Wednesday, October 19, 2011

On Financial Incentives versus Social Norms

Which do you think is more effective in changing behaviour: financial incentives or social norms?

If modern notions of human beings are correct (that is, if human beings are profit maximisers) then financial incentives should be more effective.

Actually, it turns out that in even such an individualistic and materialistic society as the USA has become, financial incentives are less effective at changing behaviour than social norms.

Research by Hunt Allcott of MIT studied the effect of telling homeowners how their electricity use compared with their neighbors' use. This had the effect of cutting energy consumption by the same amount as the impact of an 11% to 20% increase in prices:

For those who like "evidence-based" research even when common sense should be enough, this demonstrates that modern economic theory is based on false assumptions about human nature.

However, though this does not rise from the above, false theories do affect human nature, and if they are sufficiently propagated and accepted in any society, do change human behaviour in line with those theories.

In other words, we become what we accept is wiser, better, more rational, more acceptable or more right as the basis for choice, depending on which criteria is propagated in society.

Thus the importance of what is thought, what is taught in schools and universities, what is disseminated through the mass media, and most importantly what is valued and nurtured by families, churches, associations, clubs, political parties, and other social groups - both formal or informal. That's a lot of influences, you say, so which are most important? Those to which you have greater affiliation. Sphere: Related Content

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