentives Analysis Matrix to assist you.