The Effect of the Introduction of Low Reward on Performance

Bachelor Thesis Finance Department

Financial Experiments: The effect of rewards on performance

The Effect of the Introduction of Low Reward on

Performance

A paper based on the paper: "Pay enough or don't pay at all", by Uri Gneezy

and Aldo Rustichini (2000)

Lucas Lemmens

ANR: 969374

Bedrijfseconomie

Bachelor Thesis

[email protected]

Supervisor: E.S. Pikulina

18-05-2012

Tilburg University

Cleijten

Rectangle

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Abstract

This paper is based on the paper Pay enough or don't pay at all from Uri Gneezy and Aldo

Rustichini, released in the Quarterly Journal of Economic in 2000, in which two experiments

were described to test monetary incentives on performance. The experiment conducted in this

paper is based on the first experiment performed by Gneezy and Rustichini.

This paper analyzes the IQ experiment of Gneezy and Rustichini and checks if the drawn

conclusions are valid. In their experiment 160 participants were invited to do a test resembling

an IQ questionnaire. The participants were divided into four groups with different pay-outs:

one group with no payment, one with a small piece-rate payment, a group with a moderate

piece-rate payment and a group with a high piece-rate payment. The scores of the different

groups were compared. The outcome of the experiment showed that the group with the small

compensation scored the worst. Gneezy and Rustichini concluded that the intrinsic motivation

was diminished by the small compensation and therefore stated that no compensation is better

than a low compensation. Because of the possibility of different reference points of the

participants and differences in skill and characteristics, a design was created to test whether

the conclusion drawn from the IQ experiment is valid. In this new design the treatment group

has to solve mathematical questions in the first stage for a low piece-rate reward, and has to

do the same in the second stage for no extra payment. The results of this experiment are

compared to those of Gneezy and Rustichini, after which conclusions are drawn concerning

the effects of monetary incentives on performance. Due to a lack of time, the actual

experiment could not be conducted. However, the experiment of Gneezy and Rustichini was

thoroughly analyzed and the new design is ready to be put into practice.

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Table of contents

ABSTRACT .................................................................................................................................................2

TABLE OF CONTENTS ................................................................................................................................3

1. INTRODUCTION ....................................................................................................................................4

1.1. THE PROBLEM BACKGROUND ...............................................................................................................4

1.2. THE PROBLEM STATEMENT ...................................................................................................................7

1.3. ACADEMIC RELEVANCE ........................................................................................................................7

1.4. OVERVIEW OF THE REST OF THE CHAPTERS ..............................................................................................8

2. CONCEPTUAL FRAMEWORK .................................................................................................................9

2.1. IDENTIFYING THE VARIABLES ................................................................................................................9

2.1.1. INDEPENDENT VARIABLES: EXTRINSIC MOTIVATION, INTRINSIC MOTIVATION AND SKILL ....................................9

2.1.2. MODERATING VARIABLE: LEVEL OF REWARD .................................................................................... 10

2.1.3. MEDIATING VARIABLE: EFFORT ................................................................................................... 10

2.1.4. DEPENDENT VARIABLE: PERFORMANCE .......................................................................................... 10

2.2. GRAPHICAL REPRESENTATION OF THE THEORETICAL FRAMEWORK ........................................................... 10

2.3. THE RELATIONSHIP BETWEEN THE VARIABLES ....................................................................................... 11

3. THE EXPERIMENT OF G&R ................................................................................................................. 12

3.1. DESIGN .......................................................................................................................................... 12

3.2. RESULTS ........................................................................................................................................ 12

3.3. EXPOSITION AND LIMITATIONS .......................................................................................................... 14

4. EXPERIMENTAL DESIGN ..................................................................................................................... 17

4.1. DESIGN .......................................................................................................................................... 17

4.2. RESULTS ........................................................................................................................................ 18

5. CONCLUSION ..................................................................................................................................... 20

REFERENCES .......................................................................................................................................... 21

APPENDIX 1: INSTRUCTIONS FOR THE TREATMENT GROUP ................................................................ 24

APPENDIX 2: INSTRUCTIONS FOR THE CONTROL GROUP .................................................................... 25

APPENDIX 3: QUESTIONS USED IN THE EXPERIMENT .......................................................................... 26

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1. Introduction

1.1. The Problem Background

There is no consensus between economics and other social sciences concerning incentives for

motivation in financial experiments.

In general, economics states that a bigger reward leads to a better performance. Mason and

Watts (2010) concluded that people complete more tasks when payment is higher. When

financial rewards are present, one tends to work harder to obtain the reward, in contrast with

an absence of financial rewards, where one has less incentive to perform well.

Other social sciences, particularly psychology, state that financial rewards are not the solution

to make one perform well. Camerer and Hogarth (1999) state that intrinsic motivation gives

one enough motivation to perform. Financial rewards might induce one to put in more effort,

but it does not necessarily leads to a better performance, especially when a task requires skill.

First of all, to be motivated means to be moved to do something (Ryan & Deci, 2000). So, it

is a reason or multiple reasons for one to exercise a certain action. There are basically two

kinds of incentives that motivate people to put effort in something:

First there is extrinsic motivation. Davis et al. (1992) describes it as follow:

Extrinsic motivation refers to the performance of an activity because it is perceived to

be instrumental in achieving valued outcomes that are distinct from the activity itself,

such as improved job performance, pay, or promotions. (p.1112)

In other words, the extrinsic motivation is formed by the compensation you receive for

exercising the activity, and is independent from the activity itself. It is the part that motivates

you, not because you like the activity that you are doing or you want to perform because of

personal incentives, but because of the tangible reward you receive for it.

In contrast to extrinsic motivation there is intrinsic motivation, on which Davis et al. (1992)

state:

While extrinsic motivation influences behavior due to the reinforcement value of

outcomes, intrinsic motivation refers to the performance of an activity for no apparent

reinforcement other than the process of performing the activity per se. (p.1112)

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Thus, the reason you have to perform is derived purely from the activity itself. All other

factors outside of the activity are omitted. For example: enjoyment, interest, determination in

finishing the activity are called the intrinsic motivation. It can be defined as a task being

interesting, or as the satisfaction one gains from an intrinsically motivated task engagement

(Ryan & Deci, 2000). These definitions derive from two different views: the operant theory

and the learning theory. The operant theory states that intrinsically motivating activities are

activities where the reward is in the activity itself (Skinner, 1953). The learning theory (Hull,

1943) states that intrinsically motivated activities satisfy the innate psychological needs.

According to Gneezy & Rustichini (2000) the two commonly used measures to determine

intrinsic motivation are the free-choice period and the self-report.

The free-choice period is the amount of time freely spent on the activity. (Gneezy &

Rustichini, 2000). It is the period when the experiment itself is not going on, but the

participant is in contact with the activity. The time spent on the activity outside the

experiment is used to determine the intrinsic motivation. For example, the experiment consist

of solving puzzles and when the experiment is over the supervisor tells the participant that he

will be back in a few minutes and that the participant is allowed to do whatever he likes to do

(e.g. reading magazines, solving more puzzles, do other things). This is called the free-choice

period. The time spent on solving puzzles during this period is used to determine the intrinsic

motivation (Pelletier & Vallerand, 1996).

The self-report is the report by the subjects on motivation (Gneezy & Rustichini, 2000),

commonly in the form of a survey. To measure the intrinsic motivation, the Intrinsic

Motivation Inventory (IMI)1 can be used, which has been used in several experiments

concerning intrinsic motivation and self-regulation (e.g., Ryan, 1982; Ryan, Mims &

Koestner, 1983; Deci, Eghrari, Patrick, & Leone, 1994). It is a multidimensional measurement

device for laboratory experiments to assess the subjective experience of participants

concerning the activity. There are six subscales in the IMI: interest/enjoyment, perceived

competence (positive predictor), effort, value/usefulness, felt pressure and tension (negative

predictor), and perceived choice while performing a given activity (positive predictor).

Although there are six subscales, the interest/enjoyment subscale is the only one that assesses

the intrinsic motivation and is thus considered the self-report measure of intrinsic motivation.

1 Intrinsic Motivation Inventory:

http://www.selfdeterminationtheory.org/questionnaires/10-questionnaires/50

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The different subscales are useful for different kind of studies. Therefore, it is rare that all

subscales are used in one particular experiment. Experimentalists use the subscales related to

the explored subject. McAuley and Tammen (1989) found strong support for the validity of

the IMI.

Some activities do not depend on external rewards, since motivation is provided by their own

inherent reward (Deci, 1971). It would seem logical to give people a monetary compensation

if you want them to perform better. However, the following was concluded after a study held

with high school students performing an interesting activity (Kurglanski, Friedman & Zeevi,

1971): tangible rewards can undermine the intrinsic motivation, causing a worse performance

than when no compensation is offered. This paradoxical conclusion implies that it is better to

pay nothing at all than to give people a small compensation for their effort, in order to get

their best performance. This is confirmed by other studies performed with pre-school

students, where not necessarily financial rewards, but even symbolic rewards could

undermine the intrinsic motivation (Lepper, Green & Nisbett, 1973). This is also applicable to

some real-life examples like donating blood or collecting money for charity.

Gneezy and Rustichini (2000) stated that no compensation is better than low compensation,

but that sufficient piece-rate compensation induces the best performance, causing a non-linear

relationship between payment and performance. The explanation behind this statement is:

when people do not get compensated, they exercise the task purely out of intrinsic motivation.

When they receive low compensation, a part of their intrinsic motivation is replaced by

extrinsic motivation: the financial reward. When doing an intrinsically interesting activity, or

an activity for a good cause, the compensation diminishes the intrinsic motivation, with worse

performances as a result. People may (subconsciously) feel discouraged by this low

compensation. When people receive a sufficient piece-rate reward (a fixed reward for each

correct action), the extrinsic motivation is usually very high. In other words, people receive

enough money for performing a task to make the task worth doing. The better they perform on

the task, the better they get compensated (with a compensation which is worth performing

well for), so people have a good reason to put in as much effort as possible. This induces the

best performance. You can see the performance as a net result of intrinsic and extrinsic

motivation: when no compensation is offered the performance is solely based on intrinsic

motivation. When monetary rewards are introduced, the performance is now based on both

intrinsic and extrinsic motivation. When a reward has a negative effect on the motivation (in

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case of low payment), it will cause a lower net result with a worse performance as a

consequence. When the reward has a positive effect (in case of sufficient payment), it will

lead to a higher net result, causing a better performance.

Gneezy and Rustichini (2000) (when it concerns their experiment this is stated as: G&R)

study the differential effect of small and large rewards. They look at the behavioral response

to different rewards in a single-stage setup. This means that the comparison is done across

individuals and not across the performance of the same individual, since there is only one

stage in the experiment. The effects of introducing a reward and the effects of increasing this

reward are studied. The performances from the different groups are compared and analyzed.

Their main findings are that the participants who received a moderate or high piece-rate

reward scored the best, followed by the participants who received no extra payment. The

participants who received a low piece-rate reward scored the worst.

As stated before, this paper analyzes the study of G&R and checks if the conclusion that is

drawn above - low compensation has a detrimental effect on performance - is valid, and how

this can be tested.

1.2. The Problem Statement.

What effect has the introduction of low reward on the performance?

For now, it is enough to know that by a low reward a reward is meant that does not provide

encouragement to performing the task. Later, a more defined description is given.

1.3. Academic Relevance.

The effect of intrinsic and extrinsic motivation on performance is not only interesting to

finance and economics, but to all socials studies. It tells about human thinking and decision

making. Also, the fact that there is no consensus in this area makes it interesting and relevant

to investigate. This paper contributes to the ongoing discussion whether intrinsic or extrinsic

motivation leads to the best performance.

This paper contributes to the literature regarding monetary incentives on performance, by

extending the work of G&R. It shows how the conclusion - low reward leads to detrimental

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effects on performance - can be tested. If this test is passed, their study will form strong

evidence for positive effects of a high reward on performance and detrimental effects of a low

reward on performance. If this test is not passed, a close look will have to be taken at their

experiment to check what possibilities could cause certain assumptions to be wrongly made.

The main result of the analysis of the experiment of G&R is that its outcome is not clear

enough to confirm the conclusions they drew. The new design should be put into practice and

based on its outcome conclusions can be drawn concerning the effect of a low reward on

performance.

1.4. Overview of the rest of the chapters.

In chapter 2, the conceptual framework is presented. Also the variables that are used are

clarified and defined.

In chapter 3, the IQ-experiment of G&R is explained and analyzed. Their results are shown

and the limitations are exposed.

In chapter 4, a new design is presented. Possible results of the new experiment are described

and explained.

In chapter 5, the conclusions are drawn concerning the experiment and some

recommendations are given.

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2. Conceptual Framework

In this chapter, the variables which play a role in this paper are defined. An explanation is

given what is meant by the different variables used in the experiment. A graphical

representation of the conceptual framework is made and the expected relations between the

variables are given.

2.1. Identifying the Variables

In order to get a clear picture of the dependent and independent variables that will be used in

this paper, it is important to define these variables. The variables applied to the experiment of

G&R are defined below.

2.1.1. Independent Variables

Extrinsic motivation: The extrinsic motivation is the motivation the participants receive from

getting a monetary reward.

Intrinsic motivation: In experimental psychology literature, intrinsic motivation is measured

by the amount of time freely spent on the activity or the self-report of the subjects on their

motivation. Also, psychologists study modification in behavior through conditioning or

learning. For this, multiple stages in the experiment are necessary. In the experiment of G&R,

there is only one stage. Instead of looking at the performance of the same participant in the

different stages, the performance of individuals is compared with other individuals in different

groups. The subjects in the group with no payment are taken as the group performing out of

intrinsic motivation. The intrinsic motivation in this experiment is thus measured by the

performance of the subjects in the group with no payment.

Skill: A factor that might be underestimated in the experiment of G&R is the level of skill.

Since the performances are compared between the subjects, and not within the performance of

the subject, it is possible that the different groups have different skill levels. Because of this it

is possible that conclusions are falsely drawn, when the influence of differences in skill are

high enough to influence the results in performance. Since the new design consists of two

stages and the results will now be compared within the performance of the subject, instead of

between subjects, the element of skill is of no importance.

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2.1.2. Moderating Variable

Level of reward: The level of reward consists of the zero payment, the low payment or the

high payment. The different payments influence the motivation to perform.

2.1.3. Mediating Variable

Effort: There is no good possibility to measure the effort in this experiment, but it belongs

certainly in the conceptual framework. So, effort is included, but will not be measured in the

experiment.

2.1.4. Dependent Variable

Performance: The performance is measured by the amount of questions answered correctly. It

is easy to compare performances since the measurement is done on ratio scale.

2.2. Graphical Representation of the Conceptual Framework

figure 1: Graphical representation of the conceptual framework

According to the theoretical framework, performance is determined by effort and skill,

whereby effort is determined by extrinsic motivation, intrinsic motivation and skill. The level

of reward influences the extrinsic and intrinsic motivation.

Extrinsic motivation

Intrinsic Motivation Effort

Skill

Level of reward

Performance

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2.3. The relationship between the variables

The level of reward influences both intrinsic and extrinsic motivation. With no payment

extrinsic motivation is absent, so only intrinsic motivation and skill decides the amount of

effort that is put in. With low rewards extrinsic motivation is inserted and intrinsic motivation

is lowered; the prediction is that this results in a lower net result and thus less effort is put in.

With high rewards, the extrinsic motivation rises with the expectation that the effort put in is

the highest of the three possible pay-outs.

Skill as well influences effort; the prediction is a positive monotonic relation between the

variables. Skill is also affecting performance directly: the higher skilled one is, the better the

performance will be. Just as the performance will be better when more effort is put in.

So, theoretically this is the correct conceptual framework. However, in the experiment effort

is hard to measure and we excluded skill to make the findings as objective as possible.

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3. The Experiment of G&R

The design and results of the IQ experiment of G&R are shown in this chapter. Next, an

exposition is given concerning the experiment and limitations are shown.

3.1. Design

The experiment was performed at the University of Haifa, where 160 students participated.

They were requested to answer 50 questions which were taken from an psychometric (IQ)

test. For participating, students received 60 NIS (New Israeli Shekel), which at the time of the

experiment was about $17. They were divided into four different groups, with different

treatments. The subjects in the 1st group were requested only to answer as many questions as

they could; they did not receive extra money based on their performance. The second group

was given an additional 10 cents of a NIS for each question answered correctly. In the 3rd

group the subjects were given 1 NIS for each correct answer and in the 4th group 3 NIS. Since

the NIS is not relevant, the most important thing is that the reward of the second group is seen

as low and the reward of the third and forth group is seen as high.

3.2. Results

The best results were scored in the third and forth group, with respectively 34.7 and 34.1

correct answers on average. Group 1 scored 28.4 correct answers and group 2 performed the

worst with 23.1 correct answers on average. In the following figure the performance of the

individuals of the four groups is shown in ascending IQ rank; ranked 1 scored the worse and

ranked 40 scored the best.

Figure 2: The performance curve of the treatment groups

A nonparametric Mann-Whitney U test is done as well to investigate whether the populations

have the same distribution or not. The differences between distributions are significant at the

level of .9 except for the distribution between the third and forth group.

The differences in individual performance can attribute to several factors, like the degree of

skill, rationality, general knowledge, talent, willingness to put in effort and feelings

concerning money. G&R state that their result indicates that the introduction of monetary

incentives affect the individuals in the same way, although they have different characteristics.

There seems to be an indication that the effect of monetary incentives can be detrimental to

performance, when the amount is small enough. G&R tested if this effect is anticipated.

Briefly said, principals were asked if the group with no payment or with low reward would

perform better and 87% expected the low reward group to perform better. Thus, overall, the

detrimental effect from small monetary rewards on performance is not known.

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Gneezy & Rustichini (2000)

No payment

Low payment

Moderate payment

High payment

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The main conclusion G&R drew from the experiment is that extrinsic motivation produces a

reduction in the performance, for all positive but small enough compensations compared to

zero compensation (or better: when any mention concerning compensation is bequeathed).

3.3. Exposition and Limitations

There are several academic models available on the subject of the G&R experiment, which

can be used to explain its conclusions. Frey and Oberholzer-Gee (1997) provided a model on

monetary rewards and intrinsic motivation. In the model the agent has an utility function,

u(a,r) and intrinsic motivation, m(a,r) where a stands for the activity and r for the monetary

reward. The model states a negative linear effect from monetary reward on intrinsic

motivation. According to the model, a very low payment should decrease the activity only a

little, which is not the case in this experiment. The model is in this case unable to explain the

discontinuity.

Another explanation is based on the attribution theory, based on a cognitive explanation of the

displacement. People look at their actions like they are an outsider. When one receives no

monetary compensation, one interprets his motive as an intrinsic motivation. When a

monetary compensation is provided, regardless of the level of this compensation, one

interprets the monetary reward as being his motive. The perception is changed and this change

is large, independent of the level of the reward. The problem is that this concerns experiments

where participants can observe themselves and change their behavior, and since this

experiment has a single-stage set-up this explanation is less appropriate.

An analysis of Figure 2 can leads to several interesting observations. Rydval and Ortmann

(2004) analyzed the experiment of G&R as well and concluded three remarkable things:

Firstly, between the moderate and high reward group there is hardly any across-treatment

variation (variation between the different groups); the slopes are almost identical. The within-

treatment variation (variation inside a particular group) however is quite high. This is

probably caused by the different cognitive ability of the subjects. When incentives are high

enough, the incentive differentials are not determined by the individual performance, but by

the cognitive ability instead.

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Secondly, when looked at the low-incentive payments, it is clear that the overall motivation of

the participants the low reward group is lower than the no reward group, since the

performance curve lies completely beneath the others. It is highly unlikely to say that this is

because of the differences in ability as in the moderate and high reward group. Instead,

motivation seems to be the reason of the across-treatment differences. Analyzing the worst

performances from the low-incentive groups, we see scores that indicate a refusal to perform,

instead of just a lack of motivation. Such scores are not present in the high-incentive groups,

which indicates this is a specific kind of motivational problem.

Thirdly, the variation within-treatment is much greater than the variation across-treatment.

The difference in median between the best and the worst group is only 13 (24 vs. 37), as well

as the difference in the third quartile. While the smallest difference within a group is no less

than 34 (16 vs. 50, no and low reward group). The across-treatment differences can be

attributed to motivational reasons, the within-treatment differences on the other hand are

because of differences in ability. This leads to the conclusion that not only the incentive

effects are the reason for the variation in performance, but the ability differentials as well,

maybe even more than G&R had taken into account.

However, Rydval and Ortman’s observations on within-treatment differences are not

completely valid regarding the no- and low-incentive groups. Rather, the behavior of these

groups is more complex. Very noticeable is that, contrary to the moderate and high-incentive

group, the no- and low-incentive groups consist of a minority of participants who have not

answered a single question and a majority of participants who have. While the differences in

the majorities of these groups can be attributed to differences in ability, the differences

between the minority and the majority in each group are caused by motivational reasons. This

makes an across-treatment analysis more complex and requires a closer look.

Even if they conclude that the small reward leads to worse performances, this has to be placed

in the right context. The small reward is namely on top of a relatively very high standard

compensation, the 60 NIS every participant gets for showing up.

The contract describing the experiment is what G&R call an incomplete contract. The

participants in the first and second group probably interpret their contracts differently. The

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participants in the group were no monetary compensation is offered for correct answers

interpret the contract as G&R say:

"A payment of 60 NIS is provided for participation in the experiment, and I now

know that this participation consists of answering the questions." (p. 803)

To some of the participants in group 1 it felt that their part of the deal was to answer the

questions as well as possible.

The thoughts of the participants in the second group are according to G&R as follows:

"Sixty NIS were paid for showing up. The activity of answering the questions is now

paid by rate." (p. 804)

They have a complete other perception than the participants in the first group. The reference

point of the second group is the rate of 10 cents per correct answer, which is very small

compared to the sixty NIS for showing up, leading to a very low activity. Since this rate is so

low, they feel that their job was to show up and feel not indebted to answer questions

correctly.

So, the conclusion that small monetary compensation leads to reduction in performance,

might not be valid in this case, since the two groups had different reference points and only a

small part of the group showed a worse performance. To test whether this statement is true the

set-up should be different. Too much skill is involved in the experiment of G&R. This is

changed in the new design; the skill is excluded in the new set-up to make the design relevant.

The next chapter will continue on this, giving an experimental design to test the effect of low

reward on performance.

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4. Experimental Design

An interesting extension would be to first pay a group a small amount for each question

answered correctly and then let them perform the same task for no compensation. This group

is called the treatment group. This should be compared with a control group who will perform

both exactly the same tasks, but then from the start be offered zero compensation. In this case,

the same reference point is present in the first and second stage of the experiment.

4.1. Design

The subjects are 80 students from Tilburg University. The subjects are divided in two groups

of 40: the control group and the treatment group. The participants of the control group are

numbered from 1 to 40, the participants of the treatment group 41 to 80. Each student is

promised €7 for participation. The experiment is divided into two stages with duration of 25

minutes per stage, which is told to the participants. In both stages the subjects are required to

answer 15 mathematical questions taken out of a GMAT exam. The choice of the questions is

mostly based on effort and math skill, and specific knowledge is excluded as much as

possible. The pay-out scheme is shown below.

Control group Treatment group

Stage 1 No payment €0,05 per correct answer

Stage 2 No payment No payment

Table 1: Pay-out scheme

In the design €0,05 is used as a low reward. This amount is used because it is probably not

valuable to the participants and that is the aim of the low compensation. Even is the

participants answer most questions correctly, this amount is still not very valuable to the

participant and is in low contrast with the fixed payment of €7.

In the first stage, the treatment group is promised an additional payment of €0,05 per answer

given correctly. This is mentioned in the instructions. In the control group there is no mention

about any additional payment. In the second stage the treatment group is promised no

additional payment and again in the control group there is no mentioning of additional

payments. Only the students who finish the experiment and stay until the end are getting paid.

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After the introduction the papers with the first 15 questions are handed out, with the

instruction page on top to make sure no-one starts earlier; students are allowed to read the

instructions, but it is prohibited to look at the questions until the instructor gives a sign. The

only material allowed on the student his desk is scratch paper and a pen or pencil. Once all the

participants have received the papers the instructor gives a sign that they are allowed to start.

Once everyone has finished the first stage of the test, or the 25 minutes are over, the papers

are collected. No information is given about the performance to the participants. The same

procedure is used for the second stage. In the meantime the questions from the first stage are

checked by an assistant. The money earned by each participant is noted after the assistant

finished checking the answers. When the second stage is finished, the papers are collected and

participants are asked to come to the supervisor his desk, one by one. The money earned is

handed to the participant in cash, and no further mention is made about the performance to the

participant. The instructions are presented in the appendix.

4.2. Results

Due to the lack of time it is not possible to actually conduct the experiment. Because of that,

potential results instead of actual results are reviewed and alternative explanations for these

results. Different possible outcomes of the experiment are presented. Note that the design of

the experiment is still applicable and useful for further research.

The scores in the two stages from the treatment group are compared. The same is done for the

scores in the two stages of the control group. If the scores in the second stage are significantly

better than the scores in the first stage in the treatment group, then indeed the conclusion can

be drawn that the small monetary compensation leads to reduction in performance. The scores

of the control group will be put down as a base which the scores of the treatment group will

be compared with.

The new design tests if small monetary compensation leads to a worse performance. For this

to be valid, the performance of the treatment group in the first stage should be significantly

worse than the performance in the second stage, taking into account the difference in

difficulty of the questions in the first and in the second stage.

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The control group is there to check for this difference in difficulty. Since they have no

incentive to perform better or worse in the different stages, the difference in performance in

the two stages can be attributed to the difference in difficulty of the questions as well as

possible learning effects. Because of this, the results of the treatment group in the second

stage should be divided by the "difficulty rate" based on the performance of the control group.

For instance, when the control group scores on average 8 correct answers in the first stage and

10 in the second stage, this induces that the questions in the second stage are easier, or a

learning effect is present. The correct answers from the treatment group in the second stage

should then be divided by 1.25 (10/8) to correct for this difference in difficulty of the

questions and/or to exclude the learning effect.

To test whether the means of the performance in the two stages of the treatment group

significantly differ from each other, a paired samples T-test should be performed. This test

can be executed in the statistical program SPSS. The scores of the participants of both stages

have to be implemented. The sample size, means of both groups, as well as the standard

deviation are calculated and with that the paired samples T-test is executed. The T-value,

degrees of freedom and the significance is computed and with these statistics it is possible to

calculate the chance that the two means significantly differ from each other. When the

significance value is for instance 0.048 then it can be concluded that the two means differ

from each other with 95.2% confidence.

When there is no significant difference or even a significantly better performance in the first

stage, then there is reason to question the assumption that low rewards leads to a worse

performance. The degree of skill, rationality, general knowledge, talent, willingness to put out

effort and feelings concerning money of the different participants are important factors that

can cause big differences in performance between participants and thus between the different

groups as well. Those factors are excluded in this experiment, since performance is checked

within the group.

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5. Conclusion

This paper analyzed the IQ experiment of Gneezy and Rustichini and found that their

experimental design is not valid. The conclusion that the low reward leads to worse

performance is still questionable and on the outcome of G&R’s experiments cannot be

concluded. A new improved design is made to test the effect of a low reward on performance.

With this new design a representative experiment can be conducted and valuable things can

be said about the effect of low rewards on performance.

It is a pity that this experiment could not be conducted at this moment. Interesting conclusions

could be drawn and a real extension to the literature concerning rewarding systems in

financial experiments was then performed. However, all facets are ready to conduct the

experiment, which will hopefully be performed at a later moment in time. Even though the

icing on the cake is missing, there has been a lot of dedication and enjoyment working on this

paper and a strong base is made to test the effect of a low reward on performance.

21

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Appendix 1: Instructions for the treatment group

1a. Instructions treatment group stage 1

The instructions are simple but important.

You are asked to answer 15 mathematical questions for which you will get a maximum of 25

minutes.

The questions are taken from an exam used to test applicants to the university.

For each question answered correctly you will get an additional payment of €0,05.

The only thing allowed on your desk is scratch paper and a pen/pencil (so no calculators!).

Contact with other participants is strictly forbidden.

When you are finished, please wait until the instructor gives a sign.

If you have got any questions, please ask them now.

1b. Instructions treatment group stage 2

The same conditions apply with respect to the first stage.

Again, you are asked to answer 15 questions for which you will get a maximum of 25

minutes.

There will be no additional payment.





25

Appendix 2: Instructions for the control group

2a. Instructions control group stage 1

The instructions are simple but important.

You are asked to answer 15 mathematical questions for which you will get a maximum of 25

minutes.

The questions are taken from an exam used to test applicants to the university.





2b. Instructions control group stage 2

The same conditions apply with respect to the first stage.

Again, you are asked to answer 15 questions for which you will get a maximum of 25

minutes.





26

Appendix 3: Questions used in the Experiment

1 A group of 5 investment bankers and 5 clients recently frequented the Fine Tiger Indian

Restaurant. The total bill for the meal, including 20% gratuity, came to $960. On average,

how much did the meal of each individual cost before gratuity?

A $160

B $96

C $90

D $80

E $55

2 In baseball, the batting average is defined as the ratio of a player’s hits to at bats. If a player

had anywhere from 4 to 6 at bats in a recent game and had anywhere from 2 to 3 hits in the

same game, the player’s actual batting average for that game could fall anywhere between

A 0,25 and 1,00

B 0,25 and 0,75

C 0,33 and 0,75

D 0,33 and 0,50

E 0,50 and 0,66

3 After installing a powerful pump onto a large gasoline tank, John pumped gasoline out of the

tank. Each time John ran the pump, it removed 1/3 of the gas remaining in the tank.

Assuming the gas tank was full when John began, what fraction of the total gas in the tank at

the beginning was removed if John ran the pump three times?

A 8/27

B 1/27

C 2/3

D 19/27

E 27/28

4 Peter's bank account has p dollars. John's bank account has 5 times what Peter's bank

account has and 1/3 what Fred's bank account has. How much more is in Fred's bank

account than is in Peter's bank account, in terms of p?

A 15p

B 14p

C 4p

D (2/3)p

E (1/3)p

5 In a recent head-to-head run-off election, 12,000 absentee ballets were cast. 1/3 of the

absentee ballets were thrown out and 1/4 of the remaining absentee ballets were cast for

Candidate A. How many absentee votes did Candidate B receive?

A 2000

B 3000

C 6000

D 8000

E 9000

6 In a local intramural basketball league, there are 10 teams and each team plays every other

team exactly one time. Assuming that each game is played by only two teams, how many

games are played in total?

A 100

B 90

C 50

D 45

E 10

7

A 1000

B 100

C 10

D 0.1

E 0.01

8 A computer store offers employees a 20% discount off the retail price. If the store purchased

a computer from the manufacturer for $1000 dollars and marked up the price 20% to the

final retail price, how much would an employee save if he purchased the computer at the

employee discount (20% off retail price) as opposed to the final retail price.

A $1000

B $960

C $240

D $200

E $150

9 During the past week, a local medical clinic tested N individuals for two infections. If 1/3 of

those tested had infection A and, of those with infection A, 1/5 also had infection B, how

many individuals did not have both infection A and B?

A N/15

B 4N/15

C N/5

D 14N/15

E 4N/5

28

10 f(x) = -5x197-8x248+1; f(-1) = ?

A -16.251

B -12

C -2

D 14

E 16.251

11 A box contains either blue or red flags. The total number of flags in the box is an even

number. A group of children are asked to pick up two flags each. If all the flags are used up in

the process such that 60% of the children have blue flags, and 55% have red flags, what

percentage of children have flags of both the colors?

A 5%

B 10%

C 15%

D 20%

E It can not be determined

12 After running a series of television advertisements, a leading beverage producer saw its sales

increase by 25% to $1 million dollars per month. Prior to the advertising campaign, about

how many dollars in sales did the company average per day?

A $1.250.000

B $800.000

C $750.000

D $27.000

E $10.000

13 5n + 2 > 12 and 7n - 5 < 44; n must be between which numbers?

A 1 and 8

B 2 and 6

C 0 and 9

D 2 and 7

E 2 and 9

14 2x + 3y = 16 and y = -6x; -x=?

A -1

B 4/5

C -4/5

D -5/4

E 1

29

15 During a recent track meet, Peter ran x meters of the 100 meter dash in 5 seconds; running

at the same rate, how many seconds will it take Peter to run z meters of the 200 meter

dash?

A 5z/x

B 5zx

C 5x/z

D 5/xz

E xz/5

16 There are 4 more women than there are men on a local co-ed softball team. If there are a

total of 16 players on the team, what is the ratio of men to women?

A 10/16

B 6/16

C 4/16

D 6/10

E 4/10

17 During the course of an hour, an employee at Ultimate Packing Solutions wrapped packages

weighing 48, 32, 62, 12, 40, and 8 pounds. What was the median weight of the packages that

the employee packed?

A 33,333

B 34

C 36

D 62

E 33

18 Solution x contains 75% water and 25% oil; how many more liters of water than liters of oil

are in 200 liters of solution x?

A 125

B 175

C 150

D 50

E 100

19 There are 5280 feet in 1 mile and 12 inches in one foot. How many inches are in a mile?

A 5280 - 12

B 5280/12

C 12(5280)

D 122(5280)

E 12/5280

20 Walking across campus, a student interviewed a group of students. 25% of the students took

a finance class last semester, 50% took a marketing class last semester, and 40% took neither

a finance nor a marketing class last semester. What percent of the students in the group

took both a finance and a marketing class?

A 60%

B 50%

C 25%

D 15%

E 10%

21

f(x) = ; f(-1)=

A -2

B -4

C -6

D 2

E 6

22 The average (arithmetic mean) of a and b is 90; the average (arithmetic mean) of a and c is

150; what is the value of (b-c)/ 2?

A 60

B 120

C 30

D -60

E -40

23 The ratio of a compound, by weight, consisting only of substances x, y, and z is 4:6:10,

respectively. Due to a dramatic increase in the surrounding temperature, the composition of

the compound is changed such that the ratio of x to y is halved and the ratio of x to z is

tripled. In the changed compound, if the total weight is 58 lbs, how much does substance x

weigh?

A 48

B 36

C 24

D 12

E 10

31

24 At a technology consulting firm with x computers, all of which are desktops or laptops, 30%

are laptops; if 80% of the total number of computers have more than 1GB of RAM and 10%

of the computers with less than 1GB of RAM are laptops (and no computers have exactly

1GB of RAM), approximately what percent of the desktops have more than 1GB of RAM?

A 75%

B 60%

C 52%

D 40%

E 45%

25 A computer has three hard-drives; the smallest and largest hard-drives account for 25 and 45

percent of the total storage space on the computer, respectively; due to a catastrophic error,

the largest hard-drive lost approximately 22% of its storage space; after this error, the hard

drive that was originally the second largest accounts for approximately what percent of the

total hard-drive space on the reduced computer?

A 22%

B 33%

C 20%

D 39%

E 45%

26 n5(16k-8)(n-3)=n2; if n does not equal zero, k=

A 2

B 9/16

C 1

D 1/2

E 5/8

27 The ratio between x and y is 7/9; x and y are increased by 4, what is the ratio between the

new values of x and y?

A 7/9

B 14/9

C 17/8

D 11/13

E It cannot be determined

28 A group of seven students is to be seated in a row of seven desks. In how many different

ways can the group be seated if two of the preselected students must sit in an end seat (i.e.,

two students have been preselected to sit in either the first or the seventh seat)?

A 49

B 100

C 120

D 240

E 720

32

29 There are six different models that are to appear in a fashion show. Two are from Europe,

two are from South America, and two are from North America. If all the models from the

same continent are to stand next to each other, how many ways can the fashion show

organizer arrange the models?

A 48

B 64

C 24

D 8

E 72

30 A fair sided die labeled 1 to 6 is tossed three times. What is the probability the sum of the 3

throws is 16?

A 1/6

B 7/216

C 1/36

D 9/216

E 11/216

The Effect of the Introduction of Low Reward on Performance

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