The Why Axis: Hidden Motives and the Undiscovered Economics of Everyday Life (34 page)

An important takeaway from our experiment is that if you want your clients to act unselfishly, you need to show you can do the same. When Disney agreed to experiment with the new pricing, the company signaled to its customers that it cared about charitable causes and, more importantly, was willing to share the risk of acting on that concern. More generally, we learned that being creative with your pricing strategies proves you can do good while doing well (as we discussed in
Chapters 9
and
10
).

How Can We Get You to Respond?

As we mentioned in the previous chapter, we’re all used to the piles of junk mail with offers that sound too good to be true (probably because they are not so good or not so true). Many of us never open such mail—we just “file” it in the trash without even looking at it. Those who do open it usually ignore the content or requests.
Knowing this, how can a company get your attention through direct mail (or social media)?

Imagine you open a direct-mail plea and a $20 bill falls from the envelope. Whoever sent the mail likely has your attention now. Curious, you read the enclosed letter. The company is asking you to complete and return a short survey. Would you do it? What if there was only $10 enclosed? Or just $1?

Earlier, we showed how charities like Smile Train and Wonder
Work.org
have successfully used reciprocity, the basic principle that if someone does something nice for you, you should do something nice in return. But what if you’re not a charity?

In this direct-mail case, the company sweetly sent you cash and is asking you to do something for them in return. Let’s say you’re the chief marketing officer of a big chain store, and you ask yourself whether it makes sense to try to appeal to people’s sense of reciprocity when asking them to respond to a direct-mail pitch. Your company has lots of experience in sending surveys and is also good at collecting data. But it isn’t very good at figuring out which kind of incentives work best when it comes to direct mail.

With our colleague, Pedro Rey-Biel (of the University Autonoma of Barcelona), we analyzed the results of a large field experiment, comprising 29 treatments and 7,250 “club members” who were already registered customers of a big chain store.
⁶
The company sent letters asking club members to complete a fifteen-minute survey. The company was interested in the question: Which is better—paying customers ahead of time to respond to a direct-mail plea, or promising to pay them after they’ve responded?

Put another way: Would more people respond—and would the study be more cost-effective—if the company used the reciprocity angle and sent people money with the survey in hopes that they would fill it out? Or would it be smarter to do things the old-fashioned way? That is, would it be better to treat people more like employees and
make the reward contingent on having done the work? Or should the company forget the whole incentive thing and just send out surveys without a reward?

In one treatment, the company sent letters with cash, ranging from $1 to $30 (we called this the “social” treatment, since reciprocity is a social phenomenon), to about half the addressees. In another treatment, the company promised to send 3,500 people checks (with the same amounts as in the other treatment) if they filled out the survey (we called this the “contingent” treatment). In the control treatment, the company just sent the survey to 250 people and asked them to respond. The chart below shows the response.

This chart shows the “breaking point” was around $15. Up to $15, we found giving people money up front made them feel like reciprocating and therefore more likely to return the survey, even for small amounts such as $1. In fact, significantly more people responded when we told them: “You’ll get a dollar if
you’ll fill out the survey and send it back.” But after $15, more people responded to the contingent, fill-out-our-survey-and-then-we’ll-pay-you approach.

Importantly, the contingent was less expensive than the paying-up-front approach. Makes sense: after all, sending money only to those who send the survey back is cheaper than paying everyone regardless of whether they respond. The average cost of a returned survey in the social treatment was $45.40, more than double the cost in the contingent treatment ($20.97). As a result, the total cost in the social treatments was almost three times higher than in the contingent treatments ($38,820 vs. $13,212).

What can companies that send out direct mail learn from this exercise? If your budget allows you to only pay $1 for a returned survey, put the buck in the envelope. People (at least the nice ones) will be happy to get it and reciprocate in kind. But if you can spend enough money per person, you’ll be better off paying only people who send the survey back. You might, of course, sample different people in the two cases; our bet is that you’ll get more people who think like economists when you make the payment contingent and more noneconomist thinkers when you don’t.

A Trip to China

In
Chapter 4
, we talked about the way framing a bonus as a gain or loss affected teacher and student performance. Framing can be an important tool for businesses, too. Let’s say that you are the marketing manager of a product called Sunny Sunscreen SPF 50 Lotion, and you are deciding what kind of spin to put on a campaign. Your “gain-framed,” or positive message might go like this: “Use Sunny Sunscreen to decrease your risk of getting skin cancer” or “Use
Sunny Sunscreen to help your skin stay healthy.” Alternatively, a “loss-framed,” or negative message could be “Without Sunny Sunscreen, you increase your risk of developing skin cancer” or “Without Sunny Sunscreen, you cannot guarantee the health of your skin.”

Similarly, a manager can tell employees, “If we boost production by 10 percent this year, we will all be in for a bonus!” Or he could say, “If we don’t boost production by 10 percent this year, none of us will get a bonus.” Which kind of framing do you think is the better motivator?

To find out, we took a trip with our colleague Tanjim Hossain (of the University of Toronto) to the vibrant, modern city of Xiamen, in Fujian province on the southern coast of China, not too far from Hong Kong.
⁷

Xiamen is home to lots of large factories—such as Dell and Kodak. The site of our six-month experiment was a 20,000-employee Chinese high-tech firm that produces and distributes computer electronics. The company—Wanlida Corporation—produces and distributes cell phones, digital audio and video products, GPS navigation devices, small home appliances, and so on, which are exported to more than fifty countries.

Our goal was simple: we wanted to see if we could increase productivity at the plant using simple framing manipulations. So we sent two different letters to two different groups of employees.

Imagine for a moment that you are a twenty-one-year old woman—we’ll call you Lin Li—working for Wanlida, and your job is to inspect PC motherboards. You come into the factory on Monday morning, sit down at your desk, and turn on a magnifying light like the kind dentists or surgeons might use. You pull on a pair of lightweight gloves, take a motherboard in your hands, and go over every chip, nook, and cranny, looking for defects. You do this for
nine hours a day, six days a week, and, of course, receive a salary for your work.

One day, you receive a letter from management. “Dear Lin Li,” the letter says, “You will receive an RMB 80 bonus for every week in which the weekly production average of your team is above 400 units per hour.” RMB 80 is about $12, which is a pretty nice weekly bonus for a blue-collar worker in China. Because the average salary of workers in China is between RMB 290 and 375, RMB 80 represents more than 20 percent of the weekly salary of the highest paid worker. None of the 165 workers involved knew they were part of an experiment.

Feeling invigorated, Lin Li goes back to work, smiling. Another young employee—we’ll call him Zi Peng—receives a different letter: “Dear Zi Peng, You will receive a one-time bonus of RMB 320. However, for every week in which the weekly production average of your team is below 400 units per hour, the salary enhancement will be reduced by RMB 80.” Zi Peng isn’t quite sure how he feels about this arrangement, but he goes back to his desk and takes up his work with gusto.

Now, this kind of framing might remind you of the incentives that we tried on teachers and students in
Chapter 4
, when we said that they would lose their money if they didn’t perform well. And as you also probably noticed, this kind of framing combines a carrot (“you will receive a bonus”) with a stick (“if you don’t produce enough we’ll take your bonus away”). The message is clearly—and intentionally—mixed, because we wanted to see the effects of what social scientists call “loss aversion” at work in a real factory scenario.

When we feel we “own” something—say, social media privileges (if you are a preteen), our 1960s-era LP-album collection, our car, home, job, and yes, our bonus paycheck—the prospect of losing it makes us pretty darn unhappy.

So back at the factory, which individuals and teams performed the best? Those who, like your fictional self, Lin Li, received the carrot letter? Or those like your fictional colleague Zi Peng, who received the stick letter? Before you venture a guess, ask yourself what motivates you more: “gain-framing” or “loss-framing”? And if you work on a team with other people, knowing that the performance of each member affects the entire team’s bonus, do you work harder under the reward or the punishment framing?

Here’s what we found: just having a bonus incentive in place improved productivity. The effect was in the neighborhood of 4 percent to 9 percent for workers in groups and 5 percent to 12 percent for individual workers. These are sizable effects, considering the magnitude of our bonuses. But, more interestingly, although individual workers were not influenced significantly by the loss frame, people who were working in groups increased their productivity by some 16 percent to 25 percent above the workers in the reward framing. And, guess what? Errors and defects didn’t rise.

Overall, we found that Wanlida could effectively use simple framing to increase overall team productivity.

Would these results eventually wane over time? Would the workers slow down or stop responding to the punishment incentive? The answer was “No.” Week after week, for six months, the punishment framing
increased
productivity.

Clearly, the fear of loss motivated the workers more than the prospect of gain. In other words, carrots may work better if they look a bit like sticks. But who wants to work for a company that gives employees this kind of dual-handed, carrot-and-stick treatment? Well, losses are a fact of life; someone has to bear them. We believe losses are a powerful motivator. Businesses have used the threat of layoffs or firing to encourage productivity, but outside of those large-scale threats, companies rarely use loss-framing.

Of course, if you are a manager, you don’t have to use incentives as devilishly designed as the ones used in this study. Remember: it has to do with framing. If you give workers a stake in their production and
then
focus on the losses that could come from their lack of production, you should achieve the effects described above, without scaring employees through manipulative incentives.

So What’s the Big Problem?

So why don’t businesses experiment more? A number of barriers make implementing experimentation in firms difficult. One barrier, as Scott Cook pointed out to us, is that the people in power like to hold onto their PowerPoints, and they don’t want the little guys pointing out that the emperor has no clothes, or that he might run his empire in a different way.

Another is sheer bureaucratic inertia. For example, in the summer of 2009, we recruited some students to help us with a field experiment on incentives in a large company. The company came over to San Diego to meet with us, explained the simple problem they were facing, and agreed to run the experiment within a couple of months. Four years later, the study is still buried somewhere in the big organization, waiting for management approval.