0:36 Intro. [Recording date: August 17, 2010.] Book argues that we have the wrong models of motivation and how we understand business and education. What has changed and what we ought to do about it? Looked at 50 years of research in behavioral psychology and in recent years a little bit in behavioral economics. What it says is that the classic set of motivators we use inside of businesses but also in schools and our families--what I call if/then motivators: if you do this, then you get that--they work pretty well for relatively simple straightforward algorithmic sort of work, work where you are turning the same screw the same way on an assembly line or stuffing envelopes or adding columns of figures in a white collar office. Evidence is pretty clear they get you to focus. Trouble is that for work that requires greater complexity, greater creativity, conceptual thinking, fair amount of evidence that says that the if/then motivators often don't work very well and can sometimes backfire. My contention is that most work in advanced economies is becoming less routine and algorithmic because that kind of work you can send overseas and automate it. As a result, kind of mismatch: using a motivational operating system, set of assumptions and protocols that's really made for 20th century work, if/then motivators, and applying it to 21st century work. Compatibility problems. Suggest we upgrade to a different approach to motivation, one far less reliant on if/then rewards, not on all rewards but a certain kind of reward, and prizes other sorts of motivators such as autonomy, mastery, and a sense of purpose. Those last three in more detail? What the research shows as I read it--don't want this to seem like it's a screed against rewards of all kinds or cry for everyone to do volunteer work and never be remunerated. Point is that research shows pretty clearly that you've got to pay people enough. If you don't pay people enough, you are not going to get motivation. But once you pay people enough--and I would argue pay people more than enough--additional units of money have relatively little impact on additional units of performance or satisfaction. What seems to matter more are these other elements. Autonomy is essentially self-direction. If you look at management--misplaced notion of management, think of it as something that emanated from nature, delivered to us from God, when in fact it's just something some guy invented in the 1850s. Gary Hamill has said this: It's a technology. It's a technology for getting compliance. That's what it's for. If you sand off the rough edges, that's what the goal of management essentially is. Don't want compliance: want engagement; and the way that people engage, people engage autonomously, through self-direction. Providing people enormous amounts of autonomy over their time at work, task, techniques, team--cool and interesting examples of companies around the world taking this very different approach to motivation through greater amounts of autonomy. Mastery: mastery is our desire to get better at stuff because we like to get better at stuff. This is why people play musical instruments on the weekend. That seems to be in some sense something of irrational behavior. Well, it's an undeniable deep source of satisfaction--musical instruments, playing chess, rock climbing. It doesn't pay people any money. Well, it depends what you are mastering. Most amateur musicians by nature of being amateurs--or playing chess on the weekend--aren't going to make a lot of money out of it. As a rational calculation of how to make money, they are better off doing something else. Curious question: biological explanation. Superficially, playing the bassoon or chess on the weekend isn't the way to sate your hunger, slate your thirst, get your genes into the next generation. Something else going on there. Would argue it's deeply innate within most people. Isn't an obvious survival benefit but presumably it may have had some survival benefit in the past that we don't know about. Plausible. Evolutionary argument more powerful than the economic argument. On the other hand--talking to someone who has a Charles Darwin doll in his office--very comfortable with these evolutionary explanations. Problem is sometimes they can be a little bit too true, a little bit too neat. Can gerrymander them to explain just about anything. People do it because they like it, get better at it. Research by Teresa Amabile, not in the book, business school professor at Harvard--shows that the single most important thing at work was the sense of making progress. Mastery, making progress inherently motivating. Finally, a sense of purpose. People tend to perform better when they do what they do in the service of something larger than themselves or at least when they see it as part of a larger whole. Some other new research by Adam Grant at Wharton, not in the book, showing that if you introduce purpose and context to a task people perform better on it, even in the absence of any economic incentives. No doubt about it. More robust building blocks for creating tasks. That said, it doesn't mean all rewards are bad; try to divide into categories: now that reward. A little more unexpected, much less contingent. Those kinds of rewards are less disruptive of the creative work. Purely contingent carrot and sticks can disrupt it.

9:16 You call the chapter about it the "special circumstances." As an economist, we tend to like incentives. The book is a challenge to economic thinking. To some extent. I'm not an economist. I think it's a challenge to conventional business practices in many cases. Easy straw man to erect and knock down--won't stop me from doing it--this idea that: when I took economics, idea that at our core we are rational calculators of our economic self-interest and we make decisions based on that. It turns out--and I know you are skeptical of some of the work in behavioral economics--Human beings not uniformly rational as conventional theory would make us out to be. Agree with that. Certainly true: we care about a lot more than just money. Certainly true that the introduction of money into a non-monetary context can be jarring and counterproductive. Real issue here: part of is when economists talk about motivation they use this little phrase, which I find unhelpful to non-economists: at the margin. What we usually mean by that, when talking about motivation: we are motivated by lots of things--money, pride. Adam Smith understood it as well in The Theory of Moral Sentiments: we care about what others think of us, our reputation. We care about a lot of subtle things--autonomy, mastery, purpose. Those are extremely important. No one wants to turn a crank for a great deal of money and there's nothing on the other side of the crank. If you are desperately hungry you might, but if you cranked a crank on the wall for years and then went behind the wall and saw there was nothing, no one would say "Oh, I got the money anyway." All important. The question is: at the margin. Given a level of autonomy, mastery, and purpose, if you then add money to it, does that enhance it at the margin? That is, does a little more money make you try harder? or does it become counterproductive. The straw man part of these arguments is: if you just give people a little money, if they do their jobs and you just leave them alone. That's bad incentives. Bad management. Don't think many people run their companies that way. The question is how do you balance that delicate mix of autonomy, mastery, purpose and money. Because they all matter. Harkens back a little bit to the work of Herzberg 50 years ago: some kind of motivators are hygienic: if you don't pay people enough, you are not going to get motivation. Have to set a standard of hygiene--whether hygiene as fairness. A 1950s word. Gave example of dictator game: you and I are dividing $10 and I get to divide, you get to veto. Say, I give you $2; you say No. Lose both the two dollars; for the thrill of giving me 0 for my arrogance. Surprises some economists. Example you opened with: Wikipedia outperformed Encarta--unexpected. Economists would have said people being paid to do this would have done a better job. In some ways almost theoretically impossible. Took my first economics course in 1983 with a professor at Northwestern, Mary Alice Shulman. Terrific teacher. If I went to her and said: Bunch of people who don't know each other get together, agree to do something for free, would triumph over corporation: she would say No. Like going to a physics professor and saying I'm going to throw a ball out of a second story window and it will float into the air. Agree, and when we look at that, I think what we are seeing is the power of play. Mix of autonomy, mastery, purpose. We do lots of things for no money. What was surprising to economists or would have been in 1983 is that we wouldn't have thought of that as play. But it is play. That's why you and I blog for free. Fun. Has some implicit financial return down the road. Maybe. But tenuous. If we were purely rational calculators, we could probably come up with a way to say what is the net present value. Looks like a loser. Point about Herzberg. Phrase in book: the pay has to be market-based, decent pay relative to alternatives. A lot of really fun jobs pay less than that. Below a certain level, you get bitterness and resentment--dictator game. But once you've done that, do you not believe that effort and shirking are affected by what people are paid? Are you against merit pay? Do you think everyone should make the same at that hygienic amount? No. There have to be accountability measures. The fact that everybody should be treated well doesn't mean that everybody should be treated the same. Especially in the workplace, people are exquisitely attuned to fairness. It is more fair for someone who is a top producer, contributing a lot to the organization to make more than someone who isn't. But mistaken to say whoever comes up with a great idea will get $5000 will lead to great performance. There is a market mechanism here. Our norm of fairness is determined by what someone in a situation--my level of ability would be making at a similar place. Research that shows that high performing companies pay more than the market-clearing wage. What they are doing is paying people enough so they are not focused on the money; focused on the work. Another interpretation: the threat of losing your job is a motivator. By overpaying, you use that carrot and stick rather than an explicit contractual one. Research on loss aversion. A little of both. Silicon Valley: culture, flexibility, autonomy very high there. Was told if you have a business in Palo Alto--don't know if this is true--that has more than three employees you have to provide a shower. Give them a chance to go biking in the middle of the day. Will check.

19:41 Question on the margin: Does a little money on the margin improve performance? I think the evidence is very unclear there. Depends on how the money is distributed. If you offer people--something of a sweet spot. If you do a little better by some kind of metric I'll give you a $10 bonus at the end of the month, that is obviously not going to have an effect. May even have a negative effect. But a $100,000 bonus, very motivating. Will figure out how to hit their number even if it requires taking the low road. Will even do it to hurt the company. Sales bonus very motivating--talking to someone who works 80 hours a week, would rather work 40--of course it leads to people reporting things that aren't true. Mix. Not only improves performance, but a cost. Spend money to police the system. Benefit is less. For really conceptual, creative tasks--anybody who comes up with a new idea that works in the marketplace gets $100,000--motivating in the sense it will produce activity; log a lot of hours. Not convinced they will produce anything more creative, more brilliant. That is the way our economy works. If you come up with an idea that is really successful, you get more than $100,000. Generates a lot of bad ideas, a lot of entrepreneurs who are overconfident. They don't do it out of love. They do it out of love and money. Actually think for successful entrepreneurs the balance tilts more toward love. In many cases, money operates in a slightly different way--form of feedback. Hard to prove. My view is that most successful entrepreneurs are not deeply greedy people. Bruce Yandle: I love my job, but if they didn't pay me, I wouldn't show up on Monday morning. There are some jobs we love enough, like blogging; others less pleasant. For entrepreneurs, at the margin thing. Wrote about this in The Price of Everything: most people are in it for the deep satisfactions that are not monetary, but the monetary is the signal, the score keeper. Innate drives: competitiveness to do something well, not just better but better than somebody else does. Sports. If you look at great athletes--notion of competition a little murkier--motivated to do the best they can do, to do something extraordinary. Often has the consequence of besting your opponent. Intrinsically motivating; rewards feedback. Margins: think about somebody who takes a company public and then makes a lot of money. Goes and starts another company. Marginal value for billionaires is not that great. Why do they go and start another company? Interesting. Fun. But they'd rather start a company that makes a lot of money than one that doesn't. For all kinds of reasons. Both.

25:30 Underlying research in book to challenge the if/then approach. Survey of that academic history and some of the findings. Goes back to the 1940s, Harry Harlow: experiment training monkeys to solve a puzzle. Was going to reward them with raisings. They start playing with the puzzle, messing with it, figuring it out in the absence of any outside reward. Primates have biological drive, we do respond to external incentives, but maybe we also have another drive, doing things because they are inherently interesting. Controversial claim at the time. In the late 1960s, another group started taking this up, University of Rochester, experiments showed that introducing these kinds of external contingent rewards on something people enjoy doing can actually extinguish their interest in doing it. Has since refined his theory a little bit, less black and white. Behavioral economists began challenging the orthodoxy about what motivates people, more three-dimensional view of human beings. Absent in many companies, to the companies' detriment. Research first, then applications; educational part. Two types of skepticism: nature of the research and the interpretation of it. Study by Ariely in India: Rewards can be fairly large without bankrupting the budget of the researcher. Offered rewards for performance that are meaningful. $5 to jump over the table versus $5000 or $5 million. Physical tasks--throwing a ball through a hoop; and cognitive tasks. Repeating a many-digit number. Memorization; and somewhat more conceptually complicated tasks. Offered three different levels of reward: small, medium, large. Small was like a half a day's salary; large was like 5 months' salary. Meaningful amount. Found that when tasks required mechanical skill, bonuses worked as expected: the higher the pay, the better the performance. But with conceptual skill, higher reward often led to worse performance; and evidence that the most incentivized people performed the worst of all. Large difference--dramatically worse. One way to interpret that--Ariely cautious in over-interpreting it: the idea that higher rewards lead to better performance isn't uniformly true. In many cases can work in opposite fashion. Skeptical not of the results but of the interpretation. If they did it again, and found different results, they wouldn't have published it. Have to be careful. Alarm bell with academic research in general. Huge problem in research. Interesting to check the hard drives and trash bins. Seen this with friends, 20 years ago, friends in graduate school, biological sciences or chemistry; working under great master. Three students assigned to carry out same experiment: the one that came back with the result he wanted was what he went with. Affected careers. Version of confirmation bias called publication bias.

35:03 But what I found disappointing: would expect rewards to be perverse and interesting would be in a case where effort mattered. Russ: mediocre golfer, but can sink a 10-foot putt. But if you put me in front of a 10-foot putt and said: If you make this I will give you a million dollars, or if you miss this, I will sever the hand of your child, I don't think I would be very good at it. Large rewards or punishment would induce fear, anxiety, make it more difficult to do the task. Trying to memorize a nine-digit number for 5 months' salary, I might do worse. Thinking about autonomy--great that workers are autonomous, but we know that autonomous workers often search the Internet. Too much, no good. Shirking is usually a problem, even in well-intentioned organizations, non-profits, fighting for a cause. Challenge to the Ariely study is it's not the right experiment. Right experiment is you've got three months to work on something and you've got to trade off working hard versus not working hard. Rewards are really important. Interpretation you would put on that: reward with stakes that high is performance-impairing because it induces anxiety. Don't have a mechanism--not like I can try harder to memorize a nine-digit number--I either have a gift at it or I don't. I only have the fear part. If you gave me a chance to do some research or find a mnemonic for it, might have a better chance. So, one is that high reward induces anxiety; the other is that the task itself is not particularly similar to the tasks people do at work, where things are often not one-shot but require time, collaboration and some degree of effort. Fair point. There is this thing--cannot remember the name of it--essentially a curve that shows if there is not enough stimulation people don't do anything, and if there is too much, people get freaked out. Sweet spot. Yerkes-Datsun? Something like that. Think that's true. A situation where someone has three months to complete a project--hiring the right people, giving them the tools they need, the freedom they need to do a great job, and paying them a healthy salary so they are focused on the job, not on the money, is a better management approach. Think there's a norm of fairness--if somebody does come up with something that ends up enriching the company, absolutely share the profits. I'm skeptical of the claim: if you do a great job over the next three months, I'll give you six months' salary is going to lead to better performance. Agree with you. Nobody likes to feel like the mouse in an experiment; or like a serf who serves the master by benevolence. Great example in the book of the ex-post reward: employee comes up with a great new product, new solution; gets small reward, lunch. Praise, compensation after the fact has the advantage of letting the bonus be adjustable, which also let's the work effort be more open ended. Would be fascinated to know how Apple treats its top engineers. Open-endedness has some kind of advantage. If people know the company treats people fairly, good performance is rewarded. Professional sports: family are Washington National fans. Professional baseball teams--people don't get paid the same amount and the amounts are known. And while it's true there are performance clauses, they are not common. The reward is basically your next contract. When baseball players are in the year before they become free agents, they actually post better numbers, once you control for other kinds of things. They try harder. Skeptical of: the coach gave them a great talk and they tried harder. They are professionals. Aren't they trying as hard as they can? Not always. Basketball--long season. Baseball: controlling for other things, the individuals do better before free agency, but their teams didn't do any better. Hard to measure. Inherent murkiness. Possible they were just going for flashier forms of success. Assumes that the next general manager didn't realize that. Next general manager is looking at the aggregate numbers; no statistical measure of unwillingness to advance a runner with a sacrifice. Manny Ramirez--won't run out of ground balls. Nature of human beings: back to the ultimatum game. People are very attuned to fairness. Executive salaries. Look at somebody like a Bob Nardelli. CEO of a large company that does really well, you get a large salary. Don't think anyone has a problem with that. The problem is if you are the CEO of a large company and you run it into the ground, you make a lot of money. Baseball players, too. People do get mad about it. Nobody gets mad about Steve Jobs making a lot of money--seems fair. Did something. Norm of fairness seems to be what prevails. Some cultural differences.

46:10 Fascinating study: the Israeli daycare study. What happened in that? Group of Israeli day care centers. Rule was parents had to pick up their kids by 4 p.m. Otherwise caregiver had to stay late. To deter some parents from being late, they imposed a fine. Makes perfect sense. Posted sign that said fine for coming late, modest fine--the equivalent of $3. After the imposition of the fine, they noticed there was an increase in parents coming late. So disincentive, punishment, fine ended up doubling the incidence of lateness. Took a situation where there was no monetary role being played and introduced one. Book: money is weird. In that case, there was a Hayekian cultural norm that said it's not nice to come at 4:05 and really not nice to come at 4:20. A few people not so nice, abuse it, free ride--sometimes even enjoy it. Getting a deal. Some just make a mistake. There was a cost before--shame, embarrassment, inconvenience another person, not just any person but the one taking care of your kids. Some get pleasure from that. Change to $3--that's cheap! At the center friend takes his kids to, it's $1 a minute. If you make it $5 a minute or more--must be a substitute for shame at some amount. Might lose some customers, too. The other thing study shows is that if you take something that operates in the moral realm and put a price on it, you export it to the monetary realm--not an inherently bad thing, but it abides by a totally different set of rules. You are just buying time, like buying Cheetohs. Impose, say, $5/minute--would deter people; would have other negatives. Makes people nervous; would also incur litigation. Have to have a stopwatch. Russ, 4 kids; Dan, 3 kids. Show up at 4:01, $5/kid--but I look at my watch and say it's 3:59. Whose watch are we going to use to arbitrate this dispute? Textbook incentives or meter on restaurant table are not used for these problems. They use the raised eyebrow, disdainful look, shame. What's the perfect solution to this problem doesn't exist. In the first case, you have the sociopath, smirks knowing he is inconveniencing someone. Other case, tree falls on the parkway, never been late before. This is complicated. "A fine is a price." In this particular scenario the price wasn't high enough. Higher, might have unintended consequences. Businesses use all kinds of signals besides money. Sometimes money is the best, sometimes not. Hayekian order takes place inside companies, too. Netflix: no vacation policy. You can take as much vacation as you want, any time you want it. There are going to be some people who are free riders. There isn't abuse within that culture--emergent order and sense of values, nothing to do with money. The modern workplace, overwhelmingly by dispensing with the time clock, has made all of us autonomous. Unless you are expected for a conference call you can wander off and run errands. There is some. Also could have a tyranny there--nobody takes time off, competing. Hunch: people would look to see what the CEO or top people do.

56:43 Educational applications. Wife teaches high school math. Alfie Kohn: Punished by Rewards. Summary of his world view: by rewarding people for doing things such as learning we are actually hurting them. Don't completely buy that argument. There are situations where rewards can be pretty effective. In schools in general, though, think he's largely right. Paying for grades, standardized test scores. Paper by Roland Fryer, study of four school districts using monetary rewards for academic achievement: Chicago, New York, Washington, and Dallas. Two most expensive, Chicago and New York: if you get an A you get $100, $200. These did not work, no effect. Think he misinterpreted the results. Washington and Dallas, not paying by outcomes but by behaviors: if you come to class, turn in your homework. According to him, that worked better. People didn't have the social capital to figure out how to get an A, whereas they know how to show up in school. Result in Washington, D.C., murky at best. Even before you impose the controls, there was a negative correlation between paying and doing these behaviors. Even he says in the paper: troubling. One place where there were robust results was in Dallas: paid second-graders a dollar for reading a book. At the end of the year, clear rise in reading scores. How did they check whether people actually read the book? Gave quiz at the end. Set of books that were circumscribed, but very large; computerized quiz. Kind of grotesque. Very clear, seemed to work. One, paying kids a dollar a book, most kids read about 15 books; they paid the kids three times a year, and paid them with a check. Fascinating in itself. Second grader in my house; don't think he knows what a check is. The one area where these cash rewards worked--where the kids were younger--the money was less salient. Think what the schools did was get excited, it's reading year! Ginned things up, made it fun. Which you could probably do without the money. The one area things worked was the cheapest. Could be possible that if you take a kid whose life circumstances are so dire, few advantages, not similarly situated, behind from the get-go, there might be a way that some of these external things could kick-start an interest in learning. Plausible, haven't yet seen it. Move away from money for a minute: the Alfie Kohn part--gets entangled with your work on compensation and education 2.0--he doesn't even like praise. I've taught for 30 years; and have kids in my house. A great teacher can motivate kids just because the kids want to please the teacher. But not every teacher. Some teachers, they're gonna show 'em that they are not going to learn, that they are a lousy teacher. True of adults, too. Smithian point: we want praise. What Kohn argues is that any kind of reward, monetary or non-monetary, all hurts the intrinsic motivation, replacing it by extrinsic motivation. Wait a minute: if I motivate a kid to try reading who has never read before, even if only doing it for the money at first, might they not continue reading? Agree and disagree in part. Take a nine-year old, as a parent, give my kid reward for every book he reads--creeps me out. The kid is absolutely going to read in the short term. Will read short books. What you've done is say reading is like working at a fast-food restaurant; only a chump would do it for free. Think he's right in that regard. Doesn't mean that any kind of reward from an external source is inherently dehumanizing. Philosophical point. Praise. The way you praise is important. Research of Stanford psychologist Carol Dweck: praise for effort and strategy and not for innate qualities and not necessarily for results; not necessarily not for results. What strategy did you use and how can you improve that strategy. Got a 13-year old, 11-year old, 7-year old. Something clicked in his head about math, not something you just use in school. Likes to do the puzzles: Give me a math problem. Instead of saying so smart when he gets it right, say "Tell me the strategy you used on that." I counted by tens rather than trying to multiply it. Awesome. Motivating, healthy for a kid. Research: praising innate quality says that effort doesn't matter. Effort itself is ennobling, glorious in and of itself.

1:10:38 The challenge is the other direction, kid not so good at math. Destructive thing. They shouldn't plan a career in nuclear engineering; but what is gloriously rewarding for a great teacher is the ability to take average students and give them a sense of mastery. Tell them they are bad at math they are not going to get there. Might have to reward them at least with praise. Monetary carrot might be destructive. If you praise effort and strategy rather than innate ability. "Tell me what you did." That's a good strategy; why don't we try something else. Remember you were struggling with long division; now you can do it pretty well. Comes into play in homework. If they are not good at it, it's not much fun, not play. Daniel Willingham podcast: if it seems impossible the kid shuts down; if too easy kid shuts down. Not a big fan of homework--most inane, doesn't hit that sweet spot. Math teacher: gives different kids different homework. Hard work. Calls it home learning--semantic move helpful. If homework is a way to help kids practice and see connection between effort and outcome, glorious thing.