Question: What kinds of things to companies do that are irrational?
Dan Ariely: One of the things that I think companies do to a large degree that makes very little sense, is the use of focus groups. So think about what a strange idea is that we take 10 people who know basically nothing about your project and you put them in the room and you let them talk for a while and then you take the, whatever they came up with, as a consequence of these two hours of random thinking and you base your strategy on it, to a large degree. And I don’t want to say that focus groups are always useless and also uninformative, but I think that taking this data and then relying [on] it as extensively as companies do, I think it’s crazy in many ways.
And the reason I think companies do it is because when these people create a sentence or an idea, it’s very easy to say, “Joe, focus group 17, said this,” and it can help you create and formulate an idea around it. When if you said "87% of the people said X," it just doesn’t have a face, it doesn’t have a desire, it’s just not as concrete and therefore, people are not as excited about the notion. So I think the focus group is incredibly useful as a persuasive attempt to tell people what to do, but as a way to find out information, it’s not as useful as people think it is.
The other thing that really puzzles me is that companies, how little they understand about how incentives really work. So the biggest expenditure for any company is salaries. And you ask people, "What do you know about the relationship between salaries and performance?" The answer is nothing. Right? And the question is, why don’t they study anything? Why don’t they study? Why don’t they try different performance, different incentive level and see how it influences performance. And they often say, well, there are all kind of laws and if we have, pay some people one way and some people another way, we might be sued. But in the last two years, with all these questions about bonuses and so on, I’ve gone to many companies and said, “Why don’t we at least do some surveys, why don’t we at least see how happy people are in the months where they give them, you give them the bonus and how productive they are?” And the answer I got 100% of the time is that people are really miserable in bonus season and because of that, they don’t want to ask them any more questions. And I said, “If people are miserable in bonus season, shouldn’t it mean that you should study it, understand it, and try to prevent it for next year?” They say, “Well, well, not this year, this year was really miserable, maybe next year, come back to us next year.” And if you think about it, it’s really incredible.
Now, how do companies decide about compensation? They look at what other companies are doing and try to equate compensation to what other companies are doing it, but it’s a place of the blind leading the blind, right? And then if we pay 5% more, other people would start doing it, but the real question is, how do you pay and how do you get people to care about the work and become more productive and be happier at their work? And the answer is not simply that more money is better.
More money can be part of the equation, but it’s also the question of how do you give that money? Do you give it as bonus, do you give it as a fixed salary, do you give it as part of the benefits? Maybe you give benefits for the gym. Do you send people on vacation to the Bahamas? And it turns out that there are ways to use money that is economically less efficient, but actually get people to be more motivated, care more, and actually become more productive.
Recorded on June 1, 2010
Interviewed by David Hirschman