Limits to Incentives

Means of exchange are never neutral as orthodox economists assume. Intentional Currencies* respond by being explicit about the values they seek to promote and the outcomes they seek to achieve. An analysis of the use of incentives in currency design helps to guide that design. It also indicates strategies to utilise incentives to motivate intentional communities, NGOs and other volunteer-based organisations.

Motivation taxonomy normally starts with extrinsic versus intrinsic. Extrinsic means there is some external reward – usually either financial or in terms of expressed approval; intrinsic means the motivation comes from inside – from your beliefs or values or the desire to learn, to accomplish or to experience. Extrinsic motivations can undermine or devalue intrinsic motivations if applied alongside them towards the same ends. There are some nice illustrative stories here including the guy who is annoyed by kids playing next door [1] and incentivises them with cash (to play rather than to go away); and Charles Eisenstein’s story about the man who borrows his neighbour’s ladder [2]. “Some studies in psychology and economics have found that material incentive discourages prosocial behaviors and causes [for example] decrease in blood [donation]” [3]. Paying people to do something they had been doing freely as volunteers has been shown to change their attitude to voluntary work. This effect is often described as extrinsic rewards ‘crowding out’ intrinsic motivations [4].

Given all that, it seems reasonable to ask the question – should we be designing in extrinsic motivation at all?

Excluding extrinsic motivation might be a brave design decision but it would clearly be a valid one. We can imagine a currency that is so clear and compelling in its statement of intent, and its expressed values that participants identify closely with it and are pleased to be a part of it – both its day to day operation and its progression over time. Such a currency would have to put a high value on communicating their ‘specialness’, in reinforcing their special values through regular repetition of stories and in actively involving participants in governance, especially in changes in decision-making, operation, priorities or objectives.

It would also need to give detailed consideration to learning opportunities, to explicit recognition of accomplishments and to facilitating stimulating experiences – all of which should ideally be related in some way to the currency’s value-set rather than random unrelated add-ons for the sole purpose of motivating users. Indeed this ‘menu’ of intrinsic-motivation-methods might usefully feature as a regular item on the meeting agendas of intentional communities, NGOs and other (non-currency) value-led organisations.

For currencies, however, since part of their functionality is the creation (and destruction) of money-units, it seems logical to explore the ways in which some units can be allocated as rewards – as extrinsic motivators. But given the potential for counterproductive undermining of intrinsic motivations, these rewards may be best targetted at pro-currency behaviours – i.e. actions that are aimed at increasing the use of the currency qua currency rather than at actions related to the adopted value-set. Examples might be member-get-member marketing and reaching activity targets.

Rewards based on activity (or indeed any other) metrics are however susceptible to gaming. For example, fictional exchanges between two or more parties can boost apparent transaction volumes and trigger rewards (one argument for transaction taxes to provide a little friction). Motivation experts have suggested that every extrinsic incentive should be implemented in conjunction with secondary qualifying measures to head off gaming or other unintended consequences [5].

Penultimately, what are the implications for the darling of the new economics fraternity, Behavioural Economics, brought into fashionable purview by the UK government ‘nudge’ unit at No.10 (since privatised). According to Wikipedia, this discipline is “a method of economic analysis that applies psychological insights into human behaviour to explain economic decision-making”. At one level this is obviously to be welcomed as a partial antidote to the flawed model-based orthodox economics gradually being exposed as a dangerous ideology but still dominating the text books and establishment thinking.

But having surfaced insights, the discipline goes on to suggest ‘nudges’ that will change behaviours (for the better as defined by the implementer at hand), often without the nudgee knowing they have been nudged. To borrow a term from Chomsky we might call it Manufacturing Motivation. There is a difficult grey area here – especially if we *clearly* know what is best for our community, and have decided a degree of hierarchichal management might speed up the early stages of a project. Perhaps the key factor is whether the nudgee is aware of the nature of the intervention or not.

And finally, what is there to be learned from the commercial loyalty business? This sector prides itself on its ability to slice, dice and leverage big data to procure behaviour change beneficial to its clients. Arguably this capability is over-hyped by an industry that ‘would say that wouldn’t they’. This is not to say that there are no insights to be mined from big data analysis – more that in our brave new multicurrency world purchasing decisions will be determined more by peer-assessed product quality and ‘fit to value-set’ than by brand promotion and vouchers.

PS: Since I couldn’t find the correct term for ‘the one before the one before last [6]’ this is a postscript. There is almost certainly a read across from the gaming industry. At a recent visit to a market leading gaming company in the UK, I wasn’t surprised to see the geek fraternity well represented; I *was* surprised to see a whiteboard laying out extrinsic versus intrinsic motivations. Economists and behavioural analysts are now a routine part of games development. And lets face it, anyone who can persuade a bored teenager in the Philippines to pony up 18,000 dollars in a week for in-game purchases demands respect. Of a sort.


* : Designing an Intentional Currency

[2]: The Moneyless Man
The effect can also work with disincentives such as fines. Banks arguably see regulatory fines as a cost of doing business rather than an incentive to change their ways.
[5]: The classic unintended consequence: The Cobra Effect
[6]: It’s antepenultimate a smart*ss tells me. Its the one after the preantepenultimate one.

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