Uri Gneezy Interview
October 6, 2014, 9:30 am (JST)
Epstein/Atkinson Endowed Chair in Behavioral
Economics, Professor of Economics & Strategy
Rady School of Management, UC San Diego
Professor
Gneezy applies behavioral economics principles to solve real-world problems. He
has studied the effects of incentive-based interventions to encourage good
habits and reduce bad ones, Pay-What-You-Want pricing, and the detrimental consequences
of small and large incentives. In addition to traditional laboratory and field
studies, Dr. Gneezy works with companies, conducting behavioral economics-based
experiments to achieve traditional performance goals in non-traditional ways. Before
joining the Rady School, Gneezy was a faculty member at the University of
Chicago, Technion and Haifa. Gneezy received his Ph.D. from the Center for
Economic Research in Tilburg. His recent book The Why Axis: Hidden Motives and the
Undiscovered Economics of Everyday Life published by PublicAffairs in 2013
has received critical acclaim.
1. Your research spans several topics
including when
and how incentives work, deception, gender differences in competitiveness, and
behavioral pricing. Can you give us an overview of this
research and its major findings?
The theme that connects the different research topics is what motivates
people. If you consider incentives, for example, we take a look at when
incentives have a negative effect on people’s behavior, when they have a
positive effect, and when they have no effect. In a large percentage of cases, incentives
have no effect. Companies offer all kinds of incentives to people, but they do
not change their behavior. Offering such incentives, companies spend a lot of
money for nothing!
Moving to the topic of deception, we can think of what makes people lie.
Incentives do not have to be money. Power can be an incentive. I am interested
in how incentives affect the decision to lie. Many of us experience what I call
lie aversion. We would prefer not to lie if we could reach the same, desired
outcome without lying. Yet we find that many people lie. For this reason, I
think that understanding the incentives driving this behavior is important.
Similarly, my research on gender all centers on the impact of incentives. I
look specifically at how men’s and women’s reactions to incentives differ. In
our research on competitive incentives, we learned that women respond less than
men. Thus, even the gender studies we are conducting center to a large degree
on incentives.
Follow-up question:
How did you initially become interested in the issue of incentives?
From a very young age, I have always wondered why people do what they do.
What are their hidden behavioral motives? Even before starting to study
economics, I was interested in understanding what motivates people. I simply
found this topic interesting. Sometimes this interest becomes annoying: When I go to the doctor, I will wonder what is
motivating him to tell me to do something. I have become obsessed with the
question of incentives, but I also find them fun.
2. Vernon Smith used experiments to explore the formation of bubbles, and
Daniel Kahneman to develop Prospect Theory. How does your research relate to that
of these scholars, who brought the application of behavioral economics into the
mainstream by winning the Nobel Prize?
Vernon Smith and Kahneman and Tversky are the fathers of the field. They
started their research in the field when it was not popular. They were the
pioneers. Vernon Smith concentrated primarily on auctions. He called
experiments the wind tunnel. If you want to know how people will behave, you
run these experiments. I do not typically run market or auction experiments of
this type. But Vernon Smith set the rules that we are using in the field today.
For example, he indicated that we cannot deceive people in our research even
though deception is regularly used in psychology. We pay people for performing
tasks. In other words, we are looking at the real choices made by people.
Kahneman and Tversky were both psychologists. As such, they brought a
different perspective to economic problems. They did not come with a theory,
then use a wind-tunnel type experiment to determine when or how it works. Their
work was more about the psychology of decision making. Many of their findings
are about the psychology of behavior. Some of the findings related to mistakes
people make. They were trying to find a more descriptive theory of decision
making under conditions of risk.
My work is different in the sense that it is based on the work of these
three pioneers, among many others. In addition, I am looking at phenomena of
importance in the real world. Most of my research these days is with companies.
If a charity wants to raise more money, what are the behavioral or
psychological elements that can be incorporated into the way the charity
requests contributions to raise effectiveness? If a company wants more people
to follow it on its website, what kind of incentives could be used? As
mentioned, not all incentives are created equal. For this reason, if you
understand the psychology of incentives, you can actually use them more
effectively.
One major difference between what Smith, Kahneman, and Tversky did and what
I do is that I work with the companies to understand the way they or their
customers are behaving. Being closer to the real-world phenomenon in this way
is not necessarily better, but this is the stage in which I believe we
presently are in behavioral economics. Kahneman and Tversky devised the concept
of framing and showed how it is important. In a lab experiment, we can easily
show that framing a problem in one was as opposed to another causes people to
think about it differently. In my research, I am trying to take this concept to
companies, determining whether they can benefit by framing choices differently.
3. How has the field of behavioral economics evolved since 2002, when Kahneman
and Smith were awarded the Nobel Prize? Where do you think the field is heading
in the next ten to twenty years? Who are the young scholars you feel will lead
the field’s development?
To a great extent, we have left the lab. We have gone out into the field,
where we are trying to test our hypotheses in a more natural environment. That
is not to say that I do not use lab experiments. I am still doing them, but I
use them as one tool. Going out into the real world is something important that
we are doing. For example, one application we are looking at is in the area of
development in Africa. I believe the area will be interesting.
In twenty years, I hope that behavioral economics will no longer be
distinguished from “mainstream economics.” Behavioral economics is about
people. If you talk to people other than economists, these people do not even
seem to understand the need for behavioral economics as a distinct field. How
could economics be non behavioral? Our being behavioral economists means that others
are non-behavioral economists. Confusing, isn’t it?
In the future, I hope that textbooks will not have a separate chapter about
behavioral economics. Rather, I hope that every chapter will feature the basic
model rooted in the simplifying assumptions of economics, followed by
(behavioral-based) explanations of what happens when these assumptions are not
valid: “Here is what you expect when A,B, or C occurs because people’s behavior
is more complex than suggested by the simplifying models economics uses.”
We do not currently have enough young people with creative ideas. We need
more people in the behavioral economics field. There are a few good people in
the field, but no superstars come to mind.
4. Can you give us an overview of your recent best
seller The Why Axis, summarizing the highlights?
I am happy my book is popular in Japan, too. The book looks at how people
actually behave, trying to bring insight from models, theories, and
experiments. We take these insights to the real world to test how they actually
work. Behavioral economics is one topic, field experiments, the other. We are
testing the theory, not simply making assumptions. The advantage of field
experiments is that they permit understanding of the causality.
If you have a company change the price of a product they sell over the internet,
you will observe the effect. You can really isolate the effect, noting that one
group of people viewed a particular item at one price and another group at the
other price. Using such data, you can construct the demand function. You can
really test what happens when you make changes based on your behavioral
theories. To be clear, the book is about behavior economics and field
experiences: trying to both understand people’s behavior and test it rather
than making assumptions about it.
We wrote the book because we wanted to take the message to companies about
the importance of testing ideas rather than trusting their intuition about
those ideas. When companies create incentives, the frequently rely on their
intuition. These companies could benefit from field experiments. They could
both become more efficient and save money, too.
5. In addition to conducting academic research, you consult with companies to
help them apply behavioral economic principles in their businesses. Can you
tell us about your consulting practices, citing some concrete examples of
projects and the results they have produced?
We worked with a large insurance company that wanted employees to receive
flu vaccinations and take other tests. As an incentive, the company gave
employees $10 for each test, spending $100 million dollars on the program. We
conducted a field experiment to assess this incentive. In one condition, we
paid employees $10 per vaccination or other activity up to 5 activities. In
another condition, we told them they had to complete five activities to receive
a payment. Looking at the data, we realized that some of the money the company
was spending was what we call “money for nothing.” Many of the employees would
have received the vaccinations even if they had not been paid for doing so. Of
course, these employees are happy to accept the money, but it is not the reason
they are receiving the shots. In this case, we helped the company to achieve
the same goals for only $50 million dollars, saving them half of what they had
been spending.
6. Earning your
bachelors in Israel, then your Ph.D. at Tilburg University in the Netherlands,
you
were educated entirely outside the United States. How does the training you
received at the latter
differ from that offered by U.S institutions? What are
the similarities?
Like many other life events, my studying for a Ph.D. in the Netherlands was
a coincidence to answer your first question. I did my bachelors degree in Tel
Aviv because I had grown up there. After graduating, I moved to the Netherlands
with my wife, who had accepted a job there. We were not following some grand
master plan we had carefully designed.
To answer your second question, studying in the Netherlands had a
significant effect on my life. At American universities, there is one way and
one voice about how to do research. Outside the U.S, in Europe, Asia, and other
places, thought about economic problems is more pluralistic. I think the
average quality of training in the United States is higher than in other
places. European universities have fewer highly skilled researchers but the
variance in perspective is good. Different ways of thinking are good. Scholars
who have not been trained in traditional economic thinking can more easily be
creative. I am fortunate not to have attended an American in university in this
respect. If I had, I would have received more rigorous training, but would also
have left a bit brainwashed. I would have more difficulty trying to do a
different type of research.
After I completed my Ph.D., I returned to Israel, where I was a university
faculty member for four years. I decided to develop my career in the United
States for two reasons. First, in the area of economics, America is still the
center of gravity. A scholar can more easily launch a career there than
elsewhere though developing a career in Europe has also become easier. Hong
Kong, Japan, Singapore and China, are developing, too, but the United States is
still at the center. I came to America because I wanted to enter the Big
League. The second motivation was purely economic. The salary in Israel was not
adequate to enjoy the lifestyle I desired.
