Motivation and emotion/Book/2022/Behavioural economics and motivation

Behavioural economics and motivation:
What aspects of motivation theory are useful in behavioural economics?

Multimedia presentation (3 min)

Overview

Figure 1. Richard Thaler, who won the 2017 Nobel Prize in Economics, has been a key figure in the advancement of behavioural economics.

Homo economicus, the imaginary model human upon whose behaviour neoclassical economic theory rests, always possesses the necessary information, interprets it correctly, and is motivated by maximisation of their material wealth. Richard Thaler (see Figure 1) has observed that real humans are "dumber, nicer and weaker" – their information is often imperfect or misinterpreted, they engage in prosocial behaviour, and they act against their own interests when faced with temptation.

Does it matter? Economic modelling based on neoclassical assumptions influences almost every aspect of modern life. Milton Friedman famously argued that the value of a model depends on its predictive power, not the realism of its inputs and parameters. But if government and business craft policy for Homo economicus, will this create an optimal environment for real humans?

Behavioural economics identifies systematic ways in which real behaviour diverges from that of Homo economicus. Motivational psychology interrogates the “why” behind such anomalous behaviour, underpinning and explaining the observations of behavioural economists. The research findings in this field have contributed to major social improvements in many areas, including retirement savings, public health, and climate change mitigation.

This chapter addresses two critical intersections of motivation theory and economics: intrinsic motivation and bounded rationality. Three focus questions guide this discussion:

Focus questions How does motivational theory explain “irrational” behaviour? Is irrational behaviour a problem? How can motivational theory guide solutions to irrationality?

Self-determination theory and behavioural economics

The conventional economic wisdom holds that workplace performance can be incentivised by means of conditional monetary bonuses, a logical conclusion based on operant conditioning. In 2000, Edward Lazear found that an auto glass company experienced a 44% increase in worker output for a 9% increase in labour costs when transitioning from hourly to piece-rate wages. Economists, behavioural psychologists, and compelling data all seemed to agree on the merits of financial incentives linked to workplace performance. Despite this apparent consensus, dissenters lurked. Lazear claimed that his data refuted the notion that financial incentives hold the potential to reduce output, calling out E.L. Deci in the process.

Figure 2. Intrinsic motivation can lead to many different behaviours, but whatever the task, the actor's engagement is driven by interest and enjoyment.

Lazear took his jab at Deci for good reason. Along with R.M. Ryan, Deci had developed self-determination theory, a meta-theory of motivation comprised of six mini-theories. Three of these mini-theories combine to explain how external rewards can undermine intrinsic motivation and decrease overall task performance. The incorporation of SDT into economic theory revolutionised perceptions and beliefs regarding workplace motivation, and SDT has become a central component of behavioural economists' research and modeling.

Basic motivational definitions in SDT Amotivation is “the state of lacking intention to act.”. Intrinsic motivation is being motivated to do something “because it is inherently interesting or enjoyable” (see Figure 2). Extrinsic motivation is a reason to do something that relates to attainment or avoidance of an outcome that is separable from the task.

The origins of SDT

In the 1950s and 1960s, psychologists began investigating intrinsic motivation, especially its relationship with extrinsic motivation. deCharms and Festinger independently reasoned along similar lines that providing an external reward for an intrinsically motivated activity would shift the perceived locus of control, the actor’s perceived reason for undertaking the activity, and reduce intrinsic motivation. These perspectives contrasted with the well-supported views of behaviourists like Skinner, for whom rewards were reinforcement that could only increase the prevalence of a behaviour.

Deci tested deCharms’ and Festinger’s theoretical concepts with three experiments. In the first two, an experimental group of participants were given a monetary reward for completing a task, while a control group completed the task with no external reward. Deci found that, following the removal of the reward offer, the rewarded participants’ task engagement decreased: the tangible reward had diminished intrinsic motivation for the task. In the third experiment, Deci replaced the monetary reward with positive verbal feedback. This alleviated the decreased task engagement for the experimental group; in fact, their intrinsic motivation increased relative to the control. Although the study supported deCharms’ and Festinger’s theoretical perspectives, the number of participants in each experiment was small, and most results were only significant at the 0.10 level, rather than the more commonly utilised 0.05 threshold (Deci, 1971). Despite these limitations, Deci began refining his ideas, which would eventually evolve into SDT and its mini-theories.

Cognitive evaluation theory

Cognitive evaluation theory (CET) emerged most directly from Deci's 1971 study. CET examines the influence of environmental factors on intrinsic motivation, which it considers an inherent human trait that confers evolutionary advantages. According to CET, when external rewards are used in a manner perceived as controlling, they will undermine intrinsic motivation. Rewards that are expected, salient, and provisional on engaging with or completing the task in a certain way, are generally perceived as controlling. Intangible rewards, such as praise or positive feedback, unexpected rewards, and those that are not task-contingent are more likely to be viewed as supportive, and to enhance intrinsic motivation.

Organismic integration theory

Organismic integration theory (OIT) conceptualises SDT’s motivational types as occurring along a continuum from amotivation to intrinsic motivation, with extrinsic motivations falling in between. OIT further categorises extrinsic motivation by the extent to which it is internalised (see Figure 3). Internalisation of extrinsic motivation leads to greater experience of autonomy. Autonomous task engagement is the hallmark of intrinsic motivation, and is associated with higher levels of task persistence and performance. In an environment in which external rewards for a given task effectively meet basic psychological needs, the task motivation will be more readily assimilated, and behaviour will more closely reflect that displayed for intrinsically motivated activities.

Figure 3. Taxonomy of motivation, showing increasing internalisation of extrinsic motivations from left to right, according to E.L. Deci and R.M. Ryan's organismic integration theory

Basic psychological needs theory

People display intrinsic motivation for a wide variety of behaviours (see Figure 2). Some people read, while others play sport, have children, master an instrument, volunteer with vulnerable community members or explore the world. If such varied behaviours can be intrinsically motivated, what needs are people satisfying by engaging in these activities? Basic psychological needs theory (BPNT) asserts that psychological well-being and optimal development require the satisfaction of fundamental human needs for autonomy, competence, and relatedness.. These are the needs that people satisfy when engaging in intrinsically motivated behaviours. BPNT is grounded in Aristotle’s well-being concept of eudamonia. Essentially, autonomy, competence and relatedness satisfaction lead not only to happiness, but to a sense of personal worth. This distinction is important in the contexts of both intrinsic motivation, where it implies a human need for growth, and behavioural economics, where it supports the rejection of hedonic economic reasoning.

Motivation crowding theory

The key figure in the incorporation of SDT into economics was Bruno Frey, whose research in the 1990s led to the development of motivation crowding theory (MCT). Frey applied the psychological concepts to existing economic theory, explaining deviation from the relative-price effect as a result of non-additive properties of intrinsic and extrinsic motivation (see Figure 4). MCT argues that for behaviours that are at least partially intrinsically motivated, external rewards can improve productivity in one of two ways:

1. By meeting the CET requirements to be viewed as supportive, or the OIT requirements for internalisation, which will "crowd-in" intrinsic motivation.
2. By being large enough to outweigh the negative effect of controlling rewards, which "crowd-out" intrinsic motivation.

MCT has been extensively applied in organisational and public policy settings to improve workplace productivity, employee well-being, and prosocial behaviour, demonstrating the immense value of the intersection between motivational theories and economics.

Figure 4. Bruno Frey's motivation crowding theory explains several possible effects of extrinsic rewards on intrinsically motivated behaviour.

Quiz yourself

1 According to neoclassical economics, offering a monetary reward for excellent work will: Improve performance Impair performance Have variable effects Have no effect 2 According to motivation crowding theory, offering a monetary reward for excellent work will: Improve performance Impair performance Have variable effects Have no effect 3 Self-determination theory and motivation crowding theory contradict neoclassical economic theory primarily by arguing that: People will not respond to extrinsic rewards People can engage in behaviour purely out of interest and enjoyment Employers are responsible for employee well-being Extrinsic rewards are the most powerful motivator

Bounded rationality

Case study Happy_Cartoon_Man_Using_A_Smartphone Ian is a bargain hunter, and likes to stock up when he sees something on sale. One day he spots a stack of short-dated beef mince with discount stickers on each box, and a sign saying “Purchase limit: 4 per customer.” Brilliant, thinks Ian, I’ll take it home and freeze it! He buys four packs, and goes home happy. For all his good intentions, though, Ian has made a few mistakes. First, he hasn’t realised that the markdown price is still more expensive than what he usually pays at a different supermarket. Second, he’s bought more mince than he actually needs. And finally, he's overestimated his interest in defrosting it and cooking it in the future. Eventually, Ian throws out three of the packs of mince without using them.

If neoclassical economics assumes the worst of people when ascribing motivation to material self-interest, it gives them too much credit when predicting their decision-making ability. Homo economicus would never make Ian’s mistakes, but ordinary people do, and with some regularity. These systematic errors in human reasoning are called heuristics and biases. Many are a result of bounded rationality, a concept proposed by Herbert A. Simon to explain the cognitive and temporal constraints on real world decision-making.

When Ian failed to realise that the discounted meat was more expensive than he pays at another supermarket, he probably compared the discount price to the “regular” marked price on the item in front of him. This is an example of reference dependence, the evaluation of something against a known point of reference. A similar and related phenomenon, the anchoring effect, likely contributed to his over-purchasing: having been prompted that a customer might want more than four packets, Ian perceived four as a reasonable number to buy. Ian’s belief that he would subsequently defrost and cook the meat represents optimism bias or the overconfidence effect – the tendencies for people to expect unrealistically positive future outcomes, and to be exceedingly confident in their own judgements.

Dual-process theories and the motivated tactician

Many explanations of how people respond to the constraints of bounded rationality are dual-process theories. Numerous theories exist under this umbrella, but they have in common the idea that human information processing occurs along two distinct pathways, which can work in concert or independently. Perhaps the best-known characterisation of these pathways is Daniel Kahneman's "fast" and "slow" systems. Fast thinking generally relies on nearly automatic, subcortically-generated processes to provide responses to stimuli, while slow thinking is controlled, deliberative, and driven by the cortical brain.

Dual-process theories are of particular significance in a motivational context, where the implication is that people will only engage in the more effortful thought process when sufficiently motivated to do so. Ian relied on fast thinking when purchasing the mince, but if his budget had been tighter, he might have been motivated to think more carefully about whether it was good value, how many packs he actually needed, and whether he would bother defrosting them one day. The motivated tactician is a thinker who allocates cognitive effort to a task according to their context-specific personal motivation.

Physiological underpinnings

Figure 5. The anterior cingulate cortex is active when a decision-maker is aware that their decision may be incorrect

There is physiological evidence for dual-process theories and the relationship between fast and slow thinking. Brain imaging studies consistently show activation in subcortical regions when respondents are tasked with providing rapid, intuitive responses. Where these responses are incorrect, overriding them shows cortical activation.

The framing effect describes the way that people respond to different descriptions of objectively identical scenarios. This is often expressed in terms of gain versus loss, such as giving someone $10 and asking whether they would prefer an 80% chance to keep $5 or a 20% chance to lose $5. Research shows that people would prefer the first option, despite both options representing an 80% chance of ending up with $5. The framing effect is associated with amygdala activity, and minimised with increased orbital and medial prefrontal cortex activity. Increasing time pressure exacerbates the framing effect, supporting the link between rapid, subcortical processing and more deliberative cortical processing.

One common way to test dual-process thinking is to pose "conflict" problems - those in which the common rapid response is normatively incorrect. Test yourself by quickly responding to the three problems below:

The Cognitive Reflection Test Shane Frederick designed a three question test to assess reflexive thinking. Each question prompts an intuitive response that is normatively incorrect.   1. A bat and a ball cost $1.10 in total. The bat costs $1.00 more than the ball. How much does the ball cost? 2. If it takes 5 machines 5 minutes to make 5 widgets, how long would it take 100 machines to make 100 widgets? 3. In a lake, there is a patch of lily pads. Every day, the patch doubles in size. If it takes 48 days for the patch to cover the entire lake, how long would it take for the patch to cover half of the lake?

The common intuitive answers to these problems are 10 cents, 100 minutes, and 24 days. However, the normatively correct responses are 5 cents, 5 minutes, and 47 days. In conflict problems, the anterior cingulate cortex (see Figure 5) is implicated in detection of the intuitive error, while the right inferior frontal gyrus shows activation when intuitive errors are overridden to generate a normatively correct response.

Practical implications

Does it matter if people think quickly and lazily, and are more prone to error when they don't much care about the question? Perhaps Ian's mistake with the mince was a mere inconvenience, and if the implications had been more serious, he would have employed more effortful thinking. There are two significant problems with this line of reasoning:

1. People are not always aware of the cognitive processes leading to misjudgement, nor the import of a given question. Heuristics and biases are implicated in behaviours such as problem gambling, poor financial management and disordered eating, among others.
2. That these errors occur systematically enables their exploitation by malevolent actors. Ian's supermarket may have imposed the purchase limit not to ensure everyone could buy some mince, but precisely to encourage people like Ian to buy more than they needed.

Living with bounded rationality Although awareness of heuristics and biases helps to overcome their effects, many are extremely persistent. However, this is a young field of study and research into effective mitigation processes is only just beginning to emerge. If this chapter has left you determined to be a more careful thinker, keep in mind that thinking fast often produces the correct response with the least effort, and more deliberative thought processes are not necessarily free of error.

Conclusion

Motivation theory contributes to behavioural economics by explaining why neoclassical economic assumptions fail to predict real human behaviour. Two key areas where real humans differ from Homo economicus are in their responses to monetary reward and in their everyday decision making. Real responses to financial rewards are explained by accounting for intrinsic motivation, elaborated upon in SDT and incorporated into economic theory through MCT. Real human decision making is better understood as constrained by time and cognitive capacity, with people acting as motivated tacticians to allocate their limited information processing resources.

In motivational psychology and behavioural economics, irrational behaviour is, in fact, human behaviour. The problem is not with the way that people behave, but with designing a world based on inaccurate assumptions. Correcting these assumptions can lead to comprehensively superior outcomes. MCT, for example, provides an evidence-based framework to simultaneously generate greater worker productivity and well-being, satisfying both employers and employees. Understanding bounded rationality provides the tools to improve both individual decision making and the environments in which people are asked to make decisions. Insights from heuristics and biases research have been applied in numerous settings, from improving the treatment of psychological disorders to helping people better manage their finances.

At the core of behavioural economics is a rejection of Friedman’s argument that predictive power is all that matters. Society is comprised of Homo sapiens, not Homo economicus. People are happier and healthier when their needs for autonomy, competence and relatedness are supported, than when they are incentivised by controlling external rewards. People exhibit remarkable intuitive judgement to quickly process everyday information, but they err in predictable ways. That predictability enables systematic solutions to the errors, like encouraging people not to grocery shop while hungry, to allocate future pay increases to retirement savings, and to check their stock portfolios far less frequently. In short, motivation theory and behavioural economics offer a pathway to a world actually built for the people who live in it.

See also

• Hidden costs of reward (Book chapter, 2022)
• Loss aversion (Book chapter, 2018)
• Prospect theory (Wikipedia)

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External links

• The decision lab bias index (decisionlab.com)
• The behavioural insights team (Famously known as the first 'Nudge unit')