October 25, 2022 • 27 mins
Is a fine really just a price set to allow bad behavior? Barry Schwartz explains the downside of incentives and how they eliminate the idea that doing the right thing is a responsibility.
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Speaker 1 (00:11):
Lessons from the world's top professors anytime, anyplace, World history
examined and science explained. This is one day university. Welcome.
(00:36):
You're listening to the Happiness Formula. I'm your host, Mike Coscarelli.
In our last episode, Barry taught us that the art
of wisdom is not about following the rules, but about
knowing when to break them. Today, he dives into incentives.
Did your parents offer you money if you've got good
grades in school? Mindedn't? How about bonuses at work? Do
(01:00):
you get those? Barry explains that these well meaning incentives
act really warp our decision making and that we should
instead be motivated by what the right thing to do is.
Let's get started. If you're not going to insist on
(01:21):
more and more rules, then what's the alternative. The alternative
is to find a clever system of incentives that will
induce people to do the right thing. In other words,
if we get the incentives right, people will do well
(01:42):
when they do good. And there has to be some
magic set of incentives that will get doctors to practice
good medicine, lawyers to practice good law, teachers to be
excellent teachers, and even if they're not interested in being
good doctors, good lawyers, and good teachers. They will be
rewarded by for being good doctors, good lawyers, and good teachers.
(02:06):
And so whereas rules makes war on what you might
call moral skill, the ability to use judgment, well, what
incentives do is they make war on moral will. And
I'll try to explain what I mean by that. Let
(02:27):
me start with an example. I think in the examples
are good ways to learn general lessons. So in Israel,
some time ago, twenty years ago, maybe there was a
daycare center that was having a problem. The problem was
that parents were coming late to pick up their children
(02:51):
at the end of the day, and of course the
teachers couldn't leave the daycare center until all the children
had been fetched, and the teachers were getting a little
bit annoyed at having to wait for these inconsider or
at parents to show up. So the director of the
day care center, no doubt, having studied some economics, decided
(03:14):
two introduce a set of fines. If you came more
than fifteen minutes late to pick up your child, you
would pay the equivalent of a parking ticket. And he
assumed that creating this cost, this negative incentive would induce
people to come on time. So what do you think happened?
(03:38):
Day by day, week by week with the system of
fines in place, Lateness kept going up. By the end
of two months, lateness was twice as likely as it
had been before the fines were introduced. In other words,
the fines had done exactly the opposite of what they
(04:01):
were intended to do. Why. Well, what the director of
the daycare center eventually figured out is that he thought
he was imposing a fine, but the parents thought he
was introducing a price. In other words, what the parents
(04:24):
took the fine to mean is that, if you're willing
to pay thirty dollars, you have permission to come late.
You can buy an extra half hour of daycare by
paying this thirty dollar fine. So the article that reported
this result was called a fine is a price. Now,
(04:44):
of course, from the point of view of the director
of the daycare center, it was meant to be a fine.
It was a signal to people that they were behaving badly.
But from the point of view of the parents, all
it was was a ticket, a permission ticket to come
late as long as you're willing to pay for it.
And so lateness kept going up higher and higher and higher.
(05:08):
And after two months he abandoned this procedure and went
back to the way things were. No finds, just encouraging
parents to come on time. And what happened now is
that lateness went up even more. Why well, it had
(05:28):
become a better deal. You used to have to pay
to come late night and come late for free. So
that the deep point here is that before the finds
were introduced, parents had a reason to come on time.
It was their obligation to the staff of the daycare center.
They didn't always honor that obligation, but they had a
(05:51):
moral obligation to come on time. When you introduce fines,
you essentially demoralize the behavior of the parents. It is
no longer a question of what they owe to other people.
It's no longer a question of what their responsibilities are
to other people. It is now just a question of
whether they're willing to pay the price. And once you've
(06:14):
done that, it looks as though the moral dimensions of
showing up on time are essentially permanently eliminated, so that
eliminating the fines only increases lateness. And that's the example
of the Israeli daycare center I'll give you one other example.
(06:36):
In uh the late nineties nineties, Switzerland had to decide
where to locate nuclear waste dumps. They had to go somewhere,
and the question was where, And there was going to
be a national vote on the sighting of these nuclear
(06:58):
waste dumps. Now, as you can imagine, nobody wanted the
nuclear waste dumps in their neighborhood and their community, but
they had to go somewhere. The citizenry in Switzerland was
extremely well informed prior to the vote. It was a
topic of substantial debate and conversation, and a couple of
(07:23):
researchers went door to door and asked people, would you
be willing to have a nuclear waste dump in your community? Now,
what do you imagine is the percentage of people who
would say yes? If you conducted that survey in the
United States, would you be willing to have a nuclear
(07:44):
waste dump in your community? I'm guessing that the percentage
of people saying yes would be somewhere around zero. In Switzerland,
fifty of people said yes, they would be willing to
have a nuclear waste dump in their community. And so
(08:04):
the researchers probed, um, do you think nuclear waste dump
will be dangerous. Yeah, I think it's probably dangerous. Do
you think it nuclear waste dump will affect your property value? Oh?
I'm sure it will affect my property value. Well, then
why are you willing to have a nuclear waste dump
(08:26):
in your neighborhood? Well, it has to go somewhere, and
I have responsibilities as a citizen. I hope it doesn't
go here, but I can't, in good conscience give you
a reason why it shouldn't go here. Said yes, They
knocked on other doors, and instead of asking would you
(08:50):
be willing to have a nuclear waste dump in your community,
they asked this question. If we gave you the equivalent
of six weeks pay every year, would you be willing
to have a nuclear waste dump in your community? So,
these people had two reasons to say yes. One reason
(09:11):
was their responsibilities as as citizens of Switzerland. The second
reason was they were getting paid a very substantial amount
of money. It's compensation for having the nuclear waste up.
Surely two reasons are better than one, you would think.
So guess what percentage of people said yes in this
(09:33):
case where they are both discharging their responsibilities as citizens
and on top of that, getting six weeks paid. Instead
of fifty of people saying yes, said yes, half as
many people said yes. Why. Well, we can't be completely
(09:57):
certain about why, but the most likely explanation is this,
when you offer people money to accept something like a
nuclear waste ump, the offer of money is essentially telling people, listen,
I want you to make this decision based on what
(10:17):
you think is in your own best interest. Is it
in your best interest to have a nuclear waste stump
and six weeks salary or not to have a nuclear
waste stump? And the question of what your responsibilities are
as a citizen is no longer on the table. And
it turns out that the overwhelming majority of people think
(10:39):
they'd be better off without six weeks pay and without
a nuclear waste ump than with six weeks pay and
with a nuclear waste um, and so offering them an
incentive to have a nuclear waste up decreases the chances
that they are willing to accept a nuclear waste ump
(11:00):
in their community. And so the general point from both
of these examples is that when you offer people incentives
for doing the right thing, it undermines their commitment to
do the right thing, because it's the right thing. The
reason to come on time in the daycare center is
(11:22):
that it's the right thing to do. The reason to
accept the nuclear waste ump in your community is because
it's the right thing to do. When you offer incentives,
you eliminate any notion that we all are responsible to
do whatever the right thing is in a given situation.
(11:42):
So the way this is sometimes discussed is that motives
compete and instrumental motives. Financial motives crowd out moral motives.
They make moral motives less salient and less significant, which
means that when it comes to using your judgment, you
(12:03):
are less likely to use is your judgment to serve
the well being of your client, your patient, your student. Instead,
you will use your judgments to serve your interests, not theirs.
So that's the lesson, that's the drawback to relying on incentives,
(12:24):
and yet they are pervasive. There's an example taken from
an elementary school in Texas. This is in the era
of big testing, where schools are evaluated on the basis
of how well kids do. And there's a woman named
is Dewey who happens to teach third grade in this
(12:46):
Texas school district. The principle wants to get the test
scores up, and so do the teachers. Scores on these
tests are pretty much taken as the metric for evaluating
how well schools are doing under the Texas accountability system.
(13:07):
Since her school has been doing okay, but only okay.
The state says it's acceptable, but the administration and most
of the teachers are anxious to achieve the more prestigious
evaluation of recognized rather than just acceptable. This requires that
(13:29):
more than eighty percent of students passed these state tests.
The system is data driven and the only data that
ensures officially sanctioned success is scores on the standardized tests.
(13:50):
All third grade students have to pass the reading tests
to move on to fourth grade, and the teachers regularly
administer practice tests throughout the year with the goal, as
I said, of getting eight percent of students to pass
the test. M So Ms Dewey, who has been teaching
for twenty years, listens one day as a consultant hired
(14:14):
by the district explains how to use the data from
the practice tests. Using the data, says the consultant, you
can identify and focus on the kids who are close
to passing. She calls these kids the bubble kids. To
(14:35):
make this concept very tangible to the teachers, the consultant
passes out markers in three colors green, yellow, and red.
Now take out your classes last benchmark scores and divide
your students into three groups. Color the safe cases, the
kids who will definitely pass green. Don't waste your time
(14:59):
teaching them because they're already going to pass. Look at
the kids who have no chance of passing this year
and the kids who don't count kids with learning disabilities,
and color these kids red, because no matter what you do,
these kids are not gonna pass the standardized test. Now
you've got the third group, the ones who can pass
(15:22):
with a little extra help. Color their names yellow. These
are the kids you should be spending your time with.
You should focus your attention on the yellow kids, the
bubble kids. They'll give you the biggest return on your investment.
Don't concentrate on the best, on the smartest kids to
(15:45):
enhance their education. Don't concentrate on the neediest kids, the
ones who most you can most use your intervention. Concentrate
on the kids who are on the bubble because those
are the ones for whom a modest increase in performance
will make the difference between an a sceptible school and
(16:06):
are recognized school. She was appalled. A few years later
she was no longer working in the Texas school system.
It's time for a quick break. But when we come back,
how paying ceo is the big bucks isn't always the
best decision for the company. It is increasingly the case
(16:44):
that the especially at high levels in financial enterprises, the
majority of compensation is paid in the form of bonuses
rather than in the form of salary. Bonuses can be
five or ten times salary, and bonuses are come you
(17:05):
did on the basis of the performance of the individual
and the performance of the company. And you will see
in every year when the financial publications published the you
know whatever hundred highest paid CEOs, you'll see that some
CEO gets a salary of a mirror one million dollars
(17:27):
I use mere sarcastically, of course, and a bonus of
eleven million dollars. Now, what determines the bonus is the
behavior of the company stock. So if you are interested
in maximizing your compensation, what you want to do is
(17:50):
maximize the value of the company stock. What maximizes the
value of the company stock in the short term may
well not be what's in the best interest of the
company in the long term, but you don't really care
about the long term because by the time your company
suffers from your foolish decisions that raised the value of
(18:11):
company stock in the short term, you'll be long gone.
And so what this system does is push in the
direction of incredibly short term thinking, because people are compensated
on the basis of the company's short term performance. And
when this kind of a scheme for compensating high level
(18:34):
executives was introduced, people thought it was a miracle of
financial engineering, because now you know, leaders of companies only
got paid a lot if the company did very well.
They didn't have to worry about CEO s taking three
hour four martini lunches because how much they got paid
dependent on how well the company did, which in turn
(18:56):
depending on how hard and how smart they worked. And
what nobody realized is that what this was encouraging was
extremely hard work to produce extremely short term gains, often
with a massive long term price lying down the road. Nonetheless,
again and again this happens again and again. People fail
(19:18):
to learn the lesson. The lesson they learn is not
that financial incentives don't work. The lesson they learn is
that dumb financial incentives don't work. But I'm going to
create smart ones, and immediately people find a way to
game the system and turn the smart ones into dumb ones.
(19:38):
And so think back to the bubble kids I talked
about just a few minutes ago. There's an even better
way to increase the chances that kids will pass these
tests in uh elementary school. Instead of giving them extra training,
you can sneak into the office at night and change
(20:00):
answers on the kids exams. And this, of course is
what has happened in several different school districts around the country.
The biggest scandal I think was in Georgia, but it
wasn't only in Georgia. Teachers would come in and erase
the some wrong answers and replace them with right answers,
(20:23):
so that the kids scores on these tests worse higher
than they would have been without cheating. You don't even
have to go through the motions of teaching kids how
to take the test. You can just change the test answers.
In my own world academic higher education, we see the
same thing happening more and more universities and colleges feel
(20:51):
that they have to take teaching undergraduates seriously. This may
seem obvious to you if you're an outsider to higher education,
but lots of institutions of higher education are all about
nurturing research, reputations, and productivity, and the students pay the freight.
(21:14):
But the faculty aren't there to teach the students, they're
there to do their own research. Well, this has become
increasingly unacceptable, as I guess, the price of going to
college keeps going up, so more and more institutions are
insisting that they are holding teachers accountable. Now, the question
is how do you evaluate whether a given college teacher
(21:36):
is doing a good job or not? And the answer
is you give students course evaluations to fill out. How
much do you think you learned, how much did you
enjoy the class? Would you take another class with this person?
Blah blah blah those kinds of questions. Fine, here's the problem.
Over the last fifteen years or so, a kind of
(21:59):
understanding has developed between teachers and students. And the understanding
is like this, the student is saying not in so
many words, here's the deal, teacher. If you give high
grades and you don't assign much work, I'll give you
(22:20):
a high evaluation. And so, since the teacher wants a
high evaluation and the student wants a high grade and
not too much work, this kind of deal is is
struck without anyone explicitly talking about it, where the courses
are less and less demanding, and the grades are higher
(22:42):
and higher, and the course evaluations are higher and higher,
so that universities can claim that all of their students,
all of their teachers, are excellent at providing students with
high quality education. And so the measuring instrument that has
developed for evaluating the quality of instruct has been successfully
(23:07):
gamed by students and faculty alike, so that whatever it measures,
it is certainly not measuring the quality of instruction. And
there's good evidence actually that higher course evaluations are correlated
with less learning, not more. When you look at students
(23:28):
who have had an introductory course with a popular teacher
students who have had an introductory course with a less
popular teacher, and compare how they do in the next
course and the sequence, the students who have had the
course with a less popular teacher do better in the
next course than the students who had the course with
the mall more popular teacher. So not only does the
(23:51):
course evaluation fail to measure quality of teaching, there's some
reason to think it is actually measuring the opposite of
quality of instruction, and so a. In and again, we
rely on incentives to get people's motives aligned with our goals,
(24:17):
to make it so that what teachers want to do
is what we want them to do, what doctors want
to do is what we want them to do, and
so on. But it never works, it never succeeds h
And it is a poor substitute for having teachers who
want to excite and educate their students, for wanting doctors
(24:40):
who want to cure disease, and he's suffering for for
having lawyers who want to see to it that justice
is done. These incentives are a very poor substitute for
people doing the right thing for the right reason. And,
of course, from Aristotle's point of view, to put not
too fine a point on it, what it means to
(25:03):
be a wise person, what it means to be a
person of character, is not simply that we do the
right things, but that we do them for the right reasons.
We do them because they are the right things, not
because there's someone holding a gun to our heads, and
not because there's somebody dangling a carrot in front of
our noses. We want to be excellent at what we
(25:24):
do because excellence is the aim of our activities in
work and also in our relations with other people. And
so to conclude, working to improve the way our educational, medical, legal,
and financial systems operate, either by regulating them, giving them
(25:50):
more rules, or by incentivizing them will maybe prevent disasters,
but it will not succeed in giving getting us the
excellence that we want. It will move us further from
the excellence we want by undermining people's motivation to do
the right thing as financial advisors, as lawyers, as doctors,
(26:13):
and as teachers. And there you have it. Incentives don't
always encourage the right behavior. I hope you found today's
talk useful. You know I did join us next time
when Barry talks about how to find your calling. The
(26:38):
Happiness Formula from One Day University is a production of
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Lessons from the world's top professors anytime, anyplace, World history
examined and science explained. This is one day university. Welcome.
(00:36):
You're listening to the Happiness Formula. I'm your host, Mike Coscarelli.
In our last episode, Barry taught us that the art
of wisdom is not about following the rules, but about
knowing when to break them. Today, he dives into incentives.
Did your parents offer you money if you've got good
grades in school? Mindedn't? How about bonuses at work? Do
(01:00):
you get those? Barry explains that these well meaning incentives
act really warp our decision making and that we should
instead be motivated by what the right thing to do is.
Let's get started. If you're not going to insist on
(01:21):
more and more rules, then what's the alternative. The alternative
is to find a clever system of incentives that will
induce people to do the right thing. In other words,
if we get the incentives right, people will do well
(01:42):
when they do good. And there has to be some
magic set of incentives that will get doctors to practice
good medicine, lawyers to practice good law, teachers to be
excellent teachers, and even if they're not interested in being
good doctors, good lawyers, and good teachers. They will be
rewarded by for being good doctors, good lawyers, and good teachers.
(02:06):
And so whereas rules makes war on what you might
call moral skill, the ability to use judgment, well, what
incentives do is they make war on moral will. And
I'll try to explain what I mean by that. Let
(02:27):
me start with an example. I think in the examples
are good ways to learn general lessons. So in Israel,
some time ago, twenty years ago, maybe there was a
daycare center that was having a problem. The problem was
that parents were coming late to pick up their children
(02:51):
at the end of the day, and of course the
teachers couldn't leave the daycare center until all the children
had been fetched, and the teachers were getting a little
bit annoyed at having to wait for these inconsider or
at parents to show up. So the director of the
day care center, no doubt, having studied some economics, decided
(03:14):
two introduce a set of fines. If you came more
than fifteen minutes late to pick up your child, you
would pay the equivalent of a parking ticket. And he
assumed that creating this cost, this negative incentive would induce
people to come on time. So what do you think happened?
(03:38):
Day by day, week by week with the system of
fines in place, Lateness kept going up. By the end
of two months, lateness was twice as likely as it
had been before the fines were introduced. In other words,
the fines had done exactly the opposite of what they
(04:01):
were intended to do. Why. Well, what the director of
the daycare center eventually figured out is that he thought
he was imposing a fine, but the parents thought he
was introducing a price. In other words, what the parents
(04:24):
took the fine to mean is that, if you're willing
to pay thirty dollars, you have permission to come late.
You can buy an extra half hour of daycare by
paying this thirty dollar fine. So the article that reported
this result was called a fine is a price. Now,
(04:44):
of course, from the point of view of the director
of the daycare center, it was meant to be a fine.
It was a signal to people that they were behaving badly.
But from the point of view of the parents, all
it was was a ticket, a permission ticket to come
late as long as you're willing to pay for it.
And so lateness kept going up higher and higher and higher.
(05:08):
And after two months he abandoned this procedure and went
back to the way things were. No finds, just encouraging
parents to come on time. And what happened now is
that lateness went up even more. Why well, it had
(05:28):
become a better deal. You used to have to pay
to come late night and come late for free. So
that the deep point here is that before the finds
were introduced, parents had a reason to come on time.
It was their obligation to the staff of the daycare center.
They didn't always honor that obligation, but they had a
(05:51):
moral obligation to come on time. When you introduce fines,
you essentially demoralize the behavior of the parents. It is
no longer a question of what they owe to other people.
It's no longer a question of what their responsibilities are
to other people. It is now just a question of
whether they're willing to pay the price. And once you've
(06:14):
done that, it looks as though the moral dimensions of
showing up on time are essentially permanently eliminated, so that
eliminating the fines only increases lateness. And that's the example
of the Israeli daycare center I'll give you one other example.
(06:36):
In uh the late nineties nineties, Switzerland had to decide
where to locate nuclear waste dumps. They had to go somewhere,
and the question was where, And there was going to
be a national vote on the sighting of these nuclear
(06:58):
waste dumps. Now, as you can imagine, nobody wanted the
nuclear waste dumps in their neighborhood and their community, but
they had to go somewhere. The citizenry in Switzerland was
extremely well informed prior to the vote. It was a
topic of substantial debate and conversation, and a couple of
(07:23):
researchers went door to door and asked people, would you
be willing to have a nuclear waste dump in your community? Now,
what do you imagine is the percentage of people who
would say yes? If you conducted that survey in the
United States, would you be willing to have a nuclear
(07:44):
waste dump in your community? I'm guessing that the percentage
of people saying yes would be somewhere around zero. In Switzerland,
fifty of people said yes, they would be willing to
have a nuclear waste dump in their community. And so
(08:04):
the researchers probed, um, do you think nuclear waste dump
will be dangerous. Yeah, I think it's probably dangerous. Do
you think it nuclear waste dump will affect your property value? Oh?
I'm sure it will affect my property value. Well, then
why are you willing to have a nuclear waste dump
(08:26):
in your neighborhood? Well, it has to go somewhere, and
I have responsibilities as a citizen. I hope it doesn't
go here, but I can't, in good conscience give you
a reason why it shouldn't go here. Said yes, They
knocked on other doors, and instead of asking would you
(08:50):
be willing to have a nuclear waste dump in your community,
they asked this question. If we gave you the equivalent
of six weeks pay every year, would you be willing
to have a nuclear waste dump in your community? So,
these people had two reasons to say yes. One reason
(09:11):
was their responsibilities as as citizens of Switzerland. The second
reason was they were getting paid a very substantial amount
of money. It's compensation for having the nuclear waste up.
Surely two reasons are better than one, you would think.
So guess what percentage of people said yes in this
(09:33):
case where they are both discharging their responsibilities as citizens
and on top of that, getting six weeks paid. Instead
of fifty of people saying yes, said yes, half as
many people said yes. Why. Well, we can't be completely
(09:57):
certain about why, but the most likely explanation is this,
when you offer people money to accept something like a
nuclear waste ump, the offer of money is essentially telling people, listen,
I want you to make this decision based on what
(10:17):
you think is in your own best interest. Is it
in your best interest to have a nuclear waste stump
and six weeks salary or not to have a nuclear
waste stump? And the question of what your responsibilities are
as a citizen is no longer on the table. And
it turns out that the overwhelming majority of people think
(10:39):
they'd be better off without six weeks pay and without
a nuclear waste ump than with six weeks pay and
with a nuclear waste um, and so offering them an
incentive to have a nuclear waste up decreases the chances
that they are willing to accept a nuclear waste ump
(11:00):
in their community. And so the general point from both
of these examples is that when you offer people incentives
for doing the right thing, it undermines their commitment to
do the right thing, because it's the right thing. The
reason to come on time in the daycare center is
(11:22):
that it's the right thing to do. The reason to
accept the nuclear waste ump in your community is because
it's the right thing to do. When you offer incentives,
you eliminate any notion that we all are responsible to
do whatever the right thing is in a given situation.
(11:42):
So the way this is sometimes discussed is that motives
compete and instrumental motives. Financial motives crowd out moral motives.
They make moral motives less salient and less significant, which
means that when it comes to using your judgment, you
(12:03):
are less likely to use is your judgment to serve
the well being of your client, your patient, your student. Instead,
you will use your judgments to serve your interests, not theirs.
So that's the lesson, that's the drawback to relying on incentives,
(12:24):
and yet they are pervasive. There's an example taken from
an elementary school in Texas. This is in the era
of big testing, where schools are evaluated on the basis
of how well kids do. And there's a woman named
is Dewey who happens to teach third grade in this
(12:46):
Texas school district. The principle wants to get the test
scores up, and so do the teachers. Scores on these
tests are pretty much taken as the metric for evaluating
how well schools are doing under the Texas accountability system.
(13:07):
Since her school has been doing okay, but only okay.
The state says it's acceptable, but the administration and most
of the teachers are anxious to achieve the more prestigious
evaluation of recognized rather than just acceptable. This requires that
(13:29):
more than eighty percent of students passed these state tests.
The system is data driven and the only data that
ensures officially sanctioned success is scores on the standardized tests.
(13:50):
All third grade students have to pass the reading tests
to move on to fourth grade, and the teachers regularly
administer practice tests throughout the year with the goal, as
I said, of getting eight percent of students to pass
the test. M So Ms Dewey, who has been teaching
for twenty years, listens one day as a consultant hired
(14:14):
by the district explains how to use the data from
the practice tests. Using the data, says the consultant, you
can identify and focus on the kids who are close
to passing. She calls these kids the bubble kids. To
(14:35):
make this concept very tangible to the teachers, the consultant
passes out markers in three colors green, yellow, and red.
Now take out your classes last benchmark scores and divide
your students into three groups. Color the safe cases, the
kids who will definitely pass green. Don't waste your time
(14:59):
teaching them because they're already going to pass. Look at
the kids who have no chance of passing this year
and the kids who don't count kids with learning disabilities,
and color these kids red, because no matter what you do,
these kids are not gonna pass the standardized test. Now
you've got the third group, the ones who can pass
(15:22):
with a little extra help. Color their names yellow. These
are the kids you should be spending your time with.
You should focus your attention on the yellow kids, the
bubble kids. They'll give you the biggest return on your investment.
Don't concentrate on the best, on the smartest kids to
(15:45):
enhance their education. Don't concentrate on the neediest kids, the
ones who most you can most use your intervention. Concentrate
on the kids who are on the bubble because those
are the ones for whom a modest increase in performance
will make the difference between an a sceptible school and
(16:06):
are recognized school. She was appalled. A few years later
she was no longer working in the Texas school system.
It's time for a quick break. But when we come back,
how paying ceo is the big bucks isn't always the
best decision for the company. It is increasingly the case
(16:44):
that the especially at high levels in financial enterprises, the
majority of compensation is paid in the form of bonuses
rather than in the form of salary. Bonuses can be
five or ten times salary, and bonuses are come you
(17:05):
did on the basis of the performance of the individual
and the performance of the company. And you will see
in every year when the financial publications published the you
know whatever hundred highest paid CEOs, you'll see that some
CEO gets a salary of a mirror one million dollars
(17:27):
I use mere sarcastically, of course, and a bonus of
eleven million dollars. Now, what determines the bonus is the
behavior of the company stock. So if you are interested
in maximizing your compensation, what you want to do is
(17:50):
maximize the value of the company stock. What maximizes the
value of the company stock in the short term may
well not be what's in the best interest of the
company in the long term, but you don't really care
about the long term because by the time your company
suffers from your foolish decisions that raised the value of
(18:11):
company stock in the short term, you'll be long gone.
And so what this system does is push in the
direction of incredibly short term thinking, because people are compensated
on the basis of the company's short term performance. And
when this kind of a scheme for compensating high level
(18:34):
executives was introduced, people thought it was a miracle of
financial engineering, because now you know, leaders of companies only
got paid a lot if the company did very well.
They didn't have to worry about CEO s taking three
hour four martini lunches because how much they got paid
dependent on how well the company did, which in turn
(18:56):
depending on how hard and how smart they worked. And
what nobody realized is that what this was encouraging was
extremely hard work to produce extremely short term gains, often
with a massive long term price lying down the road. Nonetheless,
again and again this happens again and again. People fail
(19:18):
to learn the lesson. The lesson they learn is not
that financial incentives don't work. The lesson they learn is
that dumb financial incentives don't work. But I'm going to
create smart ones, and immediately people find a way to
game the system and turn the smart ones into dumb ones.
(19:38):
And so think back to the bubble kids I talked
about just a few minutes ago. There's an even better
way to increase the chances that kids will pass these
tests in uh elementary school. Instead of giving them extra training,
you can sneak into the office at night and change
(20:00):
answers on the kids exams. And this, of course is
what has happened in several different school districts around the country.
The biggest scandal I think was in Georgia, but it
wasn't only in Georgia. Teachers would come in and erase
the some wrong answers and replace them with right answers,
(20:23):
so that the kids scores on these tests worse higher
than they would have been without cheating. You don't even
have to go through the motions of teaching kids how
to take the test. You can just change the test answers.
In my own world academic higher education, we see the
same thing happening more and more universities and colleges feel
(20:51):
that they have to take teaching undergraduates seriously. This may
seem obvious to you if you're an outsider to higher education,
but lots of institutions of higher education are all about
nurturing research, reputations, and productivity, and the students pay the freight.
(21:14):
But the faculty aren't there to teach the students, they're
there to do their own research. Well, this has become
increasingly unacceptable, as I guess, the price of going to
college keeps going up, so more and more institutions are
insisting that they are holding teachers accountable. Now, the question
is how do you evaluate whether a given college teacher
(21:36):
is doing a good job or not? And the answer
is you give students course evaluations to fill out. How
much do you think you learned, how much did you
enjoy the class? Would you take another class with this person?
Blah blah blah those kinds of questions. Fine, here's the problem.
Over the last fifteen years or so, a kind of
(21:59):
understanding has developed between teachers and students. And the understanding
is like this, the student is saying not in so
many words, here's the deal, teacher. If you give high
grades and you don't assign much work, I'll give you
(22:20):
a high evaluation. And so, since the teacher wants a
high evaluation and the student wants a high grade and
not too much work, this kind of deal is is
struck without anyone explicitly talking about it, where the courses
are less and less demanding, and the grades are higher
(22:42):
and higher, and the course evaluations are higher and higher,
so that universities can claim that all of their students,
all of their teachers, are excellent at providing students with
high quality education. And so the measuring instrument that has
developed for evaluating the quality of instruct has been successfully
(23:07):
gamed by students and faculty alike, so that whatever it measures,
it is certainly not measuring the quality of instruction. And
there's good evidence actually that higher course evaluations are correlated
with less learning, not more. When you look at students
(23:28):
who have had an introductory course with a popular teacher
students who have had an introductory course with a less
popular teacher, and compare how they do in the next
course and the sequence, the students who have had the
course with a less popular teacher do better in the
next course than the students who had the course with
the mall more popular teacher. So not only does the
(23:51):
course evaluation fail to measure quality of teaching, there's some
reason to think it is actually measuring the opposite of
quality of instruction, and so a. In and again, we
rely on incentives to get people's motives aligned with our goals,
(24:17):
to make it so that what teachers want to do
is what we want them to do, what doctors want
to do is what we want them to do, and
so on. But it never works, it never succeeds h
And it is a poor substitute for having teachers who
want to excite and educate their students, for wanting doctors
(24:40):
who want to cure disease, and he's suffering for for
having lawyers who want to see to it that justice
is done. These incentives are a very poor substitute for
people doing the right thing for the right reason. And,
of course, from Aristotle's point of view, to put not
too fine a point on it, what it means to
(25:03):
be a wise person, what it means to be a
person of character, is not simply that we do the
right things, but that we do them for the right reasons.
We do them because they are the right things, not
because there's someone holding a gun to our heads, and
not because there's somebody dangling a carrot in front of
our noses. We want to be excellent at what we
(25:24):
do because excellence is the aim of our activities in
work and also in our relations with other people. And
so to conclude, working to improve the way our educational, medical, legal,
and financial systems operate, either by regulating them, giving them
(25:50):
more rules, or by incentivizing them will maybe prevent disasters,
but it will not succeed in giving getting us the
excellence that we want. It will move us further from
the excellence we want by undermining people's motivation to do
the right thing as financial advisors, as lawyers, as doctors,
(26:13):
and as teachers. And there you have it. Incentives don't
always encourage the right behavior. I hope you found today's
talk useful. You know I did join us next time
when Barry talks about how to find your calling. The
(26:38):
Happiness Formula from One Day University is a production of
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