Do financial incentives work?

There is a dark side of my past that I usually do not talk about. Years ago, before I became a software product designer, I user to work in advertising. Being at the constant beck and call of clients, people who work in advertising, usually suffer from low self-esteem. This is something that even successful advertising folk cannot avoid. Jacques Seguela, despite his illustrious background, having founded Havas and Euro RSCG, preferred to tell his mother that he was a pianist. At a whore house.

Don’t tell my mother I work in an advertising agency – she thinks I play piano in a whorehouse.

Jacques Seguela – Havas Creative

But even among these lowlifes, there is a category of people who are the worst affected. These are the people who work on offer ads. Offer ads are the worst. There are lies, damned lies and then there are offer ads.

Now, I used to work in advertising a really long time ago. But, even today, things have not changed much. We still use offers extensively. In fact, in Fintech and Ecommerce, the whole business model is built on burning cash to acquire customers. Offering carrots, so to speak. But, is it something that works? What is the current belief around financial incentives? In this article I want to examine some of the current beliefs, some of the scientific studies and what I think should be the way forward.

The Rational Animal

In 2005 Keith Chen from Yale did a very interesting study with Capuchin monkeys. He wanted to see if he can train the monkeys to use money. He did that by training the monkeys to exchange metal coins for fruit or candy or whatever their sweet palate desired. He would give the monkey a coin and in the other hand would offer a bowl of fruits. The moment the monkey took the bowl, Chen would take the coin from them.

Soon he had the monkeys trained to exchange coins for food. Initially the price for all the options were the same. A bowl of apples cost the same as a bowl of candy. But as time went by and Chen was able to figure out preferences, he started introducing price shocks. Candy would now cost twice as much as apples. And what the scientists discovered was that the monkeys behaved much like humans. When prices go up humans consume less of the pricier commodities and replace it with the less expensive commodities. Monkeys did the same. When the candy cost more, the monkeys would buy more apples.

The monkeys in fact understood how money worked and there was an instance where a monkey exchanged coins for sexual favours. The first know example of monkey prostitution. So, when it comes to money, humans are no better than animals.

Do ‘If… Then…’ rewards will work for humans?

If humans behave just like animals, then the standard understanding of motivation should work for us, right? Unfortunately, no. In 1962, Sam Glucksberg from Princeton University ran a few studies using the Candle Problem. Each person in the study was given a thumbtack box containing about fifty thumbtacks, a matchbox, about thirty-five matches, and one wax candle. Their task was to mount the candle on the wall and light it in such a way that no wax drips on the table.

The participants were then divided into two groups. The first group was presented the problem as it is. While the second group was provided an incentive. For people finishing in the top 25% there was a reward of $5 while the overall winner would get $20.

The ideal solution to the problem requires a bit of out of the box thinking. And interestingly, the group which was provided the incentive actually took longer to solve the problem and fewer people actually ended up solving the problem. So, the financial incentives created a pressure cooker environment which actually hampered results.

Incentives work for simple tasks.

Now the same experiment was performed slightly differently. In this case the thumbtacks were removed from the box, this removing the “functional fixedness”. This made the problem much simpler to solve. And in this case, the group that was offered the financial incentive beat the other group by a large margin.

So if incentives work for straightforward tasks they should work for tasks like buying stuff on the internet or making people use a specific type of payment instrument. Well, it does but there are some places it won’t work.

Cobra Effect – Gaming the system.

A famous anecdote describes a scheme the British Colonial Government implemented in India in an attempt to control the population of venomous cobras that were plaguing the citizens of Delhi. They offered a bounty to be paid for every dead cobra brought in. The policy initially appeared successful, heroic snake catchers started claiming their bounties and soon fewer cobras being seen in the city. Yet, instead of reducing, over time there was a steady increase in the number of dead cobras being presented for bounty payment each month. Nobody knew why.

Realising that the cobra bounty converted the snakes into valuable commodities, entrepreneurial citizens started actively breeding them. It was also much easier to kill captive cobras than to hunt them in the city. So, the snake catchers increasingly abandoned their search for wild cobras; and concentrated on their breeding programs. In time, the government became puzzled by the discrepancy between the number of cobras seen around the city and the number of dead cobras being redeemed for bounty payments. They discovered the clandestine breeding sites, and so abandoned the bounty policy. As a final act the breeders, now stuck with nests of worthless cobras, simply released them into the city, making the problem even worse than before!

Entitlement effect

The next problem is something that we commonly see today. An example of this effect can be seen in an old story which begins in the factory of the Hughes Aircraft Company when it was quite small; a few hundred employees.

Howard Hughes owned the company outright. One Christmas he gave every employee a Christmas Turkey. It was a big surprise; the employees were delighted. They all said nice things about Mr Hughes and his company.

When the next Christmas approached, what do you think the employees began to wonder and think about? “Are we going to get a turkey again?” The grapevine carried the word that the turkey would be forthcoming, and Hughes did not want to disappoint them. So, they got a turkey.

The next Christmas it was a foregone conclusion. The cry went up, “Where’s my turkey?” So, they got a turkey that Christmas and every Christmas thereafter. But no longer were they seeing motivated employees, but rather disgruntled employees who were complaining that this year the turkeys are smaller than last year.

It does not take long for people to take incentives for granted. Take free shipping on ecommerce sites or free delivery on food delivery apps. Users today expect them to be standard.

Reduced intrinsic motivation

Donating blood is a gratuitous and altruistic activity that is driven by an intrinsic motivation. But pure altruism was never enough to guarantee a constant supply of blood. So some researchers in Italy decided to study how financial incentives can help increase the supply of blood donors. They found that incentives like a day off from work drove the numbers up, but giving actual financial rewards hampered the intrinsic altruistic motivation to donate blood and fewer donors took up the financial incentives.

What to do instead of financial incentives

As designers we should be rely on financial incentives as a way to grow our user based instead, we should

  1. Build on the core feature: We should make sure that our product does not solely rely on a financial incentive to work. If users come in only for the financial incentive, that is a very fickle user base and we should be wary of that
  2. Reinforce intrinsic motivation: The users are not concerned about what your product does, but about what your product does ‘For them’. If the product can be designed to convey this intrinsic value across to the user, they are more likely to stick to the product. No financial incentive can beat that.
  3. Sometimes you do need incentives: Use incentives as a way to cross the chasm and at times to drive engagement. But not matter when you use it, use it judiciously.


  • Ajay

    September 17, 2020 at 7:06 pm

    Couldn’t agree more. I feel intrinsic motivation coupled with great experience will make a company spend less on financial incentives.

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