An incentive is not an objective fact but a subjective interpretation

From Jean Tirole and Intrinsic and Extrinsic Motivation by Alex Tabarrok

Although not central to his work, one of my favorite papers of today’s Nobel prize winner, Jean Tirole, is Extrinsic and Intrinsic Motivation (written with Roland Benabou). In this paper, Tirole and Benabou try to resolve the economist’s intuition that incentives motivate with the idea from psychology that incentive schemes can sometimes demotivate. The psychologists argue that extrinsic motivation can reduce intrinsic motivation (but they are not at all clear on why this should be the case). Tirole and Benabou try to produce a similar finding by arguing that in addition to providing motivation an incentive scheme gives the agent, the one being incentivized, some information and the information may undermine the motivation.

For example, if I tell my son. “If you get an A in math, I will give you $1000.” What does my son conclude?

My father must think math is very important for my future to offer me $1000. My father is smart. I will work hard.

This is the message that I hope to send. But my son knows that I know something about math and also that I know something about him and he may use this knowledge to make a very different inference.

If my father thinks I need $1000 to get an A, math must be very hard or I must lack talent. I will work for an A this year but next year I should probably not sign up for advanced math classes.

Or perhaps he infers

If my father is offering me $1000 to do the right thing , he must not trust my judgment.

Or perhaps

My father is trying to use his money to control me. I rebel!

Thus reward has two effects a pure incentive effect (holding information constant) and an inference effect. Notice that the inference effect depends on the context. Thus, without knowing the context–how the father gets along with the son and their history of interaction–we can’t know what the effect of the “incentive” will be. Thus I have argued that “an incentive is not an objective fact but a subjective interpretation.”

An interesting discussion and insight and one that spills over into other arenas. It is one thing to know that humans inevitably respond to incentives, it is quite another to understand what constitutes an incentive. As I have mentioned elsewhere, diversity has the benefit of increasing systemic variation which tactically decreases efficiency but strategically potentially improves adaptability and effectiveness. It is not that there is a tradeoff between pure homogeneity and complete diversity; it is that there is a constantly shifting midpoint that is both hard to quantify and determine and is subject to rapid change given the exogenous circumstances and environment.

I think Tirole's exploration of incentives is one of the sources of productivity for relatively homogenous human systems (cultures) - you have a higher probability of understanding the nature of the workforce and therefore the nature of the incentives to which they respond. Sometimes it is increased compensation or bonuses but sometimes it is time off or private recognition or public recognition or nicer environment or status or increased job security or what not. You have both a higher probability of the incentive structure being effective and a greater probability of it encompassing the majority of employees.

It is a habit of the totalitarian mind, and its greatest weakness, that it regards all people as indistinguishable and therefore interchangeable. That cast of mind is why so many centralized plans go awry. No one person or group of people enjoys omniscience and therefore all centralized plans, particularly with heterogeneous populations and volatile environments, are subject to failure arising from incomprehension of the population's actual goals and aspirations (the preconditions for adequate incentives).