John List and Uri Gneezy have appeared on our blog many times. This guest post is part of a series adapted from their book The Why Axis: Hidden Motives and the Undiscovered Economics of Everyday Life. List also appeared in our recent podcast “How to Raise Money Without Killing a Kitten.”
If you look at two pictures of two athletes: One is beaming, the other doesn’t seem too sure what she’s feeling. Which do you think won the silver? Which the bronze? Easy, right? Silver is better than bronze, so the smiling girl on the right must have won the silver.
Not so fast. After all, consider the context: Olympians train for years with nothing but the gold medal on their minds and the silver medalist just barely missed out on gold, whereas the bronze medalist just narrowly made the podium. As it turns out, the ambivalent gymnast won the silver and the happy one won bronze. (And if you think we cherry-picked the pictures here, psychologists have found that this applies to a more general set of Olympic medal winners.)
The idea that context can shape decision-making is a relatively new one for economists, but the cornerstone of this line of thinking is that people will go to much greater lengths to avoid losses than they will to experience the equivalent gain. (Danny Kahneman, author of Thinking, Fast and Slow, Amos Tversky, and Dick Thaler, co-author of Nudge, have made seminal contributions to our understanding of this behavioral phenomenon.) For example, suppose you’re at the store and a fancy bottle of wine catches your eye. You notice the price is $50—way out of your price range—and you move on with your errands. Behavioral economists would not be surprised to find that if you later got the same bottle of wine as a gift, it’d take a lot more than $50 to get you to part with it. The idea is just that losing that bottle of wine would be much worse than the price of acquiring it in the first place.
These ideas are incredibly provocative for economists in the abstract, but our work has tried to apply these ideas to get the most out of incentives in environments as diverse as manufacturing plants and inner-city classrooms.
One of the most controversial topics in public education today is teacher incentive pay. We know that good teachers matter, but there’s still only mixed evidence that incentive pay can turn an average teacher into a really good one. The lack of evidence isn’t a coincidence, though. There is a lot of resistance to even testing these ideas, in part out of the fear of the possible findings. For example, when we proposed testing the impact of teacher incentive pay in the Chicago Public School system with bonus payments of up to $8,000, the Teachers Union didn’t hesitate before responding: “Absolutely not.” The party line is that teachers are trying their hardest already and incentives for performance will not work.
Of course, not all unions are the same and in Chicago Heights—an economic and demographic microcosm of Chicago, just 30 miles south of the city—we received a more receptive hearing. After extensive negotiations, we were allowed to offer more than 150 Chicago Heights teachers a chance to earn an extra bonus. The experiment was conducted with Roland Fryer, Steven Levitt, and Sally Sadoff. In one treatment, teachers could earn up to $8,000 (on average, $4,000) if their students’ performance improved beyond a certain threshold. In another, we wrote checks for $4,000 (the average reward) to teachers before the year started with the stipulation that they would have to repay all or some of the money if their student’s performance didn’t improve.
Our results showed that incentives alone weren’t enough to move student performance. But incentives plus context? Well, when teachers were threatened with losing the rewards they had already received, student achievement in math jumped by 6 percentile points and 2 percentile points in reading.
To put this result in perspective: if the students in Chicago Heights could repeat these gains each year of elementary school, it would be enough to close the entire gap between their achievement and that of wealthier white kids from the suburbs.
If you want to explore our world further, take the Why Axis Challenge: visit www.thewhyaxischallenge.com, post a photo of your copy of The Why Axis, and be entered to win prizes, including a meeting with Uri, John, and Freakonomics author Steven Levitt!
Stay tuned for more posts, which will give a glimpse into more “undiscovered economics.”