Tags: Mentol Models The Power of Incentives: The Hidden Forces That Shape Behavior
If we don’t like the consequences of an action we’ve taken, we’re less likely to do it again; if we do like the consequences, we’re more likely to do it again. That assumption is the basis of operant conditioning, “a type of learning in which the strength of a behavior is modified by [its] consequences, such as reward or punishment.”
Psychologists argue that the best way for us to learn complex behaviors is via continuous reinforcement, in which the desired behavior is reinforced every time it’s performed.
If you want to teach your dog a new trick, for example, it is smart to reward him for every correct response. At the very beginning of the learning curve, your failure to immediately respond to a positive behavior might be misinterpreted as a sign of incorrect behavior from the dog’s perspective.
Intermittent reinforcement is reinforcement that is given only some of the times that the desired behavior occurs, and it can be done according to various schedules, some predictable and some not
intermittent reinforcement is better from an economic perspective. Not only is it cheaper not to reward every instance of a desired behavior, but by making the rewards unpredictable, you trigger excitement and thus get an increase in response without increasing the amount of reinforcement. Intermittent reinforcement is how casinos work; they want people to gamble, but they can’t afford to have people win large amounts very often.
Scheduling Reinforcement
Fixed-ratio schedules are used when you pay your employees based on the amount of work they do. Fixed-ratio schedules are common in freelancing, where contractors are paid on a piecework basis. Managers like fixed-ratio schedules because the response to reinforcement is usually very high (if you want to get paid, you do the work).
Variable-ratio schedules are unpredictable because the number of responses between reinforcers varies. Telemarketers, salespeople, and slot machine players are on this schedule because they never know when the next sale or the next big win will occur.
Fixed-interval schedules are the most common type of payment — they reward people for the time spent on a specific task. You might have already guessed that the response rate on this schedule is very low. Ironically, the “9-5 job” is a preferred way to reward employees in business.
What About Punishment?
the power of punishment to suppress behavior usually disappears when the threat of punishment is removed
punishment often triggers a fight-or-flight response and renders us aggressive.
punishment inhibits the ability to learn new and better responses. Punishment leads to a variety of responses — such as escape, aggression, and learned helplessness — none of which aid in the subject’s learning process. Punishment also fails to show subjects what exactly they must do and instead focuses on what not to do. This is why environments that forgive failure are so important in the learning process.
punishment is often applied unequally
What Should I Do Instead?
The first we already touched upon — extinction. A response will usually diminish or disappear if it ceases to produce the rewards it once did.
The second alternative is positively reinforcing preferred activities.The main principle of this idea is that a preferred activity, such as running around, can be used to reinforce a less preferred activity. This idea is also called the Premack principle.
Finally, prompting and shaping are two actions we can use together to change behavior in an iterative manner. A prompt is a cue or stimulus that encourages the desired behavior. When shaping begins, any approximation of the target response is reinforced.
Reflection:
- Design what you reward: People don’t do what you say — they do what you reward. And they won’t always “know” what you want — you have to make it clear through the incentives.
- Align rewards with the outcome you want
- Intermittent reinforcement is powerful, if you wanna motive people, maybe you can use this trick. like pinduoduo, you never know what time will be the $100 reward, so you just try again and agin…
- Punishment ≠ Learning → Create Safe-to-Fail Environments
- Shaping is the process of guiding someone toward a complex or desired behavior by rewarding smaller steps along the way.
- Duolingo: User opens the app, prompt like: “🔥 You’re on a 3-day streak! Let’s keep going?”
The Power of Incentives - How Games Help Us Examine Our World - Extra Credits
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Incentives run the world — from economics to social policies.
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But they’re often poorly designed, leading to unintended consequences.
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Many systems fail because people don’t consider what behaviors they’re actually rewarding.
I like this example: Mexico City’s Smog Law
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Rule banned driving one day/week based on license plate numbers.
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People bought extra cheap, polluting cars to get around it.
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Made air quality worse, not better.
Incentive theory
Incentive Theory explains that behavior is motivated by the desire for rewards—either tangible (e.g., money, promotion) or intangible (e.g., pride, satisfaction).
Core Principle
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A reward is given after an action, with the goal of increasing the likelihood that the behavior will happen again.
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The key idea is assigning positive meaning to the behavior.
Key Characteristics
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Positive Reinforcement Focus
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Incentive theory emphasizes positive reinforcement: rewarding behavior to encourage repetition.
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It is not about negative reinforcement (i.e., removing punishment).
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Timing Matters
- Rewards are most effective when given immediately after the behavior.
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Achievability
- Rewards must be perceived as attainable; otherwise, motivation decreases.
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Continuous Stimulation
- Positive reinforcement must be consistent and ongoing to maintain behavior.
5 Real-Life Examples that Demonstrate the Power of Incentives
I like this whole post so I just it as whole!
Incentives have the superpower to drive change & alter behaviors to help drive revenue growth and create a lasting impact. Conversely, they can inflict equal damage if used improperly. They can sink a business to bankruptcy or smear its reputation.
But why are incentives so powerful? And how exactly do they end up having such a massive impact on businesses? Let’s find out!
How do incentives work?
An incentive persuades a person or an organization to change their behavior to drive the desired outcome. Incentives are classified into 2 broad categories:
Intrinsic incentives: An intrinsic incentive creates motivation from personal fulfillment, not external rewards. For example, a musician who loves playing the piano might practice for several hours daily to refine their skill.
Extrinsic incentives: An extrinsic incentive draws motivation from external sources. Extrinsic incentives can be further classified as monetary or non-monetary incentives.
Monetary incentives
These are the most common workplace incentives. As the name indicates, they’re financial rewards designed to incentivize the actions and behaviors that help achieve the results aligned with business goals. Examples include bonuses, gift cards, and stock options.
Non-monetary incentives
These incentives don’t have a financial component, yet they motivate people to perform their best. They form an effective reward system for exceptional performers. Examples include recognition, flexible work hours, and opportunities for professional development.
However, incentives have a flip side. Incentives essentially influence the way people behave. So, if you change them, the behavior changes in tandem, causing a bias, i.e., people with a vested interest tend to guide you toward their interest. Seeking desirable results, the human mind may turn to unethical actions, resulting in perverse incentives.
Perverse Incentives
A perverse incentive rewards people unintentionally for aggravating an issue, against its original design. The cobra effect, coined by economist Horst Siebert, is the most famous example of a perverse incentive.
Now that you know what makes incentives work, let’s explore how you can wield this double-edged sword. We’ve curated a few stories from the recent past where incentives left a significant mark. Let’s learn from these real-life tales!
5 unique stories where incentives made all the difference
FedEx: Shifting gears with shift-based incentives
FedEx is known across the globe for its speedy deliveries ⚡
Yet, at one point, it had dealt with a critical processing problem.
FedEx instructed its night shift employees to sort and load packages onto planes at a centralized airport, as the processing speed was crucial to making on-time deliveries. However, this did not curb the recurring delays.
Upon closer inspection, FedEx realized the mistake. It was paying hourly wages to the night shift staff, which might have caused them to stretch out tasks to maximize their hours, resulting in higher pay. This was a classic case of incentive misalignment, since workers weren’t rewarded for the desired outcome, i.e., faster package processing.
FedEx proposed two changes: first, the pay structure was changed from hourly wages to a fixed pay per shift completed; second, it provided the staff with an option to go home as soon as the planes were loaded.
And it worked! Workers were motivated to finish their shifts quickly and go home, thus achieving FedEx’s goal of rapid processing.
Uber: Hitting the brakes on rash driving practices
Uber has become one of the most successful & safest sources of transportation across the globe 🚖
However, there’s an untold story of how Uber made a crucial change in incentives.
In the early 2010s, Uber had devised aggressive incentives to combat the offline cab monopoly. It had rewarded drivers solely based on the number of rides completed.
This prompted drivers to indulge in taking shorter routes or engage in risky practices like rash driving, in order to maximize their daily incentive. As a result, customer complaints regarding safety issues skyrocketed. This hindered Uber from becoming the powerhouse it is today.
Uber realized that its drivers were wrongly incentivized. There was a swift revamp of the incentive program, which now included a scoring criteria based on factors like customer ratings, cancellation rates, & reports of safety concerns.
Once the new program had been implemented, everything fell into place. Rides had better quality, safety concerns declined, and both customers & drivers were happy.
Global Law Firm: Cracking the case of zero teamwork
A study by Ann P. Bartel, Brianna Cardiff-Hicks, and Kathryn Shaw (2017) examines an international law firm facing a multitasking problem, i.e., when the output of an individual’s performance omits the important contributions to the firm which are essential for its long-term growth.
Like most law firms, the senior lawyers were incentivized for their billable hours (the hours that are chargeable to the client). This was the most common method of compensation since billables are easier to track for each individual.
This approach enabled the firm in its early stages, when focus was prioritized on bringing in more clients to increase its market share. However, things got tricky when it entered the expansion phase & started hiring more associates.
Since senior leaders were incentivized solely for their billable hours, meager importance was given to leadership initiatives like developing the firm’s strategy, making presentations at roadshows, and mentoring the associates. This left the associates demoralized & with very little learning opportunities.
The firm decided to revise the incentives for senior lawyers in order to crack this case.
First, billable-related commissions were scaled down. Next, a new bonus was introduced that was based on the number of non-billable activities carried out by senior lawyers.
As a result, senior lawyers allocated more time on non-billable activities like developing strategic initiatives for the firm. Billable tasks went to the associates, leading to an increase in their share of revenue generation.
We looked at how incentives shaped behaviors and helped achieve business excellence in the three narratives above. Let us look at some examples where incentives missed the mark.
Xerox: Dealing with the cheaper copier crisis
If something doesn’t go according to plan, especially in business, check the incentives.
Xerox faced a similar problem. Its new machine had just hit the market and Joseph WIlson, the founder, was waiting with bated breath to review the sales numbers for the subsequent quarter.
He was in for quite a shock when he saw the actual numbers. Despite being technologically superior, the newer machine had been outsold by the older & inferior model. He decided to look into the reason behind this appalling state.
He discovered that Xerox hadn’t changed its incentive plans accordingly. The existing commission arrangement helped reps earn more money by selling the older machine when compared to the newer one. Thus, reps favored selling the inferior model over the new one.
Charlie Munger says, “Bad behavior is intensely habit-forming, when it’s rewarded.”
Global Financial Services Firm: Meeting targets with duplicitous accounts
Aggressive sales targets and unstructured incentives can cause a catastrophe.
Under huge pressure to meet steep sales goals, employees of a well-established multinational financial services firm created more than a million bank accounts and applied for over 560,000 credit cards on behalf of their customers – without their knowledge or consent. There were also certain instances where customers were charged for products or services that they hadn’t required.
When this malpractice was discovered and the firm was put under rigorous scrutiny, many ex-employees reported that the sales goals were impossible to meet and that they were encouraged to game the system.
This took an immense toll on the company’s reputation, which was once known for its strong customer service & ethical business practices.
Summary
Incentives have a crucial role in shaping the organization, as we observed in these 5 stories. They have the power to motivate employees to do the right thing, leading to an increase in revenue, customer satisfaction, and team morale.
On the other hand, if incentives are misaligned, they can hinder new product revenue growth or worse, damage your firm’s reputation.
Next time you’re designing incentives, remember that incentives:
✅ Must be aligned with the desired outcomes (FedEx)
✅ Should drive the right behaviors (Uber)
✅ Have the potential to boost motivation & enable teamwork (Global Law Firm)
✅ Can lead to inconsistent results if not defined properly (Xerox)
✅ Can cause fraudulence if goals are too aggressive (Global Financial Services Firm)
The Distorting Power of Incentives
As to good incentives, money is not enough.
Good incentives acknowledge recognition, public perception, and the value of pursuing work that we can be proud of. So yes, if we want to persuade, we should appeal to interests not reason. But when it comes to interests, appeal not just to net worth but also to self-worth.
There are a few things worth keeping in mind.
First, the behavior you see is usually the result of incentives you don’t see. Consider the sharp elbows you see in a typical workplace. Looking at this behavior in isolation it makes little sense. However, odds are, this is rewarded in some way.
Second, we generally get the behavior we reward.
Third, creating effective incentive systems is hard work. We need to consider not only the first level of incentives but also the second and third and how they will impact the system.
I agree good incentives not just for money, it needs to be meaningful, you can feel the value of the work.
This Finwise project has problems about incentives, to be honest, the leader didn’t use it very well. For us, it’s a total voluntary project, we pay our efforts but no clear return. As a leader, you can’t expect your mebmers totally get the project’s return and meanings. You really need to introduce your project’s details problems solution, how can it make money, next step etc… If it failed, you can still gain some experiences in XXX (specific area) and I will give you feedbacks to help your growth. Without salaries, encouragement feedbacks help emotional support these factors are so important. You can’t expect people just do it without any incentives. So clearly, it’s not productive at all, 尤其在她提到可能会公司去孵化这个项目，那不就相当于我们做的没有任何意义，这个情况下没有人愿意继续做下去的， 成员共享信息不及时，所以我也提出了建一个共享文件夹；开会太频繁，也会丧失动力。 But I still learned a lot
- to be clear about what you can get in the first time, 尤其在这种没有报酬的项目上. FOR each one, give instant feedbacks and encouragement.
- 及时update各个任务进度 the leader did great
- be clear about each task, if the member didnt go well, then you need to give more detailed advice
Creating effective incentive systems
Some companies are different. Nucor, a steel company, under the leadership of Ken Iverson is one of them.
Under Iverson, compensation at Nucor had two components: A small but meaningful base pay and a very simple weekly bonus based on production. Outside of benefits and a little profit sharing, that was it. Simple, straightforward, and powerful. No subjective criteria.
The real beauty of Nucor’s compensation system, in my opinion, is that there is nothing to discuss. Daily output and corresponding bonus earnings are posted, so employees know exactly what their bonus will be before they tear open their pay envelopes. No judgment. No negotiation. No surprises.
There are three beautiful aspects to the design of this program.
The first is that it’s eminently clear what you will be paid for: making more steel. It’s so simple. Your compensation is never at the hands of someone who may or may not like you. You have no reason to say it’s unfair: You signed up for it when you signed on. If you worked at Nucor under Iverson, the first thought you had every morning was how to make more steel.
Secondly, it offers immediate feedback. Human nature, and the nature of many other higher-thinking animals, is such that immediate rewards work better than delayed rewards. A year-end bonus isn’t nearly as effective as a weekly bonus. A year-end review isn’t nearly as useful as immediate feedback. It’s simple.
And lastly, this program gave Nucor’s employees tremendous skin in the game. Everyone was working towards the same goal. Rowing in the same direction. And that makes a tremendous difference.
Does this mean every company should model their compensation program after a steel company? Hell no. But you want to think about it.
The principles for an effective compensation system work at all companies. Let’s invert — think about the common reasons that compensation systems likely fail. First, most of them are hard to explain. They are overly complicated and wordy. (At Nucor everyone from the CEO to the newest employee could explain it.) Second, the rewards are small and untimely. Yearly bonuses anyone? Third, the program has to be designed in a way that the people in it (and the people running it) can’t game it. Finally, everyone is subject to the same plan. You’re absolutely right — the Nucor story is a brilliant illustration of how powerful clear, immediate, and aligned incentives can be. But figuring out how to design great incentives — especially outside of a steel plant — is hard. That’s because incentives aren’t just about money; they shape behavior, culture, trust, and even long-term strategy.
1. Clarity: What exactly do you want people to do?
“You get what you measure and reward.”
Ask:
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What is the one behavior or outcome I want to encourage?
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Can I measure it in a way that’s fair and visible?
Bad example: “Reward people for being a team player.”
Better: “Reward people based on how many team members rate them as helpful in project retrospectives.”
In Nucor’s case: “Make more steel.” That’s as clear as it gets.
2. Immediacy: Can the feedback be fast?
We’re wired to respond to immediate rewards. Even dogs and dolphins learn faster with instant reinforcement.
Ask:
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How soon can someone see the result of their action?
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Can rewards be given weekly or daily, not yearly?
Example for knowledge work: Instead of one-time performance reviews, give weekly shoutouts or small bonuses for clear achievements — like hitting a sales target or resolving a customer ticket.
3. Skin in the Game: Are they rewarded when the whole team wins?
If only a few win, others check out. But if rewards are tied to shared success, people pull together.
Ask:
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Can part of the reward be shared or collective?
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Will the outcome benefit both the individual and the group?
Example: Profit-sharing plans or milestone-based bonuses in early-stage startups. Everyone gets more if the product launch hits the growth target.
4. Can’t Be Gamed: Is it hard to cheat?
If people can “hit the target and miss the point,” your incentive will backfire.
Ask:
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Could someone manipulate the metric without creating real value?
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Does this system promote long-term thinking?
Example: If you reward customer service staff for the number of calls taken, they might rush and provide worse support. Instead, you might reward positive customer reviews or resolution rate.
5. Universality & Fairness: Is it the same for everyone?
People hate double standards. The moment they feel the system is rigged, motivation drops.
Ask:
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Does everyone play by the same rules?
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Can they understand and opt in with full awareness?
Incentives for Personal Life — “Design-Your-Own Reward System”
- Attach an immediate micro-reward： Turn “study first ➞ scroll after” into automatic chain. I already did it very well. Every 40 mins work, a little break! Time-blocking with tiny rewards after deep sessions
- Add a Visible Streak / Tracker: I personally use toggl as tracker app, it’s super helpful to visualize how much time I spend in each task.