Economics for Humans: Tyler Cowen on Using Incentives for a Better LifePublished: December 06, 2007 in Knowledge@Wharton
Tyler Cowen wants to help you live a richer, more rewarding life -- and no, he's not an executive coach, televangelist or diet guru. Rather, he is the latest in a series of economists applying academic insights to everyday life. In his new book, Discover Your Inner Economist: Use Incentives to Fall in Love, Survive Your Next Meeting, and Motivate Your Dentist (Dutton Adult), Cowen, a professor of economics at George Mason University, argues that by understanding the power of incentives -- rather than just the power of money -- you can better accomplish your goals. In an interview with Knowledge@Wharton, Cowen talks about Adam Smith's inner drive, why optimistic CEOs may be a bad bet, and blogging. Cowen is trying, he says, "to make economics more human."
Knowlege@Wharton: What is an "inner economist?" Is it just another way of referring to enlightened common sense?
Cowen: The inner economist is enlightened common sense, but with an emphasis on the idea of incentives, that people respond to rewards and penalties. Using or discovering your inner economist is really about thinking more explicitly in terms of incentives.
Knowlege@Wharton: You are a writer and co-founder of the popular economics blog MarginalRevolution.com. How does your inner economist explain blogging? What is the incentive for people like yourself to offer high-quality goods and services online for free?
Cowen: Blogging is fun. I've made friends through blogging, but most of all I have learned a lot. I think it has made me a better economist. I would also say it's helped me to discover my inner economist. Because when you are blogging for real people, they don't want techno babble. They don't want jargon. They're like, "What can you tell me that I actually care about?" Most of the ideas in this book, in one way or another, came out of blogging.
Knowlege@Wharton: So we can be motivated to do a lot of work, even highly skilled work, just because it's fun?
Cowen: Absolutely. A lot of science works on the same basis. It's true that scientists get paid, but typically they don't get paid more, or much more, for discovering something that will make them famous. They do it because they love science, or because they want the recognition or because they just stumble upon it. Einstein was never a wealthy man but he worked very hard. So blogging is a new form of an old idea: that people do great things for free. Adam Smith didn't get paid much for writing Wealth of Nations, even though it's a long book that required a lot of work. He had an inner drive to get his ideas out there.
Knowlege@Wharton: Are most employers, then, squashing the natural motivations people have to work hard? Is there sometime wrong in focusing too much on salaries as an incentive?
Cowen: A lot of employers put too much stress on money as an incentive and not enough on fun. They often don't realize just how much their employees need to feel in control of their own destiny. But these are very common mistakes, and they usually arise because the employer himself or herself has a great need to feel in control. That's often counter productive, and people rebel against it.
Knowlege@Wharton: So the message to the boss is: Loosen up, realize that other people need a sense of control so they can follow their desires to have fun and therefore be more productive?
Cowen: That won't work in every case but I think it's an underrated business strategy. If people cooperate among themselves in a decentralized atmosphere, they often find ways of doing things that are more effective.
Knowlege@Wharton: Which companies today have a culture with that kind of freedom and individual control and sense of fun? Google comes to mind.
Cowen: Most of the successful high-tech companies have worked that way. Apple is another example. There's a lot of innovation coming out of Apple. You can't order people to innovate. You've got to make it fun for them.
Knowledge@Wharton: Besides giving people a sense of autonomy, then, what other incentives can employers offer?
Cowen: The puzzling thing about the business world is how infrequently employers use material incentives. Most workers are not on any explicit bonus program, and those who are, only receive a bonus maybe once a year. These incentives need to be framed the right way, accompanied with the right signals; like meetings, they are an act of social theatre.
Knowledge@Wharton: So what's the right way to frame an incentive like a bonus?
Cowen: People have to know why they received the incentive they did, what it means in terms of their broader status in the workplace. Framing it the wrong way, for example, would be penalizing somebody without saying what they are doing right. Negative signals are much more likely to be heeded when bundled with something positive.
A common problem with bonuses, however, is people often feel, rightly or wrongly, that they are used to reward favorites. If they are perceived that way, they are probably counter-productive. So bonuses can be an important incentive, but they have to be framed the right way. Whether you're using incentives in the family context or the business context, you can't simply pay to have something done: We all know it's a lot harder than that.
Knowledge@Wharton: Are some people impervious to workplace incentives?
Cowen: When you say that someone is underperforming, what you're really saying is there is no incentive that motivates them. In that case, you have to get rid of them. This illustrates one of my points in the book: that you can't buy and sell everything. Good incentives are hard to come by.
Knowledge@Wharton: What if an employee is underperforming but you don't want to fire them?
Cowen: Probably you have already offered many different incentives that haven't worked. Then you have to ask: What have I done wrong, such that this employee rejects the incentives I offer? If the problem rests with the other person, I say fire them. But if it's not them, then somehow you have erred, and your problem might be self-deception, a concept I discuss in the book. We all tend to think people perceive us as more benevolent than we really are. Be more self-critical and get more feedback on how you are as a boss.
Knowledge@Wharton: In your chapter, "The Dangerous and Necessary Art of Self-Deception," you write that some degree of optimistic self-deception is critical for success, and that "depressive realists," with their more accurate view of the world, fall behind. What advice would you give to a board choosing a CEO? Is it better to have an optimistic self-deceiver or a depressive realist?
Cowen: For a CEO, I'd tend to go for the realist, because at the leadership level, the costs of hubris are very high. The problem with realists is they can get depressed and feel they are not going anywhere, but this is less likely to happen to CEOs, because they are in charge.
In the lower rungs of the company, however, I would favor overly optimistic people, those who are motivated by the idea that they always have a chance of being promoted or earning more money. The higher up you are, the more I would prefer realism. A president who won't listen can be pretty disastrous. But a senator who doesn't listen -- maybe it's not ideal, but there are checks and balances, and if the optimism gets the senator to work harder, then that is the compensation.
Knowlege@Wharton: In your book, you write that you try to motivate your dentist by complimenting her. Is a good rule of thumb, then, that when you want performance from people, whether they are your employees or your children or your boss, you should start out by praising them?
Cowen: It is a good rule of thumb. But in terms of dentists, the most important point is just to realize that you have to motivate them. They don't treat all their patients the same way. They're not always inspired. They're not always equally careful to minimize pain. As patients or consumers of care, we tend to shy away from that thought, because we feel if we admit it to ourselves, we'll get very nervous. But just by thinking about it at all, you'll probably get better treatment.
Knowlege@Wharton: So you need to make yourself special to your dentist.
Cowen: Whatever you do, whether it's chatting about a mutual hobby, bringing a Christmas gift or writing a thank-you card, you need to make yourself stand out in their emotional lives.
Knowlege@Wharton: In your chapter on art, you point out that art museums are not designed around the needs or wants of you, the museum-goer, giving you fewer incentives to enjoy the experience. Do you think that's true of other institutions, like schools or churches or jails? Is it safe to assume that nothing is really designed around your wants and needs?
Cowen: The key thing is to look at how it's funded. Public schools are funded by the government, so it will seek to satisfy the teachers and, to some extent, make parents happy. It won't make students that happy, usually.
It depends on the museum, but typically museums are funded by wealthy donors, so the museum will be fancy and have nice spaces for receptions to make the donors happy. But a zoo, which is more likely to be paid for by ticket sales, is more laid out to make visitors happy. If you look at most of Western Europe, where churches are supported by the government, you'll find the churches do a lot less to make things convenient for churchgoers. McDonald's is not my personal favorite, but it's funded wholly by the money spent there and, not surprisingly, it's set up to make the customers happy.
Knowlege@Wharton: As you describe it, the basic problem of going to an art museum is that you want to enjoy it, but you have only a limited attention span. The same set of conditions would seem to apply to other activities, like exercising or attending religious services or meetings at work. What's your advice for getting the most out of these situations?
Cowen: The advice will sound simple, but it's important. You have to make it fun for yourself; you have to create your own incentives. The problem is that people are too self-conscious. They feel if they have to make it fun for themselves, there's something wrong with them. I'm saying: Get over that feeling. Be willing to make it fun for yourself -- whether it's a museum or church or finishing a serious book you want to read.
Knowlege@Wharton: So people are reluctant to admit that the thing they want to enjoy can actually be boring or difficult?
Cowen: Exactly. Once you're in that mindset of having to appreciate everything so seriously, you tend to just avoid it all together.
Knowlege@Wharton: Why did you feel you needed to write this book?
Cowen: Economics has a reputation of just being about money or cold, heartless calculations. But there's also what I call economics for emotional or imperfect or irrational people. We're not all perfect calculators. Economics is not just about business or the stock market or the Federal Reserve; it's also practical. I'm trying to bring a love of economics to a much broader audience, to make economics more human.
Knowlege@Wharton: Do yousee an "inner economist" as a kind of ideal economist, someone who takes into account not only the financial facts but also moral concerns?
Cowen: Absolutely. Keep in mind that the first economist, Adam Smith, was also a moral philosopher. This is returning to the true roots of economics. I think it's the other economists who have been subversive. I'm just putting economics back to where it was in the first place and never should have left. Economics used to be a moral philosophy, very connected to the humanities and issues of culture. It treated humans as real flesh and blood.
Knowlege@Wharton: In this book and your blogging, you draw extensively on your personal life, whether that means talking about your step-daughter or your travels around the world. Is there any downside to thinking analytically about your hobbies or other things that you just enjoy?
Cowen: Part of my message is, "Don't always be so analytical." It's true that economics, properly understood, applies to all human choices. But sometimes analysis itself will lead to the conclusion that the best approach in a given situation is just to back off and enjoy it for what it is. Sometimes you just have to let things be.