One of the longstanding political debates in the United States concerns public education; no matter what changes we make to the system, there always seem to be plenty of problems to fix. Hiring high quality teachers and regularly evaluating them is a major issue in particular. In 2010, a group of economists set out to tweak the educational system using financial incentives. They designed a research study with the goal of improving teacher performance, and thereby student performance, by motivating the teachers with big cash bonuses.
Of course, cash bonuses as a job incentive are nothing new. But the interesting part of the study was the unconventional method that the economists used to administer the bonuses. Of the 150 teachers that participated in the study, half received their bonuses at the end of the school year based on the testing results of their students. The other half of the teachers received their bonuses at the beginning of the school year, with the understanding that they would have to pay back part of their bonuses if their students didn’t perform well at the end of the year. All other factors were the same, including the size of the bonuses and the criteria for grading performance.
Whether the bonus came at the beginning or at the end of the year, you would think it would offer significant motivation for teachers. After all, money is one of the easiest levers to pull if you’re trying to manipulate behavior. But when the school year had ended and the performance results were in, the second group–the teachers who received bonuses at the BEGINNING of the year–had significantly better results. The research team determined that loss aversion, or the fear of losing what we already have, was the primary factor that motivated teachers to perform better.
Economics for Babies
The key to the teacher performance study was a principle that economists and psychologists call “loss aversion.” It’s easy enough to understand: the pain of losing something outweighs the joy of gaining something, even if those two things have equal value. One group of teachers was motivated by the fear of losing the bonuses they had already received; the other group of teachers was motivated by the potential to earn a bonus. And the fear of losing a bonus was more motivating than the prospect of earning a bonus.
A simple, real-life situation might help to illustrate loss aversion as well. I have a one-year-old daughter that loves to play with balls and she often wobbles around the house clutching them close to her chest. If I hand her a ball, she’ll take it from me, then hold it up and smile to show me she’s pleased. But if she’s holding the ball and I take it from her, she throws her head back and drops on the floor screaming hysterically. She expresses mild amusement when she receives a ball, yet writhes in agony when she loses a ball. She’s just adhering to economic principles: the pain of losing a ball far outweighs the pleasure of receiving one.
Loss Aversion in the Wild
Now that we understand loss aversion, how can we use it to our advantage? Let’s take a look at two different creative uses of loss aversion that motivate people to behave differently than they would otherwise.
1. Lose if you snooze
There are plenty of apps to choose from that “threaten” to take your money if you don’t keep up with your goals. My favorite of these is Stickk.com, which helps you set up a goal, then creates a consequence, like donating your money to charity, if you don’t achieve your goal. But since Stickk is already relatively well-known, I thought I would introduce you to a devious (and technically illegal) alarm clock that made the news last year.
If you REALLY want to wake up early, and you’re fully invested in a loss aversion strategy for motivation, build yourself a money-shredding alarm clock. The alarm goes off, along with a timer. If you don’t get up and stop the alarm soon enough, it will slowly feed your cash into a small paper shredder. This seems to be a very literal implementation of loss aversion: take action now, or your money will be destroyed. I haven’t personally tried an alarm clock like this, but I imagine it would be very effective. If you decide to rig something like this for yourself, however, you may want to be, umm, discreet about your new wake up strategy, since destroying money is a felony in the United States.
2. Saving Energy
You might find that loss aversion already exists in some areas of your life, but you don’t find it motivating because you aren’t even aware of it. This was the case with a simple study conducted about the amount of energy used in homes. Most of us receive a utility bill each month for the energy that we’ve used, but as long as the bill stays relatively the same, we hardly think about how much money we’re spending.
In the energy conservation study, homeowners were given an “in home display” that showed them exactly how much energy they were using throughout the month. This direct feedback motivated homeowners to change their behavior, reducing their consumption of energy by an average of 7%. Without knowing how fast we’re consuming energy, we blindly pay the bill that comes each month. But when we can see the amount of energy being used (and feel the pain of how much we’re spending) it’s a lot more motivating to change our behavior.
Change Your Perspective
Whether you’re trying to change your own behavior or trying to influence others, loss aversion can be a powerful form of motivation. If you take a look at the different motivating factors in your life, you may find that you can replace traditional incentives with loss aversion strategies. It’s a subtle shift in perspective, but it takes advantage of our psychological tendencies and ultimately may help you achieve the results you’re looking for.