Episode 82: Dan Ariely – Payoff

Episode 82: Dan Ariely – Payoff

How can you inspire motivation and loyalty in your employees? Through a series of fascinating experiments, behavioral economist Dan Ariely has begun to decipher the relationship between meaning, money and motivation. Discover one small habit that might be crushing your employees’ drive, the best way to deliver bonuses to instill loyalty, and an easy strategy for making tough decisions.


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Website: DanAriely.com
Book: Payoff
Bio: Dan Ariely, James B. Duke Professor of Psychology and Behavioral Economics at Duke University, is a founding member of the Center for Advanced Hindsight. He is the author of Payoff and the New York Times bestsellers Predictably Irrational, The Upside of Irrationality, and The Honest Truth About Dishonesty.



Peter: Welcome to the Bregman Leadership Podcast. I’m Peter Bregman, your host and CEO of Bregman Partners. This podcast is part of my mission to help you get massive traction on the things that matter most. With us today is Dan Ariely. He is one of my favorite authors of all time and is someone who has actually helped me personally as I’ve written. I’m particularly appreciative of having Dan on the podcast. He’s professor of psychology and behavioral economics at Duke. He does such interesting experiments. He tortures children around Halloween candy. He does experiments that I don’t even fully feel comfortable describing completely on the podcast, but I love them, and they’re so interesting. He wrote Predictably Irrational, which I think is a terrific and engaging behavioral economics book. He’s also written The Upside of Irrationality, The Honest Truth about Dishonesty, Irrationally Yours, and the book we’re here to talk about today, Payoff: The Hidden Logic That Shapes Our Motivations. He’s smart. He’s interesting. Dan, thank you so much for being on the Bregman Leadership Podcast.

Dan: Thank you for the kind words.

Peter: Payoff is about motivation, the hidden logic that shapes our motivation. I wanted you to start with the research that you did around the Bionicle experiments.

Dan: Before that, because I see myself on video, and I look a little strange, so maybe I should say a word about that. I turned 50 about a month ago, and I went on a month long hike. I stopped shaving at that point, then I grew a beard, and I kind of liked it, so this is a part of that story. This part is, of course, as you know, because I was badly burned many years ago. I have scars, so I don’t have hair on this side. It’s not a fashion statement where I’m trying to do half yes and half no, but we’ll see how long this beard would last.

Peter: I wondered for a moment whether it was also part of an experiment, and you wanted to see who asks you and who doesn’t ask you.

Dan: It is interesting to see the people who come and think it’s a fashion statement. When I tell them I was badly burned, who is upset with themselves, and who takes it naturally. It does create some interesting conversations.

Peter: I bet it does.

Dan: But, in terms of your question, when we think about motivation, there’s big motivation. Building roads, curing cancer, big things. But, most of life is around small motivation, right? Finishing a chapter, doing a presentation, and so on. We were wondering, what is the effect of these small motivations? Where does it come from? In this particular experiment, we had two conditions. We had people assemble Legos into a Bionicle, into a little robot, fighting robot. We paid people in diminishing ways. In the first condition, people came and we say, “Hey, would you like to build those? We’ll pay you three dollars for the first and 2.70 for the next, and 2.40 for the next, and so on, and so forth, down until you decide to stop.”

People said yes. We gave them the first robot. They kept on working on it. They finished. We took it from them. We put it under the table. We said, “Would you like to build another one for 30 cents less?” They said yes, we gave them the next one, and so on. Really, what we were trying to do is to find out at what level of payment they said no more, right? What is the minimum amount they would be willing to work? We told everybody that when we finished the experiment, we’ll disassemble all the Bionicles, put them back in the boxes for the next participant. This is what we called the meaningful condition. It’s not very meaningful, but we call it the meaningful condition relative to the other condition.

In the other condition, what we did was it started the same way. We gave people the Bionicle, say, “Would you like to build this for three dollars?” They said yes, and when they finished, we took it back. We asked them, “Do you want to build another one for 2.70?” If they said yes, we gave them the second one, but as they were building the second one, we were taking apart the first one. They were seeing their work destroyed in front of their eyes.

Peter: There was no lasting pleasure that they got from the sense that this might exist in the world for a few more moments.

Dan: That’s right. Then, we broke it. It went back in the box, and then, we asked them after they finished this second one, if they wanted to build the third one. If they said yes, we gave them the first one, the one they built, we disassembled, and basically, we just kept on exchanging those two. Now, this is not about big meaning in the sense that in the first condition, they were building it. They knew it will be destroyed later. In the second condition, it was destroyed a little faster and in front of their eyes.

We found three things. The first one is people stopped much faster. We call that the Sisyphic condition. We found that people stopped much faster. The second thing is that we gave some students, some MBA students at Stanford, we described to them this experiment, and we said, we asked them to predict how many Bionicles people would build in each of the two conditions. We’re basically asking, “Can you intuit the effect of this level of meaning?” People intuited the direction. People said, “Oh, I think in the meaningful condition people would build more than in the other condition.

But, people thought the effect will be tiny, when in fact, it was very large. This is another important thing. Yes, we do understand the importance of meaning. You asked everybody, “How important is meaning?” They say, “Yes, it’s good to give meaning,” but how big is the effect? The effect was about six times larger than what people predicted.

Peter: They constantly underestimate what meaning means to other people.

Dan: That’s right, in terms of their desire to work. When you look at this, you say, “People work for money, and they work for meaning.” But, how big is money, and how big is meaning? They say, “Money is the main thing. Meaning is going to explain a very small part of the variance. Mostly, it’s going to come from money.” But, they were wrong. Money is still important, but meaning plays a big role.

The third thing that happened was that if you look at the correlation between how much people naturally love Legos and how long they persisted, you would expect the correlation would be positive. Some people love Legos, some people don’t. The more you love Legos, the more you will persist. We found that the correlation was positive in the regular condition, in the meaningful condition, but the correlation was basically zero in the Sisyphic condition. What does that mean? It means that as long as people are allowed to express … That having their work not destroyed in front of their eyes, people express their love of Legos by building more for less money. But, the moment something was destroyed in front of people’s eyes, they were so heartbroken, that the people who love Legos did not produce more than the people who did not love Lego, right?

It’s a good starting point to think about meaning and to say meaning is important, more than we think, and it is so easy to eliminate the joy that people can get from meaning, right? Sadly, we do it all the time. Not intentionally. I don’t think anybody who runs a business says, “Let’s eliminate the joy from my worker’s life.” But, we do so many things that at the end of the day do that. Of example, administration is one of those things where you give people different tasks, and bureaucracies, and so on that what they do, essentially, is putting people in the Sisyphic mindset where they feel that they are building stuff for no good reason, that they’re working for no good end. It might be good for compliance, or it might be good for legal, or for all kinds of things, but it’s destroying motivation to a higher degree than we think.

Peter: Talk about the role of appreciation as a surrogate for meaning or as a communication of meaning.

Dan: Yeah. We had the related experiment like this with the same diminishing paid wage. People got paid less, and less, and less. Only, this time, people worked on a piece of paper. We gave piece of paper and we said, “There’s lot of random letters here. There are 12 instances where you have a pair of letters next to each other. Find those 12 instances, circle them each, and we’ll pay you. We’ll pay you more for the first, less, less, less, less. You can work until you finish.”

This time, we had three conditions. The first condition was what we call the meaningful condition. People basically filled the paper. They wrote their name at the end. They gave it to the experimenter. The experimenter scanned it from top to bottom, said “uh huh,” put it next to them, and said, “Would you like to do another sheet of paper for a few cents less?” That kept on going. This was the acknowledged condition. The second condition we called the ignored condition. People came, they showed the piece of paper, the experimenter didn’t look at it, didn’t scan it, just took it, and put it on the big pile of paper next to them. In the third condition, people gave them the sheet of paper, and immediately put it through a shredder, destroyed immediately. If you think about the results of the Bionicle, you could say, “Well, people in the shredded condition worked much less. People in the acknowledged condition worked much more.”

That’s obvious. But, what about the ignored condition? The ignored condition was somewhere in the middle, somewhere between them, but where between them? Would it be like the shredder? Or will it be almost as good as the acknowledge. Because, after all, you didn’t really destroy things in front of people’s eyes. You just didn’t look at, and said, “uh huh.” The result was that this condition was almost as bad as shredding. What does it mean? It means that if you really want to demotivate your employees, shredding is the right way to go. That’s the best way to demotivate people. Not acknowledging their effort is almost as bad. Almost as good, if you want to demotivate. If you think about this, how often do we acknowledge people? How often do we give compliments to people? How often do we even say thank you?

I think we treat thank yous and compliments as if we have only 50 of them to give in our lifetime, and we cherish each of them, just not to waste them. Simply eliminating this level of acknowledgment eliminates motivation. The good news in all of this is how easy it is to get people to motivate simply by looking at the sheet of paper and saying “uh huh.” Think about what it means. It says I’ve seen your effort. It didn’t say I appreciate it. Those simple things create the big difference in terms of motivating.

Peter: Interesting, so it’s not even appreciation as much as it is acknowledgement.
Dan: Yeah. It’s not. Of course, appreciation would be even better.

Peter: Have you tested appreciation against acknowledgement?

Dan: We haven’t, but I would think that it would be more powerful, but it’s amazing that even acknowledgment can get you so far ahead.

Peter: Some what you hear with people in business is, “Look, this is what I pay them to do, so I don’t need to go above and beyond. I pay them well, and they’re doing their job.” You have a particular view backed by research, of course, as all your views seem to be, on payment and the role of money in motivation.

Dan: Yeah, and of course we should pay people. I don’t think we should stop paying people, but what we should ask ourself is to what extent, what can money buy you? Money can get you to get people to show up at work. Some of it can actually get people to really care. But, when you think about the knowledge economy, when you think about people’s hearts and minds, you think about dedication and so on, it turns out that money can not only not provide you that, it can in fact backfire. Consider the following case. Imagine you work for me, and I said, “What would you prefer? I can either give you another thousand dollars, or I can send you to a week for the North Carolina beach.” What you might say is a thousand dollars is a thousand dollars. I can go to a different beach and buy an iPad. If I go to the beach you’re sending me, it’s just not ideal. Give me the thousand dollars. It’s a better way to maximize my wellbeing.

But, the question here is not just about money transfer. I’m not just trying to get you to maximize your life. I’m trying to get you to be more dedicated and caring about work. Let’s ask this time a different question. If I either gave you the money or I sent you to the beach for a weekend, which one of them would you stay late in two weeks from now? The answer, it’s the beach. What happened is that money is actually a short term exchange. When you think about money, it’s basically a very simple exchange. It’s work for money. That’s the exchange. We spell it out, and the framework is finished. But, the framework that we actually want to create in the modern workplace is much more long term and less restrictive. We say, “I want you to care about work when you’re at home. I want you to think about work when you’re driving. I want you to help your fellow workers, even if you’re stuck on a weekend, and they need your help on something.”

That doesn’t come with money, because money is a tit for tat exchange where if I say, “How much are you paying me for this.” What we need is we need an exchange that is not about short term, and it’s not just about backward looking. But, it’s fact, it’s a relationship that you build forward over a long term. Here’s an example. Let’s say I want to give you a 5% salary increase. I could give you that money in a bonus. I could give you that money as an increase in your salary per month. I could give you that salary as a fund to pay for your vacation, and I could give you that money in a fund to pay for your kid’s college tuition. Those are not the same thing. You could say the best one would be the fungible one. Give it to me in a monthly payment, because I get this to get fastest. Financially, it’s the right way to go.

It turns out it’s not. The monthly payment is perfectly fine, but very quickly you stop thinking of it as an increase in salary. You just get used to it. You think to yourself I’m just spending a bit more on groceries. When you get to the annual level, as a bonus, you can start spending it on other things. Basically, the money that you count doesn’t belong to the same ebbs and flows of money. All of a sudden, you can permit yourself to get a new bicycle, or vacation, or something like that. When I give you money that is dedicated to a vacation, all of a sudden, I say, “I care about you relaxing.” It isn’t when I give you this money toward your kid’s college tuition, I say, “I care about you in your really long term, and I care about your whole family.” That’s a very different statement.

If you think just about the efficiency of money, it goes in one way. But, if you think about what money says in terms of our relationship, that’s a very different story. Companies need to think about not just about how do I pay you back for what you did for me today, but how do I get your loyalty moving forward, which is what you should really care about.

Peter: That means spending money in ways that indicate your long term care of the person, of them personally. Here’s what I find so fascinating, Dan, and this goes to the predictably irrational. We know we’re better off with the thousand dollars from an efficiency standpoint. That’s obvious, if you’re just looking at pure economics, not behavioral economics. Yet, the truth coming out of these experiments is that there’s so much more value in receiving motivational payoff in other ways. Meaning is more important than just pure money coming in. Yet, to choose between the two often times we make the wrong choice. We often don’t know what it is that will actually give us pleasure.

How do we get better at making choices that trade off what we know is in our best interest for what we know will actually feel the best, ultimately, which is long term in our best interest? Let me tie one more thing into that, just to make it complicated for you to answer, which is I love the research of asking the executives, having the executives look at experimenting with bonuses, but when it came to their own bonuses, they said, “No, no, no. Thank you, we’re not interested in experimenting with our own bonuses. We like it just like we have it.” It plays to the same issue for me, which is what risks we’re willing to take with that trade off what we think we want with what we actually want?

Dan: One of the things that you’re saying is that we actually do very real experiments with motivation and payoff and payment. It’s shocking that salary is the biggest line item for a company. I can’t imagine one where it’s not the case. You ask people, what do you really know? What do you really know about the relationship between how you pay people and how motivated they are? Most people have to admit, almost nothing, because you have some people hire some consulting firm to tell them what other people are paying. In terms of truly understanding the nature of motivation, companies like Zappos, and Google, and P and G, everybody has their own theory, but nobody can tell you they’ve tested that theory or they actually understand what’s going on. It’s kind of shocking how little we know about the relationship between payment and motivation, and how little we invest in learning more about this.

The most extreme example for this was I talked to a consulting company, a very large consulting company at their bonuses. I said, “Let me do a survey. We’re not going to do experiments with bonuses. Let’s do a survey to understand happiness, expectation, and so on.” What they said was, “No, no. We can’t let you ask people about the bonuses.” I say, “Why?” They say, “It’s such a miserable period in a company that we don’t want people to think more about their bonuses. We want them to think less about the bonus.” I said, “Look, the whole theory of bonuses is you don’t want people to think about them. You want people to think about the bonus, and your theory is by thinking about the bonuses a lot, they’ll work harder and be more productive. Otherwise, you wouldn’t do it if they don’t think about it. The fact that they think about the bonus and it makes them miserable, doesn’t it suggest that it’s the wrong payoff structure?” They said, “Yes, yes, yes, but we have to do it.”

By the way, consulting companies, people who give advice, presumably … The other thing is, why are we so wrong? When you ask people about themselves, and you say, “Under what conditions would you go to somebody’s house and give them cash instead of a bottle of wine? Under what conditions would you offer your significant other $50 if they did the laundry or scratched your back?” People understand that those are not the right terms, but for some reason, when we look into our lives, we understand some of this. But, when we look into other people’s lives, we are not active participants. We are observers. As observers from the outside, and sometimes it also happens for our lives in the future, when you say, from a distance. When you’re in a particular situation, you understand how you feel in that particular situation. But, when you predict from a distance, your situation, or you look at the lives of other people, we think much more cognitively and much less emotionally.

Things like reciprocity or revenge … Here’s an experiment in reciprocity, a very simple experiment called the trust game. Two people, different rooms. They don’t see each other. You give player one $100, and you say, look player one, you can either keep the $100 or you can send it to player two. If you send it to player two, the money will quadruple. It will be $400. Then, player two could either walk away with the money, in which case you get zero, or they can send you back $200. Now, what happens is that the prediction is that player two … The economic prediction is the player two will walk out with all the money. If they got $400, and it’s anonymous, why don’t they just walk?

The reality is that people send the money, and people who get the money almost always send the money back. We have this need to reciprocate. I did some studies on people who were panhandling. Some of the most successful beggars basically come to people and put their hands up to have a handshake. They say, “When somebody passes you by, they just try not to look. They try to pretend you’re not there, that you’re not human. But, if you put their hands, it’s very difficult to ignore you. They shake your hand. They look into the eyes. Then, they have no other option but to give you money.”

We have this incredibly wonderful … By the way, usually, we think about irrational is the same as bad. Irrational is not bad, right? Falling in love, and respecting a handshake, and sticking to our word. There’s lots of wonderful things, being altruistic, helping each other, reciprocation. All of those things are irrational from the standard economic perspective, but they’re wonderful, and we’re full of those tendencies. The thing is that we don’t recognize those tendencies when we’re far away from it. If you’re in a particular social situation and somebody did you a favor, you feel the need to reciprocate. You understand it in that moment. But, if you’re far away from it, you don’t understand.

If you’re asked a question of how can leaders of any organization basically have a better insight into what strives us, one thing of course is research. I think this is what research is supposed to do. It’s supposed to give us some hints about, here are the directions you’re going to likely to get things wrong. Let’s be careful. That’s one approach. The second approach is to make decisions about situations only when we’re experiencing them. Right? So, if you say, “How do I understand real motivation?” I would say, “Try to understand it when you’re on the job, fully immersed into it.”

Peter: In the heat of the moment.

Dan: That’s right. When you think about running, you can say, “Oh, it’s going to be terrible.” Maybe the first few minutes are terrible, but then you get used to it. You maybe enjoy the pain or the difficulty of breathing, or music, or whatever it is. If you want to understand the first two minutes, be in the first two minutes. If you want to understand running, you have to be in the mode of running. If you want to understand the joy of anything or the challenges of anything, you have to be in that situation. We’re not just good predictors.

Peter: Where in fact, we’re particularly not good predictors. What you’re saying, which I’ve found very much to be true in the advisory work that I do, which is, if someone’s having a hard time making a decision, they should just make a decision that is hopefully reversible in some way so they could experience it, and then they could decide. Because, they’re not going to figure it out in their heads.

Dan: That’s right. We simulate in our heads different situations, but we have a hard time simulating the emotional element in lots of ways, which is of course why women have multiple kids, and why we keep on falling. All kinds of things that are good and bad. As somebody who had lots of pain, and you say, “What do I remember from my three years in hospital?” I remember being in a lot of pain. I remember some of that, but it’s at a descriptive level. If you ask, “At what intensity do I really remember it, and at what intensity can I actually make reasonable decisions about pain?” I would say, “I can’t.” I really can’t. To truly make those decisions, I will have to experience the pain again. I remember it was terrible. I remember some elements about it, but thankfully, most of the quality, most of the feeling of the emotion is gone. You just can’t simulate it, no matter how much you try. When you try to say, “How much do I care?” Anything that has to do with …

We can simulate how much do I like $100, or what else can I buy with $100? That, I can always do. But, to simulate joy, commitment, a feeling of improvement, a sense of meaning, you can’t do it without feeling that sense.

Peter: Dan, thank you so much. The book is Payoff: The Hidden Logic That Shapes Our Motivations. All of Dan Ariely’s books are incredible, and fun to read, and interesting. I urge you to go out and get them. Dan, I so appreciate you being on the Bregman Leadership Podcast.
Dan: My pleasure, and looking forward to next time.

Peter: I hope you enjoyed this episode of the Bregman Leadership Podcast. If you did, it would really help us if you subscribe on iTunes and leave a review. A common problem that I see in companies is a lot of busyness, a lot of hard work that fails to move the organization as a whole forward. That’s the problem that we solve with our Big Arrow process. For more information about that or to access all of my articles, videos, and podcasts, visit PeterBregman.com. Thank you, Clare Marshall for producing this episode, and thank you for listening.

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