Passion Struck with John R. Miles - Uri Gneezy on How to Create Effective Rewards Systems EP 269

Episode Date: March 21, 2023

Uri Gneezy, an economics and strategy professor at the Rady School of Management at UC San Diego, joins me to discuss his new book "Mixed Signals: How Incentives Really Work." We explore how we can design reward systems that minimize unintended outcomes and maximize happiness, well-being, wealth, and success. In This Episode, Uri Gneezy And I Discuss His Book "Mixed Signals" If you're interested in learning more about the powerful role of rewards and incentives, then you will definitely want to listen to this episode! Gneezy provides a surprising and thought-provoking perspective on the matter, and his insights will challenge everything you think you know about incentives. So saddle up. It's about to get interesting! Full show notes and resources can be found here: https://passionstruck.com/uri-gneezy-create-effective-reward-systems/  Brought to you by Green Chef. Use code passionstruck60 to get $60 off, plus free shipping!” Brought to you by Indeed. Head to https://www.indeed.com/passionstruck, where you can receive a $75 credit to attract, interview, and hire in one place. --► For information about advertisers and promo codes, go to: https://passionstruck.com/deals/  Like this show? Please leave us a review here -- even one sentence helps! Consider including your Twitter or Instagram handle so we can thank you personally! --► Prefer to watch this interview: https://youtu.be/v430a4Jr97g  --► Subscribe to Our YouTube Channel Here: https://www.youtube.com/c/JohnRMiles Want to find your purpose in life? I provide my six simple steps to achieving it - passionstruck.com/5-simple-steps-to-find-your-passion-in-life/ Want to hear my best interviews from 2022? Check out episode 233 on intentional greatness and episode 234 on intentional behavior change. ===== FOLLOW ON THE SOCIALS ===== * Instagram: https://www.instagram.com/passion_struck_podcast * Facebook: https://www.facebook.com/johnrmiles.c0m  Learn more about John: https://johnrmiles.com/   

Coming up next on the PassionStrike podcast. How can we do better in the future? We can do better in the future by learning from this and using it. And those are the successful companies. At the end of the day, you shouldn't be afraid of failing and you shouldn't punish your employees or people for failing if we didn't happen because of laziness. Welcome to PassionStrike.

Hi, I'm your host, John Armiles. And on the show, we decipher the secrets, tips, and guidance of the world's most inspiring people and turn their wisdom into practical advice for you and those around you. Our mission is to help you unlock the power of intentionality so that you can become the best version of yourself. If you're new to the show, I offer advice and answer listener questions on Fridays. We have long form interviews the rest of the week with guest-ranging from astronauts to authors, CEOs, creators, innovators, scientists, military leaders, visionaries, and athletes. Now, let's go out there and become PassionStruck. Hello everyone and welcome back to episode 269 of PassionStruck,

recently ranked by Interview Valet as the fourth best podcast for conversation. And thank you to each and every one of you who comes back weekly to listen and learn, had to live better, be better, and impact the world. After you're new to the show, thank you so much for being here, or you simply want to introduce this to a friend or family member, we now have episode starter packs with your collections of our fans, favorite episodes that we organize in the convenient topics to give any new listener a great way to get acclimated to everything we do here on the show. Either go to Spotify or PassionStruck.com slash starter packs to get started. And in case you missed it, last week I interviewed three different authors.

The first was Charlotte Auburn Burgess who's a professor at the Stanford D School and we talked about why you need a personal manifesto. I also interviewed Dr. Mike Rucker, the author of the new book, The Fun Habit, and we discuss the importance of adult play. And lastly, Lisa Honeck-Booksbaum about her new book, Soaring Into Strength. Please check them all out in case you haven't. And thank you so much for your continued support of the show. Those ratings and reviews go such a long way to increasing our popularity, but more importantly, bringing more people into the passion-struck community,

where we can give them hope, meaning, and connection. Now, let's talk about today's episode. Incentives are designed to influence behavior, but they often fail because they send mixed signals. How do you promote teamwork, but reward individual success? Or encourage innovation, but then punish failure? Today's guest, behavioral economist, Bernie Canese, is the author of the new book,

Mixed Signals, How Incentives Really Work. During our interview, Bernie and I discuss how to design effective incentives while aligning them with goals, using insights from behavioral economics, game theory, psychology, and field work. He highlights how the right incentives can encourage people to make positive changes, such as driving more fuel-efficient cars, being more innovative at work, and even going

to the gym. The key is to ensure that incentives send a clear sign signal with the desired behavior. Bergen Easy is the professor of economics and strategic management at the Rady School of Management UC San Diego. As a researcher, Geneasy focuses on putting behavioral economics to work in the real world where theory can meet application. In addition to typical laboratory and field studies, Bergen is working with several firms,

conducting experiments in which they're using the findings from behavioral economics. They help companies achieve their traditional goals in non-traditional ways. Thank you for choosing PassionStruck and choosing me to be your host and guide on your journey to creating an intentional life. Now, let that journey begin. I am so honored and ecstatic today to have Dr. Erick and EZ on the Passion Start podcast.

Welcome, Erick. Thank you. Great to be here. Well, I wanted to start off the interview by congratulating you on the launch of your new amazing book called Mixed Signals, How Incentives Really Work. Congratulations. Thank you. Thank you. It's an exciting journey.

Well, I absolutely loved it. And as we discussed, prior to the interview, I loved the illustrations that are throughout it. And I thought they did such a great job and help and complement your different chapters. So well done. Thank you. I think that it's great to have a visual because we read and it's hard to grab our attention. And once we have something like this, you have a cartoon that illustrates the point. You think that helps me remember it and I hope it will also help the readers remember the takeaways

in a fun way. I wanted to start out with I have spent a lot of time interviewing many behavioral scientists on the podcast. And much of the study of behavioral economics started in lab environments. But as I researched you, you specialize in field experiments. And I was hoping that you could explain the difference between the two, how they complement each other. And perhaps also discuss what your role is with the behavior

change for good initiative. Experiments is one tool. It's a tool that we're using. It used to be the group when I did my PhD in the late 90s when I received it, I was called an experimental economist because we identified ourselves with the tool. But to the same time, there was another group that called themselves the herbal economist and they think that they were right. to the same time there was another group that called themselves the herbal economist and they think that they were right.

Now very few people called themselves experimental economies because we use other tools, so surveys, real data, theory, many ways in which you can study the behavior of people. And experiments are just one tool that we do. I think that it was a useful thing to do back in the 70s and 80s when they started, because they wanted to distinguish themselves from other ways that economists did. And that was a very revolutionary thing to do at a time. But now we are mature enough to say, look, we are interested in the evolution of economics. And it's actually funny because when I talk with normal people, not economists,

not economists, the other economists ask me, are there any other kinds of economists? And they think they're right. So if you look back enough, you'll see, so Adam Smith would have been considered the behavioral economists. And all the people up to basically the revolution that happened after Second World War with neoclassical economics, I think where the behavioral economists understood that we care about the behavior of people. That's what we care about. And we can approach it with different tools. We can approach it with experiments, or with real data,

or with theory, or whatever we want. But at the end of the day, we care about how people behave. OK, and before we dive headfirst into incentives, I wanted to jump to another topic topic because I found a great research paper that you did in 2021. You co-wrote it, but it's about how individuals make time-money trade-offs in labor context. And in the paper, they're either asked to work to earn money or to pay money to avoid work. Can you tell us about the results from the study?

Yes, two marketing people here, Garland Wendy, two good friends, one of them is a graduate student. I think that every good behavioral study that they did starts with the real life observation. So I can tell you about myself that I do stuff at the house, say at the garden or fixing my deck or things like that, even when I don't enjoy them just to avoid paying for it. But then you ask yourself would you do the same to go and

work on the deck or the garden of your neighbor, of course not, right? I wouldn't do it in order to be paid. So imagine that I can fix something for $200. Well, I'll rather do it myself. But I would never go and do the work for some for my neighbor, right? Something that is called mental accounting in economics that is very very clear in this case that I'm willing to work in order to avoid paying money, but I'm not going to do the same work for someone else in order to earn the money. So it's kind of a weird thing that I think many of us have, right? So many of us are reluctant to hire people to fix stuff.

Despite the fact that it's much more efficient, I can do consulting and earn more money than a gardener. A gardener earns $15 an hour, $20 an hour. I earn more if I do consulting, but yet I feel bad when I spend them on this way. So that was our starting point. And then we started to look at different aspects of it. In the paper that you mentioned, basically we said,

look, say that we need you to work for us for 10 hours. I'm not sure, I mean, do we have to pay? People said, $100. They calculated $10 an hour, and they said, if you want us to work for you for 10 hours, it will cost you $100. Then we asked the different group of people, told them, look, we have $100 to spend

how many hours you're willing to work for it? And then people said, well, three or four hours, which doesn't make sense, right? Because now they are saying the value of an hour of work for us is $25 instead of $10. So we found that if we give you the number of hours, you basically multiply or hourly wage by this, and we get quite a flat line.

So we ask you for one hour, you say $10,, five hours you say $50, $10, $100. That was on the other end when we ask you how much, if we pay $10, you're willing to work for us, you'll say one hour. So that's still the same. But if we ask you five hours, we already say only three hours, which implies that your hourly wage becomes much higher. We ask you for $100 how much are you going to work for us? You say much less than the 10 hours that the title was. And I think that it's interesting. We don't really know how to trade time and money in a sensible way. I think it is because as you wrote in the article, the thing about time is you can't go back and recoup it. So it is interesting how people value the two

and which one they put their preference on. So I just thought, yeah. We have this time is money. Well, it's not right. You cannot go to the ATM, like you said. You can't go to the ATM and withdraw some time. And time is in a sense, the great equalizer. The richest people in the world don't have more money

denied the, sorry, they don't have more money than I do. Sorry, they do have much more money than I do. They don't have more time than I do. Right? So time is kind of fixed. You can't take it with you. It cannot save it. It's really fundamentally different than they think

that the psychology of it is very different. Well, I wanted to use this topic to introduce incentives, because if you look across all the countries in the world, the United States is in the bottom three of work-life balance. And you're seeing now all this employee disengagement because I think a big thing about it is even when you do have PTO or vacation, many Americans do not take it. And so I think now companies are trying to force them to take it, but it doesn't seem

as though the incentives that they're using are paying off. And I was wondering if you had any thoughts on this. That's actually a surprising question to start the discussion of incentives and they really And I was wondering if you had any thoughts on this. That's actually a surprising question to start the discussion of incentives and they really like it, right? Because you're saying maybe we're getting too much incentives to work in the US and relative to other places from unemployment in order to keep getting your unemployment. So you really have to go on vacation, so stop looking forward. In the US, we do work a lot. My daughter is a software engineer and she gets, I think, 10 days a year or something like that as vacation, which is very little. And I think that many people, like you mentioned, during COVID really said, well, maybe they're recalculating, especially the other people recalculating, and maybe we don't

want to do this. I don't know where it's going to end. It's an interesting dynamic that is still going on, and it's not clear where it's going to end. But it's clear that something about the incentive structure should change in the sense that let me give you one example that I care about if you look at investment bank in say or law firms, people work over their 60, 70, 80 hours a week. And that doesn't make any sense because no one is really effective after 10 hours a day, especially when you need to use your brain. After 15 hours, your marginal value is negative.

You're going to make bad decisions, bad choices. And I think that in many of these cases, the norm became to work so hard. If you know that you're going to be there for 12, 15 hours, you're going to take more coffee breaks, you're going to check your social media, you're going to do some other stuff, you cannot just concentrate. I think that would have been much better if you knew that you have eight hours a day to work and when you're at work, you actually

work. The incentives should be such that it's like that. So if I would have opened a new investment banking or financial advisor company, I would say, look, you're allowed to work only eight hours a day. That way, I think that I could have attracted better people that are willing to work these eight hours a day and then go home and stuff work. I think that would have been great, but that's not the norm now. I think that we all suffer from it. Yes, and the incentives that we've been teaching our children are definitely causing a lot of this as I found out from recent interview I did with Robert Waldinger who leads the Harvard study of adult development and in 2007. amount of millennials and ask them what the number one factor in their happiness would be, and they said it was getting rich. Second, it was getting famous. And they did the study a decade later and came back with almost the same result. And so obviously, that's coming from somewhere

and how they believe they should be leading their lives. Yeah, someone already said that youth who's wasted on young people. So my friend told me a nice story. How do you know that you get older if your friends stop complaining about money and start complaining about health? So when you get older, you see more about the balancing life that it's not just about getting richer.

I think that to a great extent, that's a difference between the US and you mentioned Spain, for richer. I think that to a great extent that's a difference between the US and dimension Spain, for example, I think that in Spain you'll get less of this, if you'll survey the people in Spain, there is probably the data is probably out there, you'll get less of what would make you happy, less would be defined in terms of getting a good job, earning lots of money and things like that, and it would be more getting a good job, earning lots of money and things like that. And it would be more a life balance. Yes, and it's interesting,

the American perspective of the Spaniards were as that they were lazy, but I wonder if you look 20 years down the road who's happier between the two groups and who suffers more burnout. Well, I'm gonna get off of this. I just thought it was a fun conversation to maybe introduce the topic of incentives. But in the book, you begin by describing a situation

speaking of your kids that I think many of us are victims of. We go to a movie or in your case, a theme park like Disney or another event where there is a free entry based on your kids age. And you end up telling a white lie about their age to gain free entry. My question for you is what can we learn about how incentive sends signals from that example? So the story is that my son turned three and that's a great age because that's when they start to communicate and you can talk with them and when they start communicating they also start lying. That's what people do, that's what kids do. And then as a good guy we told them good only bad people lie, so you shouldn't lie. That was fine. Unfortunately my son is not stupid, so we went to Disney World and just after

you turned three and like you said, the casheurit tells us 103 year old it's free and over it's I think if I remember correctly it was 117 dollars. And I immediately said well it's almost three, which is true because it's almost three just from the wrong side right of the three. We, I paid for myself and we went in and then after an hour later my son pulled my shirt and asked me, that you told me that only bad people lie and you just lie, what's the story of it? And that's, that really summarizes the, what the book is about. The book is about the different signals that we say. So I can tell my son one signal is telling my son, look, being honest is important. Good people tell the truth, bad people lie. That's a very strong story that you try to tell your son and send a signal.

But then when you get incentives, in my case, it was added in 17 dollars, you get incentives to lie and you lie, that sends a very different signal to my son. That's the title, mixed signals, because on the one end, they're telling what you should do. And the other end is, you observe what I do in the presence of incentives. And almost every incentive that you can think of actually sends a signal, say that I'm working for you, I'm your employee, I want to be a good worker, all else equal, most of us want

to be good workers, right? But we don't always know what it is. And you can tell me stories about say that I would work for you in fact check. You tell me it's really important for me that you'll get it right, that you'll get only the facts in my book and whatever. But then you incentivize me to finish it fast. What kind of message am I going to get from this? What's the signal to think about? Do you care about quality? Or do you care about me being fast? And of course I'll react to the incentives. Like my son understood that I reacted to the incentives in the entrance to this world,

you should expect me to actually be fast and the quality might be lower because I'll really try to be fast. First of all, because that's the way I'll make more money. But even deeper than that, I'm not really sure that you really care about quality if you're paying me for quantity. So that's the risk of this. That's what my son actually learned. So a few minutes later,

we got to another attraction which was four or above, four-year-old above, and my son said, with anticipation, I'm just over four. So he didn't have any problem to learn from me what you should do when he suits you. Well, the flip side of that is if you're Disney and you know that people are doing this, I think there's a common way that many of us would approach the situation if we were Disney. The easiest way to do it would be to require people to bring some form of identification. That can cause its own difficulties. So how would the solution change based on the use of signal? So like you said, I think Sydney can ask me to bring birth certificate if I want to get the discount, but that's not the way you do in this one big happy family.

You go there, it's the happiest place in the world and everyone should be happy. You should trust me, fight earlier, you should trust me, if I tell you, you should trust me. And by the way, I'm not unique. If you look at Google Analytics, you see the billions of people are asking this question with a B, not exaggerating, right? Asking for ID would work, but that's not the way you go. So if you think about the solution at the Errol Economist, kind of Errol, sounds kind of solution to this,

Disney can actually ask that the kid will say their age. I could have trained my son, look, Ron, we're going together, now you should lie. I could have said it, but that's a very strong already violation of the norm. I don't think that I would have done it for $117. So I really think that Disney could use this in terms of signaling because see, business should understand that I will be less likely to send a signal to my son that he should lie when he gets to the line. So that could be a behavioral solution for that just, we need the child to tell us how old they are. Okay, and staying on this theme of lies,

you also wrote a paper with Marta, Sarah Garcia, to study the ability to detect lies and you developed a new paradigm from your work. What did you both determine? So we tried to look at whether people are good at detecting lies in videos. So we had people recording videos in which they either told the truth or lie. And then we showed these videos to people and tried to see whether people are good at detecting whether the people are saying truth or not. Turns out that people are really bad at detecting lies. So they think they make what we call type 1 and type 2 errors. They believe stuff that they shouldn't and they don't believe stuff that they should. So the first finding is that people are just really bad at detecting

lies and that's consistent with other findings in the literature. Interestingly, people are really overconfident about their ability to detect lies. So the fact that we have that I teach negotiation over here and I talk with my students, I tell them that they shouldn't lie in negotiation, but they shouldn't be naive other people will lie to them. And they're going to be very bad at detecting lies. But they're also going to be very overconfident about their ability to distinguish between a lie and truth. And that's very dangerous when you negotiate, for example, or when you just try to figure out what people do, that you make this mistake of thinking that you're really

good at it. So I can tell you that they study lies for 15 years now, maybe even a bit more. And I'm not better at detecting lies than anyone else. That's something that I learned about myself. So when I watch these videos, if I don't know what happens, I'm not good at detecting whether it's true or false. What I did learn and what is important to learn is that I'm really bad at it. And that's that in itself is important, right? If you're not overconfident, you know that you're not just not that good and detecting this. Yeah, well, that's really interesting and it makes me think of the topic of gambling where you're probably playing against people at a poker table

who are trying to lie to you in one way or another and it was interesting. I had Annie Duke on the and one way or another. And it was interesting. I had Annie Duke on the podcast. And I asked her being a professional poker player, what differentiates a professional from a novice. And her answer was pretty interesting, is she said, we end up holding about 80% more times than an office would.

There are lots of, I think, that poker I enjoyed playing poker. And poker is a risky game because the feedback that you get is noisy. If I play chess against someone who is better than me, I will lose every game. I'm not a good chess player, I will lose every game. When you play poker and I'm not a great poker player, I play twice a year, I enjoy it, sometimes I get lucky. Not so I can play against the best player in the world, within now I can do better than that player. Because it's noisy, I might just get really lucky. I can make stupid decisions, which I do, because for example I'm not patient enough, right? So I play

too many hands. and then you can get lucky I can chase stuff and they can get lucky so it's learning is really harder right so when you think about the incentives the incentives push you to understand that in chess Monday when the incentives are clear in chess that I just I shouldn't play against someone who is much better than I will lose all the time with poker. There sometimes you win you remember this meaning mostly we say that we remember losses more than wins but I think that in poker at least for me I win, it's an amazing feeling. And we get the notion that we are much better than we are. And that relates to the line that you said that we are overconfident about our ability. I'm not overconfident about my ability to play chess and definitely over confident about my ability to play poker. Well, I think I could say the same thing about golf

that you said about handling because I could go out there and shoot 100 plus, but if I had one or two good shots, that's what you seem to remember as your takeaway and not how bad you shot on the other ones. Well, that's great. That's interesting, right? Because we do talk about loss of version and now we remember the bad stuff, but maybe when it comes to hobbies, for example, we remember the good stuff, it's interesting. Well, it is interesting.

I interviewed this performance psychologist, Nate Zinser, who has been teaching at West Point for 20, 25 years, and he has a book about confidence. And he said that if you look at the best athletes, Kirby Bucket, Eli Manning, who he coached, Olympic Bob sledding athletes, what he teaches them to do is to not focus on the number of times they struck out, focus on the number of hits you had and the mechanics that caused you to have that success, not the failure.

It's a really interesting way to think about things. Speaking of gambling, often when we're playing, there's a conflict between what a person might be saying to you and the signals that their body are given off which are telling a different story. And there's often the same thing when it comes to incentives. And my question is,

why is there often a conflict between what we say and what are incentives signal? So there are, in the book, I talk about a few aspects of this. One of them I mentioned, the quantity versus quality. So think about my profession. If I'm a professor,

I get basically being good at my job would mean publishing good paper, lots of good papers, but it has a quantity and a quality measure. Imagine that my dean would come and say for every paper that you publish, I'll give you a bonus. That would be incentive for quantity. That's a result of published many papers. If she'll tell me I'll pay you for quality, then I'll try to concentrate on only the top journals and publish over there. The worst is when she'll come and tell me

you should focus on quality, but then give me incentives for quantity. So very often we see this tension between quantity and quality. Another one is between teams and individual incentives. So I can tell you look, we really care about teamwork. You need to work together with other corporate, with them. It's really important. But then I give you individual incentives because it's very to measure and it's very easy to keep. Sometimes it's better to have people that you care really only about the best performer and you should attract the best people and you should give individual incentives. That's great,

it's not a mistake. Sometimes you care about the team, you should give incentives to the team. What you shouldn't do is say I care about the team but then give individual incentives. Right, you need to be consistent because they incentives that you give, send a message that people take too hard. They can leave them confused or just leave them following something that you give, send a message that people take to heart. You can leave them confused or just leave them following something that you don't want. And I don't want to think about politicians, short-run in Loneground or CEOs or coaches, if you want. We all say that we care about the Loneground, right?

For politicians, the governor of California, I want him to care about the Loneground with public transportation. Imagine that he decides to invest in train. That project will be ready in 20 years. You'll have to put a lot of resources today, which means that he will not be able to put resources in other stuff that people will see.

And the outcome will be 20 years from now. If his dock he'll still be alive, but he'll definitely want to be reelected with such position. There is a nice quote saying that, from a politician says, we all know what we need to do, but we don't know how to get elected based on this. Right, so there is a tension between the short run

and the long run. So if you hire a coach and you tell the coach, look, we want to be successful this season, we care about, maybe we're willing to suffer this season. We care about what it may be. We are willing to suffer this season in order to train the young people, give them experience and build up the team. But then if the team loses, you fired them. That's the wrong incentives to do.

So you need to make sure that if you do care about the long run, which in many cases you should, don't judge people at the end of the quarter. After a few games or whatever it is. So in some cases you don't have any other choice. We like the fact that we live in a democracy in which every four years we get a chance to say what's our opinions about about the leader. I'm saying that it's not a perfect system. Maybe one of the major problems with it is that the elected politician cannot think

about the long run. But with companies we should be, we have more freedom, right? We can appoint Salon, we can tell that person, look, you're in charge, you need to take this team or you need to take this company, we care about the long-term, define what the long-term is, we'll give you a window of two years in which we'll make sure that you're not taking vacation, taking the private jet and going to the Caribbean every week.

But as long as we see that you're making the effort, we'll give you a chance. That's going to be much better than telling them, okay, we care about the long run, but we're going to evaluate you at the end of the court. Yeah, and I have a great personal example of this. And when I was recruited to join Dell, Michael had told me that what he wanted

to bring to the organization was large-scale transformation. The only way that you're going to do that is to really make long-term decisions about the strategy of the company. But what I found out when I got there was that although they talked about long-term goals, all the reward systems that the company had in place were based on quarterly results. In fact, I've never been with a company where so many long-term initiatives where we were spending tens of millions of dollars on them were cut because they were not producing immediate results. To make it even worse, one of the biggest award systems that they had was at that time there were five different presidents. And Michael would have them all compete on a quarterly basis, and one of them would get this huge trophy and then at the end of the year the person who

at the most trophies would of course get rewarded the most money and the person who was number five would most likely get fired. Right, perfect example, right, so they should read my book. I think that's exactly the point. You cannot expect someone that knows that your she will be evaluated at the end of the quarter to actually think about the long run. So Michael can tell them whatever he wants. That's not what they're going to be. It can also get them to do unethical things. It could be from just sabotaging the other presidents, like you said, that five presidents,

we need to be the best. One way is to be better myself and other ways to get that one to perform less well. I think that's a perfect example of what you said. Well, I wanted to jump to shaping incentives and one of the things that you brought up in the book, and as I was reading it, I was thinking about my dog Bentley and how I incentivize him, especially when he was younger to carry out the behaviors that I wanted. But what you say is, all animals, not just humans, react to incentives. But while that's the case, why is there a big difference when it comes to shaping incentives

between animals and humans? So Bentley probably reacts to incentives just like I do. He smells the food is happy, right? And they know that you'll get a treat, is happy, and we all are. And all animals are. So yeah, the main difference. So we already reacted to incentives, but the main difference, the big difference is that

Bentley doesn't design incentives for other dogs in lives in Florida. He doesn't design incentives for dogs in New York. That's only human are doing this, only human are designing incentives for others. The economy is based on incentives that are designed by people. The great example that is quite famous at the end of the Soviet era in the 80s, an economist from Moscow came to London and the famous economist in London said, can you please introduce me to the person who's in charge

of bread distribution in London? Because I come from Moscow and we want to learn how to do it better. It doesn't work that well in Moscow. And British economist didn't know how to answer this. There isn't a guy in charge of bread distribution in London. There is, there are incentives. So the farmer that wakes up early and goes and work in the field works hard and then the truck driver, then the baker, the, all this chain are doing it

because they have incentives to do this. They need to pay rent, they need to feed their families. Those are all incentive structures that are out there. And we designed them. So market is basically an incentive structure. And many other examples of that, we design incentives. Animals, Bentley doesn't design incentives.

We do. We all do. Right? You design incentive for Bentley. Maybe Bentley designs incentive for you, by the way. So if you don't behave like he wants you to behave, he can probably react to this. But he would never be able to design incentives for me

and too far away from it. And people can do that. Well, I'm sure in his own head, he wishes he could develop an incentive to get more cats to come by the yard so he could chase them. Well, one of... What does he do with them if he catches one? They're usually too fast. I've never seen him catch one.

It's gone. But he doesn't chase anything but cats. It's so interesting. I think it's more curiosity than anything for him and he likes their smell. He knows who chased. I mean, doesn't know why. Yes. Exactly. Well, that leads me to a topic that I didn't really know too much about before I read your book, and that was the difference between social signaling and self signaling. And I was hoping for the listeners who might be like me and didn't understand the difference. What's the difference between the two and what happens when incentives are added to the mix? So social signaling would be me trying to impress you by actions that I do or choices that I make

or just talking with you I can try and impress you that's social signaling. Self signaling is me trying to figure out for myself what kind of a person I am. So let me give you an example from the book. Say that we both live in warm places. Imagine that we would live in Minnesota. That's a better location for the story. Better set up for the story. Imagine that you live in a cold place.

You see that you're neighboring the morning, walking with a large bag filled with, say, hand with soda cans to the recycle center. We probably say, wow, she's a great person. She really cares about the environment. So she's sending you a signal that she cares about the environment, that she's a good person, and that's the social sign. She might even feel good about herself.

It's like, well, I'm a good person. I could have thrown him to the trash that was easy, but I do make the effort. I'm a good person that would be the self-signaling. So that's the difference between self and social signaling. I would interact with incentives. Imagine that now you live in a place where you get five cents per Soda Can that you recycle back in many places you see. So now, Samsung are you see your neighbor she walks to the recycle center in a cold morning with a hundred soda cans, and then you say, for $5, she's really cheap. Right, so the social signaling that she says is not,

oh, I care about the environment, but she's cheap. You attribute something very different to her. Actions than you did before. Could also have had the self signaling. So before that, I did it because I'm a good person. Now I'm doing it for $5 as well. For $5, I did it because I'm a good person. Now I'm doing it for five dollars, well, for five dollars, I'm not going to leave the house in my, walk on the ice and do that. So that we have self-signaling, social signaling and the interaction with incentives that is, I think,

interesting to understand. As a follow-on to that, I thought an interesting thing that you covered in the book was the value of self-signaling from the economics of blood donations. So many people donate that blood, we know that. And in the US, you are not allowed to get paid for it. And most places in the world, you're not allowed. And there is a discussion in economics started in the 70s.

It was a guy called Tito, who was the economist, brought the book about the difference between the American and the British system at the time. So at the time in the US, you got paid for blood donation in the UK you did it. And his claim was that in the US you get drug addicts to donate blood. And in the UK you get normal people that care about the world. But I didn't blood it. Then he talked about the quality of blood that you get because of their diseases. The idea is that when I go to donate blood,

I feel good about myself. That's the self-signaling. I really feel good about myself when I do something good like this. I might even mention it to my friends at work, sorry I couldn't be here in the morning, I went donate blood, that would be the social signal. And that's fine, people doing it all the time. Now again, like the story with the seller can imagine that I would give you $50 for doing this. Well, you might get my daughter to do it. She is a student, she needs the money, she might go and do it for $50. But I wouldn't do it for $50. So I would say, well, for $50, it's not worth it. It would change like with the

solar panel, it would change the meaning of what I'm doing from, I'm a good guy, too, I'm doing it for $50. So monetary incentives would be bad. But you can think about other kinds of incentives that you can be. For example, you can give me a pen or a coffee mug with the logo of the blood bank. Then that's an incentive, right? And it also reinforces both signals. So now when I, at work, I come to the meeting with the coffee mug saying blood bank, everyone knows that I'm a nice guy that I don't need a blood.

So I get this the value of social signaling. I might even feel good every morning when I drink coffee from this to be reminded of good of a person. The monitor incentive in this case would crowd out the social and self signaling. But the mug can actually the coffee mug can actually reinforce this to signal. So that's why the while you pay is also very important. Yeah, it's interesting. Another example that I can think of is if you're a Catholic and you think of Palm, or Ash Wednesday, those who were the ashes on their forehead to signify that they actually went to church on that day and were practicing is another I think

way that you could send a signal. Right. Instead instead of bragging, you don't have to say, oh, I went to service. People can just see, right? Exactly. Right. Well, one of my favorite television shows has always been Seinfeld. It was interesting that you brought Seinfeld up in the book. And what I wanted to ask is, what did Seinfeld teach us

about ways to inform others about values, your abilities and preferences? Oh, so I think that Seinfeld, Larry Davis and Jerry Seinfeld are the best psychologists they know, so that observations they have one of the nicest ones I like is about the mask life situation. So Elaine and Jerry have to go and see the baby, you have to see the baby, you have to see the baby, then they see the baby.

And the baby is like the ugliest baby they've ever seen. They really, you could see that they are shocked when they see it. And then they go outside and to catch some hair, and then they say the interesting part is that the prince will never know how ugly their baby is because no one is going to tell them the baby is ugly. That's what they call the mast life situation. The example that really relates to incentive is gifts. So Jerry needs to buy a lame gift, which has a birthday. And if you think about it, gifts are really funny. So before holidays, you buy gifts to your friends or to your family,

people waste huge amounts of time and money and they don't get exactly what the other person wants. It's much better to give from economic perspective, not from a psychological perspective that we'll get in a second. It's much better to just give you a gift card or just give you cash. Right, and that's what the majority is actually doing. It decides to give you lane, I think it was $182 cash for a birthday. So it gives her the envelope wrapped very nicely and she's very excited, then she opens it and she screams it in, what are you, my uncle, what are you giving me cash in that? And then Kramer comes in and he gives her something much cheaper, a bench that cost much less and she's very happy because the signal that you send when you give cash is

look, I didn't want to waste time on you, I didn't really care, I found the simplest way of rewarding you. Whereas if you buy a gift you say, look, I thought about what are your preferences, but when I get you, I want to restore, I've met some efforts, so you are more important to me. You send a signal with what you give. If you are just an economist, you would say, well, cash, that's it. If you understand the psychology of signals, you would say, yeah, gift might be a much better way of doing that.

Okay, and I'm going to jump to part two of the books, where you go into mixed signals, and I'm going to to part two of the books where you go into mixed signals, and I'm gonna just talk about a couple of them. We've already brought up encouraging long-term goals, but incentivizing short-term success. Some of the other common ones are encouraging teamwork, but incentivizing individual success is one I love. Inspiring innovation and risk-taking, but punishing failure.

And I think I wanna just stick to that one because I have seen that again and again in my career, especially being in technology where people want this innovation, but they don't want the fail fast, fail often consequences that are going to come from it. But in the book, you cover a number of companies who've succeeded with doing it, but you also talk about some companies like Blockbuster, we could also say Code Act and Sears,

who failed to do it. And my question for you is, what is the cost of a company or not innovating? It's a great example where I can tell you, look, be creative, try new stuff, and then you know that if you fail, I'll fire you or I'll punish you, I won't give you the bonus. A great example where you will not get creativity, and the example that you give. So think about Blockbuster in the 90s.

We are the most successful company in the world. If you read the history of how Netflix started, basically because of late fees, right? So blockbuster for the young Gilesner that don't remember it, blockbuster was not that expensive, unless you were too late in bringing back the DVD at that. And then they charged you a ridiculous amount of money that we're extremely annoying to get.

And what they didn't understand is that the world is changing, same as true for Koda, I can do all the examples that you mentioned. Many companies are doing well and are missing creativity. When I asked about consulting, I always prefer to consult with a successful company than with a company in distress because the company that doesn't do well is already thinking and trying the best they can. Re-evaluating everything. The successful companies are the ones that actually can benefit much more from someone looking deep into what they're doing and telling them. So if someone in the 90s would have told Blockbuster, look, you're doing well, but so you're monopoly now, but

You're doing well, but so you're monopoly now, but the world is changing. It's not always going to be physical stores. You're annoying your customers. That's a mistake. You need to do something, wake up before it's too late. That would have been a great thing. Then they should have played with stuff and see what works and what doesn't. To understand what works, you need to think about what doesn't. For my little world, I ran experiments.

We started with this. I ran experiments. Very often, I make mistakes. I have intuition. I run the experiment. People don't behave the way I thought they are. I try to learn from this. What was wrong with my intuition?

What did I do? I don't get mad at the people and say, I should change the people. But I understand that my intuition was wrong. And maybe I shouldn't pursue this experiment because it does work. Or maybe I should actually learn something much more interesting that is counterintuitive

that can actually teach me about it. But I try something. If it doesn't work, it's your fault. You came up with a suggestion. We tried it. It didn't work. It's your fault. I'm going to be upset at you.

And that means that I'll fire you't want to give your promotion or bonus, that's the wrong way to go. You need to analyze it, you need to do the three things that are important to do when you're debrief something like this, look what happened, why did it happen, and how can you do better in the future. So if when you look at what happened, clearly it didn't work. Why it happened, you can think, oh, it didn't happen because you didn't do your job. It didn't put enough effort. Then you should be punished. But if I look at why it happened, well, we have the wrong mental image of what people are doing. How people are going to react. Then you should say, okay, how can we do better in the future? We can do better in the future by learning from this

and using it. And those are the successful companies. At the end of the day, you shouldn't be afraid of failing and you shouldn't punish your employees or people for failing if we didn't happen because of laziness. Yeah, and I'll just bring up a great example of this. I recently released an episode with the Home Depot Co-Founder Bernie Marcus, and I just bring up a great example of this. I recently released an episode with the Home Depot co-founder Bernie Marcus, and I asked him what the secret of the success was while he was leading the

company. And he said, a lot of companies, they celebrate the quarters and they talk about all the successes. And he said, I looked at it completely different. I feel like you get complacent when that happens. So whenever we had a successful quarter, I challenged people even more and gave them incentives on finding what we were doing incorrectly or inefficiently that we could put more focus on. And he said that constant state of incentivizing people by trying to look for failures ended up leading to greater and greater success. Smart guy. Yes.

I'm going to jump to chapter 12 because I had forgotten about this story of Marlon Brando and the Oscar acceptance. And I was hoping you could tell the listeners, if they're not familiar with what happened, what we can learn from it about audience scarcity and the status of award givers. So that's even weird to hold for it, I think. We've done for it, sorry, it's 50 years ago. Basically, this chapter talks about awards.

How should we evaluate awards? So there are many parameters that go into this. If you give the best employer award once a day or once a week, it's going to be less valuable than if you give it once a month or once a year. So think about the Oscars, right? It's valuable because it's very hard and because you do it only once here. If it was a weekly Oscar ceremony, people would not give it that much attention.

And the higher the status of the award, the more important it is. And in many cases, think about the Nobel Prize in physics. I have no clue why they got it, but they can understand that smart people evaluated them and they had competition with other very smart people. If you got a Nobel Prize in physics, I have all the respects for you without understanding at all what you do. Right, so the award could signal that person is really important. It's also important to use it. So Nobel dimension did it because he had bad conscience invented dynamite and. And the study killed lots of people.

So he wanted to clear his conscience in the sense that you can think about who's giving the award. Imagine that about the book for the book imagine that I'll get in the war. I would care about the relevant people that give it more than the last relevant people. Anything that you can think about, the people that actually give the award is important. And also the recipient. So when you taught me about this podcast, you told me you interviewed before. And I was very impressed by that.

So you get signals about what you're doing by the people that got the award or got the podcast in this case, but the said that you compare yourself, the audience and many, many other aspects. And it's a very good way to send signals. So the story with Marlon Granba at the time was, he was upset with the way Native Americans were represented in movies.

So the John Way movies that we all grew up on in which it goes around and killed the bad Indians, he thought that that's a really wrong representation of what happened. That was a big crime conducted in the American history against Native Americans, and that should be reflected in movies. We're talking about 50 years ago today, it would be clear that's something that you should do, but 50 years ago it wasn't, it was clear, there were good guys and bad guys and the good guys always look the same. The bad guys, you wanted to send a very strong message

in the Oscar ceremony when he got the Oscar, which is clearly the greatest honor that an actor can get. He didn't go up, he sent a representative American that went to receive the award for him and or to reject their word for anything. And basically said, look, we are protesting against the representation of Native American in the movie industry. I think that was a very strong message because it didn't give up something small, it gave

up something really important. I think that even being Marlon Brando, it was really important for him winning the Oscars, but he said, look, I want to send a very strong signal, and I'm going to do it by not accepting this award. Yes, and I think you bring up some great points, and another guess that I had on the show, your pure Dolly Chug, wrote a great book about this and more just future this year about how these biases and how we look at things really depends on if you're the victor or the victim

in many cases and how we remember history. And I had two final questions for you. And one of them was from a company perspective and one of them was from a personal perspective. And I'll start with the personal one first. And that is on this podcast, we talk a lot about behavioral change. And what I wanted to ask is how can incentives help remove barriers to behavioral change? So one of the things that we all struggle with, if you don't have bad habits,

you're a very boring person. all struggle with if you don't have bad habits, you're very boring person. So it's how to change our habits. We spend huge amounts of money and mental effort on exercising or losing weight. And less computer games stop smoking whatever you want. The question is how can we do this? It can be an incentive help in the sense. So we had the experience in which we paid people to go to the gym for a month and exercise. And then you wanted to see whether the habit will continue after that. And we did see some effect of this and that is that the first time you go to exercise, it smells really bad. It's you don't really know what you need to do. It's kind of where is it, where do I park? What do I need to do? And then maybe after a month, you get used to the smell.

You maybe you meet some people that you enjoy, exercise, and we you learn everything. And then you might create some kind of habit that you're going to do in the long run. So we have success. We've been centurizing other people. And then we thought, you know what? Why can't I incentivize myself to do it?

So if you can convince yourself, look, the first time you're going to go and exercise the short term cost is going to be higher than the short term benefit. You will not see changes in your body shape. You will not feel better. It's going to be sore. It's going to be bad. Make sure that you commit to go there for a month. First, in terms of incentive, you can give incentives yourself. You need to do it this way. There is another interesting way of thinking about it by Katie Milkman, Kevin Volpe, and Julia Manson that came up with what they call temptation bundling. So imagine that you want to watch your favorite TV series,

we mentioned Signed for, but think about something more current. And imagine that you allow yourself to watch it on your iPad only when you exercise. Right, so you basically you kill two birds with this incentive self-incentive. You don't indulge yourself too much, you don't spend too much time watching Netflix. And you're really looking forward to, in my case, it's the elliptical machine. I allow myself to watch Netflix only when I'm on the elliptical machine. That's great because watch Netflix only when I'm on the elliptical machine, that's great, because I'm looking forward, I want to see

what happens in the next episode, I have to go on the elliptical machine and watch it. So this kind of self-incentives are really good for changing your habits, and that's something that you should think about. So incentivizing is definitely not just others, you can also incentivize yourself. Erie, I had one last question I wanted to ask you at the beginning of this episode. I talked about

how the culture of so many companies today is causing employee disengagement and burnout, but they're cultures that we find ourselves in and situations not just in the corporate world, but also in the political world or in the social world. How can you use incentives to change cultures by changing the payoffs? So a case study that is really close to my heart is about the female gender manipulation. That's in Africa, there are many places that still do that. It's basically a circumcision of young girls. And it's horrible thing that happens.

It's it leaves scars. It's dangerous in the short run. It's dangerous in the long run. When you give birth, it prevents them from enjoying sex. It's really a horrible crime against these little girls. We're talking about 10, 12-year-old girls, sometimes even younger. And one of the places where we looked at is the Masai tribe, and Kenya and in Tanzania, and over there it's very prevalent. You see, you know that it happens all the time, and we try to understand why

it happened. Turns out that it happens mostly for economic reason. The girl, when she comes up to get married is worth more in the marriage markets. She's worth more cows, literally more cows. If she is circumcised and if she is not. So it's kind of an economic transaction that causes this horrible human rights violation. And the question was can we use incentive to change it now Now, before we think, you can think about all the Americans are coming and pouring money in order to change traditions. Many of the people that know more about this than I do are compared to raping with these young girls.

You cannot say, oh, that's part of the culture. And we should leave it. So I think that it's really important to try and change it. And the way we try to look at it is based on another program that they had. We worked with a group in Kenya. And over there, they had problems with lions. They used to have lots of lions and the lion population got smaller and smaller, partly

because there are more people. And partly because they're mosaic, kill them. So if a lion attacks a bomber, that's where they live, the house, and kills a cow, the elder, the owner of the bomb is calling the warriors, and the warriors go with their spears after the land. And they kill it. There are many environmental problems based on this because the old food change is being disturbed, and that's just bad for the environment. The economic reasons that was important over there is that many tourists come to see the lines.

You want to see lines when you come to visit this place and it has lots of, if I can promise you that if you come to my lodge, you can see lines, you're more likely to come to my lodge. So then the person in charge of the owner of the lodge set up an incentive scheme in which elder, if a learned attacked the bomber, the elder could call the foundation that gives the incentives. They will come and verify that indeed cow was killed by a lion. There was no negligence, so everything is okay. And then the elder will be compensated for it for the cow, but only if no lion was killed within this area in a couple of weeks after that. So now the elder, before the elder would call the warriors to go after the land,

so the land will not come back and kill another cow. Now the elder tells the warriors don't kill the land because then I won't be compensated for the cow. Tender, the disreservative response in the sentence was really crucial in increasing the population of lands by a factor of four within 10 years. So it was really good in changing their culture. So now before that warriors, the right of passage

was Euclila lion, and that's, you can imagine that killing the lion with the spear is not, it's not an easy thing, it's very risky. So many of them still carry scars, some of them were killed in the process. So now instead of that, they created groups that actually protect lions. The warriors are actually now busy protecting lions making sure that you don't take your herd to a place where they know that they are lions and things like that. We thought

that if it worked over there with lions maybe it can work over here and what we suggested it is that we'll go to schools, we'll have a check of their girls. And if we see the dance, here comes the size, we'll offer the parents incentives. If the girl is not circumcised in a year from now, we'll sponsor her high school studies. So we'll pay for high school. High school is done a bit further away because lots of money.

And if the girl is not circumcised, we're going to pay for it. And that's something that parents really want. They really want their girls to go to high school because then when they come back, they can be teachers, nurse as they have much higher economic value. They can then marry. When they come back at 18, they can choose who they are marrying without being circumcised.

And the value that they'll get is much higher. So again, economic transaction, it sounds really horrible when you translate things, the cost of a girl in two cows, but that's how they do it. Instead of circumcising them for economic reasons, they want circumcised them for economic reasons, then they'll be compensated for it and they'll get actually higher value.

That's what we are trying to do. This project is still in the planning board, mostly because of the funding, but we hope that we can really change the culture over there. And in order to do this, you need to also change enough of the girls' behavior, because now there is very strong peer pressure to be circumcised. Because if you're not, you're not really a woman, you're still a girl and other things. And we hope that if you're not girls, we'll go to high school and we'll actually

want to be circumcised, the peer pressure will change, we'll shift. Thank you so much again for being here. And congratulations on this amazing book. Dr. John, I really enjoyed it. So I thoroughly enjoyed that interview with Erie Ganesi. And I wanted to thank Erie, the behavioral change for good initiative and Yale University Press for the honor and privilege of interviewing him on the show. Links to all things Erie will be in the show note at passionstruck.com.

Please use our website links if you purchase any of the books from the guests that we feature here on the show. All proceeds go to supporting the show. Videos are on YouTube at either John R. Miles or Passionstruck Clips. Avertise their deals and discount codes are in one convenient place at passionstruck.com slash deals. I'm on LinkedIn and you can also find me

at John Armiles and Twitter and Instagram where I post daily to compliment everything that we do here on the show. You're about to hear a preview of the Passionstruck podcast interview I did with Dr. Will Cole, who is a leading functional medicine doctor. We discuss his brand new book, Gut Feelings. Healing the shame-fueled relationship

between what you eat and how you feel. But this concept that I talk about with my patients and I talk about in gut feelings of the shame inflammation, how do these mental emotional spiritual things, if it has to be with chronic stress or trauma, body love or lack of self-compassion, how do these things impact our physical health and how they literally can be stored in ourselves, impacting the way that our body methylated, which is our body's ability to regulate inflammation and detox and make neurotransmitters. How is it impacting us? Our body is a cellular library, and the thoughts and our words and actions and experiences

are the books that fill up that cellular library. The fee for our show is that you share it with family or friends when you find something interesting or useful. If you know someone who is dealing with adult-applying incentives, then definitely share today's episode with Erie with them. In the meantime, do your best to apply what you hear on the show so that you can live what you listen. And until next time, live life Ash and struck. you