Money, usually regarded great for buying things, is also handy for keeping score and could help people make better decisions, claims a new study.
According to Thomas Rietz from the Tippie College of Business, without any kind of incentive peoples' decisions may seem irrational and have little logical connection.
"If you offer incentives to people, it generates more economically rational decisions," Rietz said.
"The incentive doesn't even have to be money. If it's just a way to keep score, it still makes a difference," he said.
Rietz and his co-authors Joyce Berg, professor of accounting at University of Iowa, and the late John W. Dickhaut, professor of economics and accounting at Chapman University, reached their award-winning conclusions by modifying an experiment that economists and psychologists have used for decades to determine peoples' motivations.
In the experiment, a subject is shown two circles drawn on paper. Both circles are divided into two regions, and each region has a payoff. One of the circles is considered high risk because it has a small region with a high payoff and a large region with a low payoff - say, 36 dollars and 4 dollars.
The other circle is considered low risk because its two payoffs are of relatively equal value - say, 14 dollars and 15 dollars.
The subject is then asked which circle she would choose if she were given a spinner, spun it on either circle, and received the money on which the spinner landed. The answer is recorded, and the examiner moves on to another pair of similarly divided circles, and then another, and so on.
The subjects are also asked which of the circles they valued more by assigning each circle a dollar amount.
In the past, researchers noted that the subjects' responses were often logically inconsistent because they would frequently choose to spin on a circle that they valued less.
This was interpreted to mean that the subjects were making irrational decisions, casting doubt on the bedrock economic theory that people make decisions after logically evaluating their choices and picking the option that's most valuable.
However, Rietz and his co-researchers wondered, what would happen if you actually allowed the subjects to spin the spinner on one of the circles instead of asking a purely hypothetical question, and if you let the subjects play out the chosen gamble, would that change their choices.
They found that it did. By giving the subjects a spinner and letting them spin on their chosen circle, choices became more consistent.
Rietz said that this was true whether the subjects actually received the money or not, indicating that the subjects made more rational decisions even when the outcome was nothing more than a way to keep score.
"Just seeing how many points you win makes a huge difference," Rietz said.
By keeping the experiment hypothetical, subjects often stated inconsistent preferences. But let them spin, and while they still made random mistakes, they revealed stable underlying preferences.
Rietz says this suggests that people will make more rational decisions if they're given an incentive, even if the incentive is only something minor.
"Even incentives that are not economically valuable still motivate people.
"Employee of the month programs don't offer anything more valuable than a special parking spot or a photo on the wall, but that's enough to motivate a lot of employees to be better workers," he said.
Rietz noted that online video game companies use these kinds of motivations to keep customers. In many of these games, such as World of Warcraft or Call of Duty, gamers receive points for completing certain tasks, like collecting spells or blowing enemies' heads off.
Eventually, though, gamers who play long enough would eventually collect the maximum points, then lose interest and quit.
"When you've reached the top, there's no incentive to accumulate more points and so you stop playing," he said.
But this is bad for the video game company because then the gamer also lets his monthly subscription lapse. So to keep these gamers interested and paying to play the game, some companies started allowing those who reached the pinnacle to cash in all their points and start over, and in return gave them an emblem of some kind to indicate that they'd achieved the game's ultimate success.
Every time they max out and start over, they get another emblem. Even though the reward has no value except maybe to boost the player's legend in the gaming world, it's enough of an incentive for them to keep playing the game.
The study won the best paper award last month at 'Experimental Economics, Accounting and Society: A Conference in Memory of John Dickhaut' at Chapman University.