Is money a lousy way to motivate people?


The paper studies the determinants of regular volunteering departing from previous literature on extrinsic and intrinsic motivations. It contributes to the literature investigating the role of monetary rewards to influence intrinsic motivation. Using a simple framework that allows me to study the effect of monetary rewards on intrinsic motivation, the paper shows, controlling for endogenous bias, that monetary rewards crowd-out intrinsic motivation.

Source: “Do monetary rewards crowd-out intrinsic motivations of volunteers? Some empirical evidence for Italian volunteers” from University of Naples, Department of Economics, Discussion Paper No. 3/2009

“Extrinsic motivations crowd out intrinsic motivations.” That’s economist-speak for: if someone loves doing something and then you start paying them, money undermines that natural desire.

A lot of studies have shown this to be the case but it’s something we have a hard time wrapping our head around because nobody needs reminding how wonderful money is but we seem to take passion and respect for granted every chance we get.

From that same study:

Raising the external rewards by one-standard-deviation increase regular volunteer labour by 29 percentage-points. The crowding-out effect reduces the continuative unpaid work by 58 percentage-points. Thus, the crowd-out effect dominates the relative price effect and increasing monetary rewards reduce regular voluntary labour by 29 percentage-points.

So, in English: Yes, it may be hard to believe at first but if you go from not paying someone to paying someone a little, volunteer participation drops dramatically. Want more help? Don’t give people any money.

It sounds crazy but you have to understand that just the very idea of money does whacky things to our brains:

Money plays a significant role in people’s lives, and yet little experimental attention has been given to the psychological underpinnings of money. We systematically varied whether and to what extent the concept of money was activated in participants’ minds using methods that minimized participants’ conscious awareness of the money cues. On the one hand, participants reminded of money were less helpful than were participants not reminded of money, and they also preferred solitary activities and less physical intimacy. On the other hand, reminders of money prompted participants to work harder on challenging tasks and led to desires to take on more work as compared to participants not reminded of money. In short, even subtle reminders of money elicit big changes in human behavior.

Source: “Merely Activating the Concept of Money Changes Personal and Interpersonal Behavior” from Current Directions in Psychological Science, Volume 17 Issue 3, Pages 208 – 212

In the immortal words of Cyndi Lauper, “Money changes everything.”

Want people to trust you more? Well then you sure as hell shouldn’t give them any money:

This paper reports on an experiment studying the effectiveness of two types of mechanisms for promoting trust: pecuniary and non-pecuniary as well as their mutual interaction. Our data provide evidence that both mechanisms significantly enhance trust in comparison to the standard investment game. However, we find that the pecuniary mechanism performs significantly worse than the non-pecuniary one. Our results also point to the fact that pecuniary mechanism, which depends on monetary incentives, can be counterproductive when combined with mechanism which relies primarily on psychological incentives.

Source: “Words Speak Louder Than Money” from Department of Economics, University of Canterbury, Working Paper No. 18/2008

How about apologies? Nope. Money doesn’t cut it:

After an unsatisfactory purchase, many firms are quick to apologize to customers. It is, however, not clear why they should do that. As the apology is costless, it should be regarded as cheap talk and thus ignored by the customer. In this paper, we test in a controlled eld experiment whether apologizing influences customers’ subsequent behavior. We find that apologizing yields much better outcomes for the firm than offering a monetary compensation.

Source: “The Power of Apology” from Centre for Decision Research and Experimental Economics, Discussion Paper No. 2009‐12

How about for fostering creativity? Malcolm Gladwell reviewed Daniel Pink’s book “Drive: The Surprising Truth About What Motivates Us”:

Dan Pink is best known for a number of really insightful business books, including “A Whole New Mind.” In “Drive,” he tackles the question of what motivates people to do innovative work, and his jumping-off point is the academic work done over the past few decades that consistently shows that financial rewards hinder creativity. These studies have been around for a while. But Pink follows through on their implications in a way that is provocative and fascinating. The way we structure organizations and innovation, after all, almost always assumes that the prospect of financial reward is the prime human motivator. We think that the more we pay people, the better results we’ll get. But what if that isn’t true? What the research shows, instead, is that the great wellspring of creativity is intrinsic motivation—that is, I do my best work for personal rewards (out of love or intellectual fulfillment) and not external motivation (money). Pink does a good in tracing some of the implications of that for business organization. My only criticism of the book—and it’s a small one—is that he could have followed his thesis even more aggressively. What if we carried this thesis to Wall Street, for example? And what does it mean for things like tax policy? Does he think that we could have European levels of marginal taxation and not affect the creative underpinnings of our entrepreneurial class? I think I spent as much time thinking about what this book meant as I did reading it.


What about paying students to get good grades? Mixed results. What I found most interesting was that even if it did work it didn’t seem to get the real desired result, kids didn’t really try to learn more, they just tried to game the system:

The students were universally excited about the money, and they wanted to earn more. They just didn’t seem to know how. When researchers asked them how they could raise their scores, the kids mentioned test-taking strategies like reading the questions more carefully. But they didn’t talk about the substantive work that leads to learning. “No one said they were going to stay after class and talk to the teacher,” Fryer says. “Not one.”

Wanna punish people? (a negative motivation) Money might not always be the best way:

We study whether the use of monetary incentives might be counter-productive. In particular, we analyse the effect of fining owners of long-term care institutions who prolong length of stay at hospitals. Exploiting a unique natural experiment involving changes in the catchment areas of two large Norwegian hospitals, we find that hospital length of stay are longer in the hospital using fines to reduce length of stay compared with the hospital not using monetary punishment. We interpret these results as examples of monetary incentives crowding-out agents’ intrinsic motivation, leading to a reduction in effort.

Source: “Does monetary punishment crowd out pro-social motivation? A natural experiment on hospital length of stay” from Journal of Economic Behavior & Organization

In Freakonomics Levitt and Dubner describe a similar scenario:

Imagine for a moment that you are the manager of a day-care center. You have a clearly stated policy that children are supposed to be picked up by 4 p.m. But very often parents are late. The result: at day’s end, you have some anxious children and at least one teacher who must wait around for the parents to arrive. What to do?

A pair of economists who heard of this dilemma – it turned out to be a rather common one – offered a solution: fine the tardy parents. Why, after all, should the day-care center take care of these kids for free?

The economists decided to test their solution by conducting a study of ten day-care centers in Haifa, Israel. The study lasted twenty weeks, but the fine was not introduced immediately. For the first four weeks, the economists simply kept track of the number of parents who came late; there were, on average, eight late pickups per week per day-care center. In the fifth week, the fine was enacted. It was announced that any parent arriving more than ten minutes late would pay $3 per child for each incident. The fee would be added to the parents’ monthly bill, which was roughly $380.

After the fine was enacted, the number of late pickups promptly went … up. Before long there were twenty late pickups per week, more than double the original average. The incentive had plainly backfired.

Mom was right. Guilt works better than fines.

Is this not seeming universal enough for you, yet? Need more proof? Babies do it:

The current study investigated the influence of rewards on very young children’s helping behavior. After 20-month-old infants received a material reward during a treatment phase, they subsequently were less likely to engage in further helping during a test phase as compared with infants who had previously received social praise or no reward at all. This so-called overjustification effect suggests that even the earliest helping behaviors of young children are intrinsically motivated and that socialization practices involving extrinsic rewards can undermine this tendency.

Source: “Extrinsic rewards undermine altruistic tendencies in 20-month-olds.” from Developmental Psychology, Vol 44(6), Nov 2008, 1785-1788

Still don’t believe me? Okay, it’s true for dogs too:

Folks at the University of Vienna conducted a test in which dogs were asked to shake hands over and over and over again. If you have any experience with dogs, you will not be surprised to hear that they were absolutely delighted. And they didn’t care about being paid! The opportunity to perform the same trick endlessly with a stranger in a white coat was reward enough.

Then the researchers brought in new dogs that were given a piece of bread as a reward for every handshake. The uncompensated dogs watched, lost their innate love of mindless repetition and grew sullen.

“They get so mad that they look at you and just don’t give you the paw anymore,” said Friederike Range, one of the scientists.


Still need more proof? I wouldn’t dig up another study even if you paid me. In fact, I’d probably be less likely to.

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