How a decision is presented affects people's actions

• endowment effect
• status quo bias
• WTP \(\neq\) WTA
• loss aversion

Lots of evidence from the laboratory, less from the "field".

Also, less evidence (though some) from "economically relevant" decisions.

These phenomena are explained by…

• bad experimental design
• people who don't or haven't had time to learn

• Data from a natural field experiment at Wanlida Group.
• Wanlida \(\Rightarrow\) top 100 electronics manufacturers

• "Reward/Gain": "positive frame" – if the week's average per-hour production reaches a threshold, a bonus is paid at the end of the pay period. Weekly bonus = RMB 80.
• "Punishment/Loss": "negative frame" – employees provisionally given the bonus before the week begins, if the week's average per-hour production fails to reach a threshold, the bonus is taken away at the end of the pay period. Weekly bonus = RMB 80.
• "Gift": just a control (also company wanted it): one-time four-week bonus of RMB 320

1. Bonuses (of either type) increase productivity for groups and individuals.
2. Punishment/Loss frame outperforms the gain frame for groups and individuals (less robust) \(\Rightarrow\) an \(\uparrow\) of 1% of production (this is economically significant) at low marginal cost
3. Effects are stronger for groups than individuals.
4. Effects persist for whole period of study (long-term).

1. Incentives are powerful & behavioral econ has a role in the workplace.
2. Results complement industrial psch & expand toolset of practitioners.
3. Social structure & institutions affect/constrain how people act in the workplace.

• Teams of workers (14 people) engaged in relatively flexible production
• Individual inspectors (of products) involved in incentive schemes too
• Can compare pre- and post-experiment:
  • productivity in terms of output (DVD chips)
  • quality of productivity with error rate
• 4 weeks in a treatment; 1 week after a treatment ended

• all payments made to all teams at the same time
  • improves credibility
  • limits time preference concerns
• compare within and between observations
  • same observation exposed to multiple treatments
• workers didn't know about experiment
• management wanted targets achieved in 60-80% of cases (morale)
  • targets calibrated with pre-experiment data
• minimized information transmission between groups

• Find strong treatment effects among teams of workers
• Stronger effect for teams than individuals means how groups are formed is important: "collective esteem" in a group; "group polarization";
  • people are worried about letting team members down
  • workers in loss frame may be extra careful not to cost the team the bonus
  • large groups more likely to contain a very loss averse person

• Where incentives profitable for the firm? Yes!
  • Quality rate remained constant
  • Cost of incentives: RMB 64,960;
  • To hire more workers for same output would have cost about RMB 69,900
• What about permanently adopting the bonuses/penalties?
  • long-run effects of incentives
  • no 'trend' in the effects; remain constant throughout study

Take home messsage: Behavioral econ can play a big role in improving productivity and profitability within firms.