“Large Stakes and Big Mistakes” – An analysis of incentives

There is the expectation that individuals perform better, the greater the incentive. We believe this is true because (1) we believe the performance-contingents increase motivation and effort in the individuals and (2) that these increased features result in better performance.

Although, it doesn’t always apply. For example, between New York Taxi drives, the higher the payment, the lower the number of hours worked. Here, the issue is that the drives have a target income in mind, therefore the higher the payment, the lower the number of hours they need to work to achieve the predefined income.


Why is it important to offer the right amount of incentives?

In our economy, we have quite often principal-agent relationships. In which the principal asks for and the agent completes the task. Principals hire agents because it confers efficiency, either through skill and expertise or through lower opportunity cost of time or effort to the principal.

Although, given that incentives also represent an opportunity cost for the principal – it can be costly to pay incentives! -, it is relevant to know at which point raising contingent incentives may be losing money.


In 2009, Dan Ariely published a paper entitled Large Stakes and Big Mistakes, the researchers studied the performance of individuals in various tasks under incentive schemes and came to interesting results.

I summary it briefly.


No Payment. Not having a monetary connection changes the perceived nature of the task. The agent now sees it as a voluntary work and will perform better.

Low Payment. Offering low payment results in low motivation and effort. Often, performing worse off than in no payment conditions. If you can’t pay enough, don’t pay at all.

Medium Payment. As in many other things, the balanced option is the one with the best output. Offering a medium payment leads to the best performance.

High Payment. Surprisingly, in many tasks, the high payment one was the one with the lower performance. One reason might be because we shift from “automatic” to “conscious” task performance, which is less productive. Another reason is that high incentives can cause “choking under pressure” resulting in a lower performance. The negative effects are more notorious in cognitive tasks, especially creative ones. In physical tasks higher incentives, actually increased performance.

Choking under pressure is more likely in front of an audience and the research did not find any evidence that individuals have different propensity to choke. The likelihood has to do with task-specific characteristics.


“Yerkes Dodson Law”

Paying beyond an optimal level of incentives can lead to decrement in performance. The optimal level varies on the task, the individual’s personality and his experience with the task.

The larger the experience, the larger the optimal amount, particularly if previously the individual had high incentives for performing the task.


It is interesting to see the impact that high incentives can have on performance. Understanding these effects helps to improve performance and prevents money wastes.

What is your experience with incentives?


This article is not sponsored.

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