Ronnie O'Sullivan & the limits of incentives

Ronnie O’Sullivan yesterday gave us a nice example of the limitations of basic economics. He turned down the chance to go for a 147 break because the £10,000 prize for doing so was “too cheap.”

This is an example of how incentives can backfire. Had there been no prize for doing so, I suspect O’Sullivan would have gone for the maximum, because he's a showman. Instead, he took umbrage at the meanness of the reward.

In this sense, he behaved just like the parents of children at the Israeli kindergartens described in a famous paper (pdf) by Aldo Rustichini and Uri Gneezy. They show that when the kindergartens introduced small fines for parents who collected their children late, the number of late-comers actually increased.

What happened in both cases is motivational crowding out: financial incentives can displace intrinsic ones. Small fines crowded out parents’ desire to help kindergarten staff by being punctual, just as a small prize pot crowded out O’Sullivan’s desire to play brilliantly. This is no mere curiosity. One reason for banks’ serial criminality – PPI mis-selling. Libor rigging, forex fixing and so on – is that bonus culture has driven out any sense of professional ethics.

Daniel Pink, author of Drive, has described this crowding out as “one of the most robust findings in social science”: see this paper (pdf) by Edward Deci and colleagues or this by Bowles and Reyes for more evidence.

You might object that incentives only backfire in these cases because they are too small: O’Sullivan would have gone for the 147 if the prize were bigger.

However, big incentives can also backfire. The Yerkes-Dodson law says that people can become over-motivated and so “choke” under pressure: other work by Uri Gneezy has established this experimentally. Who can forget John Terry’s penalty miss in the 2008 Champions League final? (And who would want to?)

These are not the only ways in which incentives can fail. There are others:

 - Performance-related pay can encourage people to hit targets at the expense of the organizations’ wider goals. If teachers “teach to the test” they might fail to instil in children a love of learning, and if bosses are incentivized to hit quarterly earnings’ targets they abandon longer-term strategy. For a formal model of this, see Benabou and Tirole (pdf).

 - They can lead to figures being manipulated or fiddled.

 - They can encourage a tunnel vision and so reduce (pdf) creativity. As Pink says:

Rewards, by their very nature, narrow our focus… Rewarded subjects often have a harder time seeing the periphery and crafting original solutions. (Drive p44-46)

 - Big bonuses can signal that the task is very difficult, or even impossible. This might demotivate existing staff, or have adverse selection effects, insofar as only irrationally overconfident people will apply for the job.

 - Bonuses can encourage people to free-ride on others’ efforts. They can also encourage slacking, if workers give up after they have met their targets, or excessive risk-taking as workers become desperate to meet their targets.

Tim Worstall is right to say that the core concept in economics is that incentives matter. However, they can matter in unpredictable ways.

The point here is a simple one. Designing incentives – in companies, sport, public services or wherever – require careful thought. More thought, in fact, than is often given. I fear that, in the real world, “incentives” in fact serves an ideological function described by George Carlin:

Conservatives say if you don’t give the rich more money, they will lose their incentive to invest. As for the poor, they tell us they’ve lost all incentive because we’ve given them too much money.

Comments

[Luis Enrique]

I am not that familiar with contract theory but from what I know economists usually say that high powered incentives are rarely a good idea

[TickyW]

Perhaps economics trainees should be required to study industrial sociology/industrial psychology in tandem with their economics studies before they are let loose on the world with half-baked pure-economics ideas.

Interesting, I believe Noah Smith is advocating that empirics should be taught at 101 in tandem with economic theory. This may help too, as it could highlight the flaws in the latter and indicate to students that economics does not have all the answers.

[Tom]

I'm not sure O'Sullivan would have potted the final ball if there were no prize on offer. A similar thing happened in 2010, with him refusing to pot the final ball on a 147 because of a lack of a "special prize" (although in this case the tournament offered £4k to the player with the highest break, with the prize being shared if there were multiple 147s. Appreciate this still constitutes a prize, but it's not quite a "direct" one so to say).

http://www.theguardian.com/sport/2010/sep/21/ronnie-o-sullivan-snooker

[Anomaly UK]

Is bargaining for a better deal not covered in Econ 101?

https://twitter.com/paddypower/status/699599727474700288

[Dave Timoney]

This was the last game of a morning session, which gave O'Sullivan a 4-1 lead. At the time he chose the easier pink, there was still 1 red on the table. If he'd missed the black, his opponent might have conceded, or he might have decided to try some snookers (the optimum time is on the last red), either for some practice or just to rile Ronnie.

Leaving aside the confected publicity angle (Barry Hearn was involved), or the possibility of a betting scam, one possible explanation is that O'Sullivan had a pressing lunchtime appointment, so clearing the table and ending the session, even at the sacrifice of £10k, was more important to him.

[Sad Lassie]

Actually, your Carlin quote doesn't quite cover the attitude. The problem with giving too much money to the poor is not that it directly disincentivises them, but it reveals to them very clearly how difficult it is to do better by their own efforts, since the handouts are given to people who very clearly need them.

In contrast, the rich may well decide that they have better things to spend their time on propping up the Exchequer.

For those of us in the middle, taxation rates often make us angry and disinclined to support people who definitely do need support. I'm confident that taking nearly half of my income irritates me every time I see it spent badly or without any regard for economy. In real terms a few percent more or a few percent less makes no practical difference to my lifestyle, but I know which will change my attitudes and how

[Deviation Fom The Mean]

Incentives are a red herring. I have seen the argument used by left and right. But I will look at the left use to highlight my argument.

The left claim that co-ops are more productive than capitalist firms because workers will be incentivised to work harder, to apply themselves more etc. But in my experience the overwhelming majority of workers put in the effort and apply themselves regardless.

Incentive economics is one of those branches which attract wankers and tossers of all stripes ready to wow us with their trendy and modern sounding meta-theories. What incentive economics more often than not reveal are the prejudicial mind of the economist rather than any key insights into how economic actors behave.

Incentive economics comes straight from the managerial mindset and the rise of this sort of economics is a reflection of the rise of managerialism.

[gastro george]

@DFTM - Having worked in both co-ops and "capitalist" companies, I'd agree. IMHO the biggest incentive is to feel valued and that your voice can be heard.

[TickyW]

Just to add further to the mix.

Lord Freud and IDS make the mistake that benefit claimants respond solely to monetary rewards/penalties when they (Freud and IDS) enforce a harsh regime of benefits sanctions on unemployed claimants.

To my mind, this is another example of how an inappropriate economics framework has been used; in this case, to develop a "solution" to unemployment.

Underpinning benefit sanctions is the ugly idea of the creature "homo economicus", a coarse and base creature (in the eyes of its creators), which can only respond to "loss aversion" techniques. Deprive the creature of food for three weeks and it will look for, and find, paid employment.

Yes, a significant number of claimants do not renew their benefit claim following a sanction. Unfortunately, no-one knows why. Is it because they have found a job? Or are they subsisting on survival crime and / or foodbanks?

Lord Freud and IDS have declined to commission follow-up surveys so as to ascertain the destinations of non-returners. Again, an example of economic theory being applied, but without much empirical support for its efficacy.

[gastro george]

@TickyW - Do you get the impression that IDS cares?

[George Dawes]

@DFTM @GG So to clarify your comments, you both agree with the article that the right incentives are vital, you're just keen to note that incentives don't have to be monetary.

[TZH]

great article