How To Understand Psychological Incentives - Uri Gneezy

We always go to vacations when it's crowded and it costs much more because that's when the kids are off school. So parents took their kids away from school either the week before or the week after. It was much cheaper and much nicer vacation. Schools didn't like it. What did they do? Put a fine of 60 pounds if parents come in late. Bad mistake, because now people, instead of saying, "Look, it's bad to do it," now they said, "60 pounds? I'm going to save 1,000 pound by not going during the crowded time."

(wind blows) What are incentives? For the people that are not indoctrinated into understanding what that is.

Incentives is something that will make you do a thing that you wouldn't do otherwise. They try to push you in- in this direction. A common mistake is that incentive is only money. It's definitely not. There are many other things that could be. It could be status, it could be playing computer games, not teaching at class. Many other things, but in general, it's something that will make you do a thing that otherwise you wouldn't.

What do you think that economists get most wrong about incentives?

It's, uh, it's a long list. But basically it's, uh, if you read about incentives in economics, it's, you see a formulas as if it's physics, right? As if you're talking about particles or atom- atoms, you know, moving around the- the world. And that's not the case. We're talking about people. Incentives work. That part economists got very much right. But we don't always know how they work. The simplifying assumptions that people just, you know, you give them more money, it's better, you- you give them m- more incentives, you're going to get more of what you want, that's just wrong. The main thing that people in, that economist miss I think is that incentives send a signal. When I give you incentive, when I tell you if you do X I'll pay you ten dollars, then you get the ten dollars plus you get the signal that that's what I want you to do. And then you start thinking, "Why does Uri want me to do this? Is that bad for me? Is that good for me?" What are his motives, right? So you get, you- you start interpreting this. Incentives basically complete a story. You have a story in your mind, you look at the world, and once you get incentives, it helps you to create one sort of- of story.

And it's kind of like a feedback loop, because for every incentive that I'm given, there is a story about that incentive. What does it mean? What do I know about Uri? What has Uri incentivized me to do previously? What can I infer about his desires for me moving forward?

Ongoing story that never ends.

Okay. So if that's what economists get wrong, what's the missing addition? What- what gets folded into the economic view of this which starts to flesh it out a little bit more?