Beb52a003f0fe264c6577aa9701b3160eae75f33

This course is made possible thanks to our friends at the personal finance app Tink. Tink is a Swedish app that helps you keep track of your income and your expenses. Download it for free to iPhone here and here for Android. By doing so you also support us at Daily Bits Of. Thank you!

Today's lesson comes from our extremely popular course Hacking Human Nature for Good. If you are not one of the thousands of people who have tried it I recommend you to do so. 

Incentives are a widely-used tactic to drive desired behavior, whether it’s parents telling their children to be good or Santa won't bring them any presents, or Airbnb rewarding users with credits when they tell a friend about the service.

In behavioral economics, we define a reward is anything that increases the frequency of a behavior.

There are four basic kinds of rewards:

Money
This type of reward is straightforward. Money is a very powerful motivator for almost everyone. It allows us to eliminate various inconveniences and pains in our lives, and also allows us to indulge in many different pleasures. That’s powerful.

Social
This is probably the most abstract type of reward.  Things like praise, social recognition and status are examples of social rewards. We’re social creatures, so the attention and respect of others can be a powerful motivator.

Things
Things include tangible objects such as electronics, food, or gifts. An extra 500 MB on Dropbox for signing up a friend is classic use of a tangible incentive.

Points
Points are representations of achievements, progress, and relative standing to other people. In simpler terms, points are progress indicators.

A note of caution
Even though money is an extremely powerful incentive, it does have its psychological drawbacks. It changes the nature of the relationship between the two parties involved. Just imagine how weird it would feel if a friend of yours plunked a $20 bill down on the table after joining you for Christmas dinner at your house. This action feels strange because the two of you have a social relationship, but the money re-frames the interaction as a transactional one.  

Uri Gneezy ran a famous study that illustrates the way in which money can change relationships. A daycare in Israel started charging a fee to parents who were late to pick up their children. As a result, the number of late-coming parents increased (1). Without the fine, parents would arguably feel guilty about making the daycare providers wait. By attaching a monetary amount to the act of being late, parents no longer had to feel guilty because it was reframed as a transaction versus a social interaction. In fact, even after the fee was removed, late pick-ups did not go back to their original (lower) rate.  This shows that once this reframing from relational to transactional occurs, it can be difficult, if not impossible, to shift it back.


Exercise
Think of examples of incentives used for your favorite products. What type of incentives are they?

For more tips from this author on how to design ideal incentives, including product videos, see here.

References
(1) Gneezy, U., & Rustichini, A. (2000). A fine is a price. The Journal of Legal Studies, 29(1), 1-17. doi:10.1086/468061