Showing posts with label output. Show all posts
Showing posts with label output. Show all posts

Nov 5, 2010

How Rewards Pay Out

Let's take the 'Candle Test' as constructed by the psychologist Karl Duncker (1930).

Just take a look at the materials on the left picture.

A candle, a box of thumbtacks, and a book of matches.

Here's the simple task:

Attach the candle to the wall so that it doesn't drip onto the table below.

(Please, don't read any further until you solved this challenge....)

Here's the solution:

Empty the box with thumbtacks. Place the candle in the emptied box. Fix that box to the wall using the thumbtacks. Place the candle in the box.

If you managed to find this solution (without cheating) within 4 minutes, you're still an enlightened actuary.

If not? Don't mind, things will get better after reading this blog.

To find the solution you had to overcome what is called “functional fixedness”: You had to see beyond the thumbtack box as purely a container for the thumbtacks.

Rewarding Performance
In the sixties Sam Glucksberg used the 'Candle Test' to test the impact of extrinsic motivational factors on the problem solving ability.

Glucksberg created two groups of participants. The first group was told they would be timed to establish norms for how long it would typically take people to solve this sort of puzzle. The second group of participants were offered $5 each, if the time they took to solve the problem was in the top 25% of all those tested. The fastest achievement would be rewarded with $20.

The outcome of this experiment was that it took the extrinsically incentivized second group on average three and a half minutes longer to solve the problem. Obviously the incentives narrowed the participants minds and blocked them to think literally 'out of the box'....

From this experiment it became clear that rewards fail and work contrarily in case of complex situations.

Similar experiment....
Then, Glucksberg took a similar experiment in a slightly different way.
He presented two new groups the situation on the left picture.
Can you predict the outcome this time?

This time, the rewarded group defeated the non-incentivized group by miles....

Why???? Because the tacks were OUT of the box !!!!

By placing the thumbtacks out of the box and placing the thumbtack box empty on the table, Glucksberg had changed the problem.

Instead of achieving a heuristic task (i.e. a complex task that requires analysis and experimenting with possibilities to develop a solution), the problem was reduced to a more algorithmic problem (i.e. the solution comes down to a set of simplistic steps down a single pathway to one conclusion).

To summarize: financial short-term rewarding of complex tasks leads to output reduction instead of a better performance.

More than actuaries, professionals like quants, investment managers and bank managers are rewarded on short-term output, while - at the same time - their professional challenges and objectives are complex like a Gordian knot.

A way out
If we want to get out of the current economic crisis, we'll have to stop rewarding short term results one way or the other. Our complete (economic) system should be rebased on rewarding long(er) sustainable results and well calculated risk. Don't wait any longer, just start today at your department.

The issue of "not getting the 'right' professionals if we don't pay enough" is a fable. No matter how professionals like CEOs, Bank managers or actuaries are: if they just go for the short-term money and aren't intrinsically motivated to make this world a little better with their gifts and skills, please let them leave.

Tip: Include rewarding in your risk models!

Let's conclude with an interesting video by Dan Pink who examines the puzzle of motivation, explaining that traditional rewards aren't always as effective as we think.

Related/Used sources:
- Carrots and sticks
- Functional_fixedness