Monday, 30 November 2015

Incentives and thinking

"The main point is that having commercial economic incentives in place causes us to perceive new information in more positive-sum terms than otherwise would be the case, or at least that is how I interpret his results" or so writes Tyler Cowen about a new working paper An Offer You Can’t Refuse? Incentives Change How We Think by Sandro Ambuehl.

An interesting idea worth thinking about, especially when you find on page 4 of the paper the sentence "In the first experiment I use cash to induce subjects to eat whole insects, including silkworm pupae, mealworms, and various species of crickets." What's not to love?

The paper's absract reads:
Around the world there are laws that severely restrict incentives for many transactions, such as living kidney donation, even though altruistic participation is applauded. Proponents of such legislation fear that undue inducements would be coercive; opponents maintain that it merely prevents mutually beneficial transactions. Despite the substantial economic consequences of such laws, empirical evidence on the proponents’ argument is scarce. I present a simple model of costly information acquisition in which incentives skew information demand and thus expectations about the consequences of participation. In a laboratory experiment, I test whether monetary incentives can alter subjects’ expectations about a highly visceral aversive experience (eating whole insects). Indeed, higher incentives make subjects more willing to participate in this experience at any price. A second experiment explicitly shows in a more stylized setting that incentives cause subjects to perceive the same information differently. They make subjects systematically more optimistic about the consequences of the transaction in a way that is inconsistent with Bayesian rationality. Broadly, I show that important concerns by proponents of the current legislation can be understood using the toolkit of economics, and thus can be included in cost-benefit analysis. My work helps bridge a gap between economists on the one hand, and policy makers and ethicists on the other.

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