Like Giving Candy to a Baby - Think Like a Freak - Steven D. Levitt, Stephen J. Dubner

Think Like a Freak - Steven D. Levitt, Stephen J. Dubner (2014)

Chapter 6. Like Giving Candy to a Baby

Amanda, three years old, had been successfully potty-trained but then backslid. None of the usual enticements—stickers, praise, and the like—could get her back on the toilet.

Her mother was so frustrated that she turned the task over to her father, one of the authors of this book. He was supremely confident. Like most economists, he believed he could solve any problem by setting up the right incentives. The fact that his target was a child made it even simpler.

He got down on his knees and looked Amanda in the eye. “If you go to the toilet,” he said, “I’ll give you a bag of M&M’s.”

“Right now?” she asked.

“Right now.” He knew that every parenting book frowns on using candy as a bribe, but parenting books are not written by economists.

Amanda trotted off to the toilet, did her business, and raced back to claim her M&M’s. Victory! It was hard to say who was prouder, daughter or father.

This scheme worked perfectly for three days—not a single accident. But on the morning of the fourth day, things changed. At 7:02 A.M., Amanda announced: “I have to go to the bathroom!” She did and got her M&M’s.

Then, at 7:08 A.M.: “I have to go again.” She did, just a quick tinkle, and came for her candy.

At 7:11 A.M.: “I have to go again.” Again, Amanda made a minimal deposit in the toilet before claiming her next tranche of M&M’s. This went on for longer than any of the interested parties care to remember.

How powerful are the right incentives? Within four days, a little girl went from potty-challenged to having the most finely tuned bladder in history. She simply figured out what it made sense to do given the incentives she faced. There was no fine print, no two-bag limit, no time-interval caveat. There was just a girl, a bag of candy, and a toilet.

If there is one mantra a Freak lives by, it is this: people respond to incentives. As utterly obvious as this point may seem, we are amazed at how frequently people forget it, and how often it leads to their undoing. Understanding the incentives of all the players in a given scenario is a fundamental step in solving any problem.

Not that incentives are always so easy to figure out. Different types of incentives—financial, social, moral, legal, and others—push people’s buttons in different directions, in different magnitudes. An incentive that works beautifully in one setting may backfire in another. But if you want to think like a Freak, you must learn to be a master of incentives—the good, the bad, and the ugly.

Let’s begin with the most obvious incentive: money. There is probably no quadrant of modern life in which financial incentives do not hold serious sway. Money even shapes the way we are shaped. The average U.S. adult weighs about 25 pounds more today than a few decades ago. If you have a hard time picturing how much extra weight 25 pounds is, take a length of rope and thread it through the handles of three plastic gallon jugs full of milk. Now tie this giant milk necklace around your neck and wear it every day for the rest of your life. That’s how much weight the average American has gained. And for every person who hasn’t gained a pound, someone else out there is wearing two milk-jug necklaces.

Why have we gotten so fat? One reason is that food has gotten so much cheaper over time. In 1971, Americans spent 13.4 percent of their disposable income on food; that number now stands at about 6.5 percent. Not all prices have fallen. Some fresh fruits and vegetables, for instance, cost substantially more today. But other foods—especially the most delicious, fattening, and low-nutrition foods like cookies, potato chips, and soda—have gotten much cheaper. By one measure, a pure high-nutrition diet can cost as much as ten times more than a pure junk-food diet.

So there is little doubt that financial incentives work well, even if the outcome is undesirable. Consider a 2011 traffic accident in the Chinese city of Foshan. A two-year-old girl, walking through an outdoor market, was hit by a van. The driver stopped as the girl’s body slid beneath the vehicle. But he didn’t get out to help. After a pause, he drove away, running over the body again. The girl later died. The driver eventually turned himself in to the police. A recording that was widely reported to be a phone call with the driver was broadcast on the news. “If she is dead,” he explained, “I may pay only about 20,000 yuan”—roughly $3,200. “But if she is injured, it may cost me hundreds of thousands yuan.”

There are no Good Samaritan laws in China, and compensatory damages for a long-term injury often run higher than death damages. So while one might wish that the driver had put his moral and civic responsibilities first, the perverse financial incentive may have been too strong to ignore.

And let’s consider the most common realm in which financial incentives dictate our 'margin-bottom:0cm;margin-bottom:.0001pt;text-align: justify;text-indent:12.0pt;line-height:15.95pt'>No matter how much fun you have at work—and no matter how often you hear a professional athlete swear he’d play for free—few people are willing to work very hard without getting paid. No CEO in the world, therefore, is so delusional as to expect his employees to show up every day and work hard for no money. But there is one gigantic workforce asked to do exactly that. In the United States alone, they number nearly 60 million. Who is this massive, underpaid throng?

Schoolchildren. Sure, some parents pay kids for good grades, but school systems are generally dead-set against financial incentives. Shouldn’t kids, the argument goes, be driven by a love of learning rather than cash? Do we really want to turn our children into lab rats who master a maze only to get the cheese? To many educators, the idea of paying for grades is downright disgusting.

But economists aren’t so easily disgusted. They are also somewhat pushy—which is how it came to pass that a band of economists recently ran a series of experiments in hundreds of schools across the United States, offering cash prizes to more than 20,000 students. In some cases, the students were paid a few dollars for completing a simple study task. In others, a student could make $20 or $50 by raising their test scores.

How well did the cash-for-grades scheme work? There was improvement in a few cases—second-graders in Dallas, for instance, read more when they were paid $2 per book—but it was incredibly hard to move the needle on test scores, especially among older students.

Why? The rewards offered to the kids were probably too small. Consider how much effort it takes for a C or D student to start getting A’s and B’s: come to class regularly and pay attention; do all the homework and study more often; learn to perform well on tests. That’s a lot of work for just $50! By comparison, a minimum-wage job pays pretty well.

So what would happen if you paid a student $5,000 for every A? Since no deep-pocketed funder has yet come forth with this kind of money, we don’t know for sure—but our guess is that honor rolls across the country would explode with new names.

When it comes to financial incentives, size matters. There are things that people will do for a lot of money that they’d never do for just a few dollars. The most devoted carnivore in the world might well go vegan if the tofu lobby offered him a $10 million stipend. And then there’s the tale of an economist on holiday in Las Vegas. He found himself one night in a bar standing beside a gorgeous woman. “Would you be willing to sleep with me for $1 million?” he asked her.

She looked him over. There wasn’t much to see—but still, $1 million! She agreed to go back to his room.

“All right then, “ he said. “Would you be willing to sleep with me for $100?”

“A hundred dollars!” she shot back. “What do you think I am, a prostitute?”

“We’ve already established that. Now we’re just negotiating the price.”

Cash incentives, with all their limitations and wrinkles, are plainly not perfect. But here’s the good news: it is often possible to elicit the behavior you want through nonfinancial means. And it’s a lot cheaper too.

How to do this?

The key is to learn to climb inside other people’s minds to figure out what really matters to them. Theoretically, this shouldn’t be so hard. We all have a lot of practice thinking about how we respond to incentives. Now it’s time to sit on the other side of the table, as in a good marriage, to understand what someone else wants. Yes, it may be money they’re after—but just as often they are motivated by wanting to be liked, or not be hated; by wanting to stand out in a crowd, or perhaps not stand out.

The problem is that while some incentives are obvious, many aren’t. And simply asking people what they want or need doesn’t necessarily work. Let’s face it: human beings aren’t the most candid animals on the planet. We’ll often say one thing and do another—or, more precisely, we’ll say what we think other people want to hear and then, in private, do what we want. In economics, these are known as declared preferences and revealed preferences, and there is often a hefty gap between the two.

When trying to figure out what kind of incentive will work in a given situation, it is crucial to keep your eye on this gap. (Thus the old saying: Don’t listen to what people say; watch what they do.) Furthermore, it’s often the case that when you most desperately want to know someone else’s incentives—in a negotiation, for instance—your incentives and theirs are at odds.

How can you determine someone’s true incentives? Experiments can help. The psychologist Robert Cialdini, an éminence grise in the study of social influence, has proved this again and again.

In one case, he and some fellow researchers wanted to learn about the incentives that would encourage people to use less electricity at home. They began with a phone survey. The researchers called a diverse set of California residents and asked them: How important are the following factors in your decision to conserve energy?

1. It saves money.

2. It protects the environment.

3. It benefits society.

4. A lot of other people are trying to do it.

Let’s see what we have here: a financial incentive (no. 1), a moral incentive (no. 2), a social incentive (no. 3), and what might be called a herd-mentality incentive (no. 4). How would you guess the Californians ranked their reasons for saving energy?

Here are their answers, from most important to least:

1. It protects the environment.

2. It benefits society.

3. It saves money.

4. A lot of other people are trying to do it.

That seems about right, doesn’t it? Since conservation is largely seen as a moral and social issue, the moral and social incentives are most important. Next came the financial incentive and, in dead last, the herd mentality. This too seems sensible: who would admit to doing anything—especially an act as important as conservation—just because everyone else is doing it?

The phone survey told Cialdini and his colleagues what people said about conservation. But did their actions match their words? To find out, the researchers followed up with a field experiment. Going house to house in one California neighborhood, they hung on each doorknob a placard encouraging residents to save energy in the warm months by using a fan rather than air-conditioning.

But, this being an experiment, the placards were not identical. There were five versions. One had a generic “Energy Conservation” headline, while the others bore headlines that matched up to the four incentives—moral, social, financial, and herd-mentality—from the phone survey:

1. PROTECT THE ENVIRONMENT BY CONSERVING ENERGY

2. DO YOUR PART TO CONSERVE ENERGY FOR FUTURE GENERATIONS

3. SAVE MONEY BY CONSERVING ENERGY

4. JOIN YOUR NEIGHBORS IN CONSERVING ENERGY

The explanatory text on each placard was also different. The “Protect the Environment” placard, for instance, said that “you can prevent the release of up to 262 lbs. of greenhouse gases per month.” The “Join Your Neighbors” version merely said that 77 percent of local residents “often use fans instead of air-conditioning.”

The researchers, having randomly distributed the different placards, were now able to measure the actual energy use in each home to see which of the placards made the most difference. If the phone survey was to be believed, the “Protect the Environment” and “Do Your Part for Future Generations” placards would work best, while the “Join Your Neighbors” sign would fail. Is that what happened?

Not even close. The clear winner of the four was “Join Your Neighbors.” That’s right: the herd-mentality incentive beat out the moral, social, and financial incentives. Does this surprise you? If so, maybe it shouldn’t. Look around the world and you’ll find overwhelming evidence of the herd mentality at work. It influences virtually every aspect of our behavior—what we buy, where we eat, how we vote.

You may not like this idea; none of us wants to admit that we are pack animals. But in a complicated world, running with the herd can make sense. Who has time to think through every decision and all the facts behind it? If everybody around you thinks that conserving energy is a good idea—well, maybe it is. So if you are the person designing an incentive scheme, you can use this knowledge to herd people into doing the right thing—even if they’re doing it for the wrong reasons.

With any problem, it’s important to figure out which incentives will actually work, not just what your moral compass tells you should work. The key is to think less about the ideal behavior of imaginary people and more about the actual behavior of real people. Those real people are much more unpredictable.

Consider another Robert Cialdini experiment, this one at Petrified Forest National Park in Arizona. The park had a problem, as it made clear on a warning sign:

YOUR HERITAGE IS BEING VANDALIZED EVERY DAY

BY THEFT LOSSES OF PETRIFIED WOOD OF 14 TONS A YEAR,

MOSTLY A SMALL PIECE AT A TIME.

The sign plainly appealed to the visitors’ sense of moral outrage. Cialdini wanted to know if this appeal was effective. So he and some colleagues ran an experiment. They seeded various trails throughout the forest with loose pieces of petrified wood, ready for the stealing. On some trails, they posted a sign warning not to steal; other trails got no sign.

The result? The trails with the warning sign had nearly three times more theft than the trails with no signs.

How could this be?

Cialdini concluded that the park’s warning sign, designed to send a moral message, perhaps sent a different message as well. Something like: Wow, the petrified wood is going fast—I’d better get mine now! Or: Fourteen tons a year!? Surely it won’t matter if I take a few pieces.

The fact is that moral incentives don’t work nearly as well as most people might imagine. “Very often,” Cialdini says, “public-service messages are designed to move people in societally desirable directions by telling them how many people are behaving in undesirable directions. So many people are drinking and driving—we have to stop this. Teenage pregnancy is so prevalent in our schools—we have to do something about this. Tax fraud is so rampant that we have to increase the penalties for it. It’s very human but it’s a wrong-headed strategy, because the subtext message is that a lot of people just like you are doing this. It legitimizes the undesirable behavior.”

Does Cialdini’s research depress you? Perhaps it suggests that we humans are incorrigibly felonious, hell-bent on grabbing our fair share and then some; that we are always looking out for ourselves rather than the greater good; that we are, as the California energy study showed, a big fat pack of liars.

But a Freak wouldn’t put it that way. Instead, you’d simply observe that people are complicated creatures, with a nuanced set of private and public incentives, and that our behavior is enormously influenced by circumstances. Once you understand how much psychology is at work when people process incentives, you can use your wiles to create incentive plans that really work—either for your own benefit or, if you prefer, for the greater good.

Brian Mullaney, by the time he hit upon one of the most radical ideas in the history of philanthropy, had already had a couple of other radical ideas.

The first came when he was around thirty years old. He was living the life of “an archetypal yuppie,” as he puts it, “a Madison Avenue ad man in an Armani suit and Gucci loafers. I had all the accessories: the gold Rolex, the triple black Porsche, the penthouse apartment.”

One of his biggest clients was a plastic-surgery practice on Park Avenue in New York. Their patients were, for the most part, wealthy women looking to get slimmer in one region or more buxom in another. Mullaney often took the subway to visit the client. His ride sometimes coincided with the end of the school day; hundreds of kids would rush onto the train. He noticed that many of them had facial marks: scars, moles, blotches, even misshapen features. Why weren’t they getting plastic surgery? Mullaney, a big, talkative, ruddy-faced man, had an outlandish idea: he would start up a charity to offer free corrective surgery to public-school kids in New York. He called it Operation Smile.

The project was off to a good start when Mullaney learned there was another charity with the same name. This Operation Smile, based in Virginia, was big time: it sent volunteer medical teams to poor countries around the world to perform plastic surgery on children. Mullaney was wowed. He folded his little Operation Smile into this big one, joined its board, and trailed along on missions to China, Gaza, and Vietnam.

Mullaney soon realized how life-changing a simple surgery could be. When a baby girl in the United States is born with a cleft lip or palate, it is routinely fixed at an early age, leaving just a small scar. But if that same girl is born to poor parents in India, the untreated cleft would likely bloom into a horrible jumble of misshapen lip, gum, and teeth. The girl would be ostracized, with little hope for a good education, job, or marriage. One tiny deformity, so fixable, would lead to “ripples of misery,” as Mullaney puts it. What appeared to be purely a humanitarian issue was also an economic one. Indeed, when he pitched Operation Smile to reluctant governments, Mullaney sometimes referred to cleft children as “nonperforming assets” who, with a simple surgery, could be returned to the economic mainstream.

But the demand for cleft repair often outstripped the supply that Operation Smile could offer. Because the organization flew in doctors and surgical equipment from the United States, its time and capacity in a given place were limited. “On every mission, 300 or 400 children would show up begging for treatment,” Mullaney recalls, “but we could only help 100 or 150.”

In a small village in Vietnam, there was one kid who played soccer every day with the Smile Train volunteers. They started calling him Soccer Boy. When the mission was over and the Americans were driving away, Mullaney saw Soccer Boy chasing after their bus, his cleft lip still unrepaired. “We were in shock—how could he not have been helped?” As a humanitarian, it hurt; as a businessman, it rankled. “What store,” he asks, “turns away 80 percent of its customers?”

Mullaney helped conceive a new business model for Operation Smile. Rather than raise millions of dollars to fly doctors and surgical equipment around the world for limited engagements, what if the money were instead used to equip local doctors to perform cleft surgery year-round? Mullaney calculated that the cost per surgery would drop by at least 75 percent.

The leadership of Operation Smile, however, wasn’t as keen about this plan. So Mullaney left to help start a new group, Smile Train. By now he had sold off his ad agency (for eight figures, thank you very much) and devoted himself to fixing the smile of every last Soccer Boy and Girl he could locate. He also wanted to change the face of the non-profit industry itself, “the most dysfunctional $300 billion industry in the world,” as he saw it. Mullaney had come to believe that too many philanthropists engage in what Peter Buffett, a son of the über-billionaire Warren Buffett, calls “conscience laundering”—doing charity to make themselves feel better rather than fighting to figure out the best ways to alleviate suffering. Mullaney, the archetypal yuppie, had become a data-driven do-gooder.

Smile Train was phenomenally successful. Over the next fifteen years, it helped provide more than 1 million surgeries in nearly 90 countries, all with a worldwide staff of fewer than 100. A documentary film called Smile Pinki,which Mullaney helped produce, won an Academy Award. Not coincidentally, Mullaney had turned the organization into a fund-raising juggernaut, taking in nearly $1 billion all told. The skills that had been useful as an ad man were useful as a fund-raiser too—targeting potential donors, honing the Smile Train message, and pitching its mission with just the right blend of pathos and verve. (He also knew how to buy up New York Times “remnant” ad space at a fraction of the sticker price.)

Along the way, Brian Mullaney learned a great deal about the incentives that lead people to give money to a charity. This led him to try something so unusual that, as he says, “many people thought we were crazy.”

The idea began with a simple question: Why do people give money to charity?

This is one of those obvious questions that most smart people might not think to ask. Mullaney became consumed by it. A raft of academic research pointed to two main reasons:

1. People are truly altruistic, driven by a desire to help others.

2. Giving to charity makes them feel better about themselves; economists call this “warm-glow altruism.”

Mullaney didn’t doubt these two factors. But he thought there was a third factor, which people didn’t talk about:

3. Once people are asked to donate, the social pressure is so great that they get bullied into giving, even though they wish they’d never been asked in the first place.

Mullaney knew that number 3 was important to Smile Train’s success. That’s why their millions of mailings included a photograph of a disfigured child in need of cleft surgery. While no fund-raiser in his right mind would ever publicly admit to manipulating donors with social pressure, everyone knew how strong this incentive was.

But what if, Mullaney thought, instead of downplaying the pressure, Smile Train were to highlight it? That is, what if Smile Train offered potential donors a way to alleviate the social pressure and give money at the same time?

That’s how a strategy known as “once-and-done” was born. Here’s what Smile Train would tell potential donors: Make one gift now and we’ll never ask for another donation again.

As far as Mullaney knew, a once-and-done strategy had never been tried before—and with good reason! In fund-raising, acquiring a new donor is difficult and expensive. Almost every charity initially loses money in this phase. But donors, once hooked, tend to give again and again. The secret to fund-raising success is cultivating these repeat givers—so the last thing you’d want to do is set them free as soon as you’ve hooked them. “Why would you ever agree to not harass donors when harassing is the main ingredient for success in direct mail?” Mullaney says.

Smile Train took this harassment seriously. If you made an initial donation, you could expect an average of eighteen mailings a year. Once you gave to Smile Train, you were getting into a long-term relationship whether you liked it or not. But Mullaney suspected there was a whole universe of other people out there with no interest in a long-term relationship—and, indeed, who might be annoyed by Smile Train’s stalking. These people, he hypothesized, might be willing to pay Smile Train to stop sending them mail. Rather than getting into a long-term relationship, maybe they would consent to a single date with Smile Train as long as Smile Train promised to never ask them out again.

Mullaney tested this idea by launching a direct-mail experiment that included hundreds of thousands of letters with the once-and-done message. Even Mullaney, who never met a piece of conventional wisdom he liked, wasn’t sure this was a good idea. Once-and-done could be an unmitigated failure.

How did it work out?

Households that got the once-and-done letter were twice as likely to become first-time donors as people who got a regular solicitation letter. By fund-raising standards, this was a colossal gain. These donors also gave slightly more money, an average of $56 versus $50.

So Smile Train quickly raised millions of extra dollars. But were they sacrificing long-term donations for short-term gains? After all, every new donor now had the option to tell Smile Train to kindly get lost forever. The once-and-done mailing contained a reply card that asked a donor to check one of three boxes:

1. This will be my only gift. Please send me a tax receipt and do not ask for another donation again.

2. I would prefer to receive only two communications from The Smile Train each year. Please honor my wishes to limit the amount of mail sent to me.

3. Please keep me up-to-date on the progress The Smile Train is making on curing the world of clefts by sending me regular communications.

You might expect all new donors would tick off box number 1. After all, that was the promise that got them in the door. But only about one-third of them opted out of future mailings! Most donors were happy to let Smile Train keep harassing them—and, as the data would eventually show, they were also happy to keep giving money. The once-and-done operation raised overall donations by an astonishing 46 percent. And because some people did opt out of future mailings, Smile Train raised all that money by sending fewer letters, which saved a bundle on expenses.

The only failure of once-and-done was its name: most donors didn’t give just once and they weren’t in any hurry to be done with Smile Train.

Why did Brian Mullaney’s gamble work so well? There are several explanations:

1. Novelty. When is the last time a charity—or any kind of company—offered to never bother you again? That alone is enough to get your attention.

2. Candor. Have you ever heard a charity acknowledge what a hassle it is to get all those beseeching letters in the mail? In a world of crooked information, it is nice to hear some straight talk.

3. Control. Rather than unilaterally dictate the terms of the transaction, Smile Train gave the donor some power. Who doesn’t like to control their own destiny?

There is one more factor that made once-and-done successful, a factor so important—subtle and powerful at the same time—that we believe it is the secret ingredient to make any incentive work, or at least work better. The most radical accomplishment of once-and-done is that it changed the frame of the relationship between the charity and the donor.

Whenever you interact with another entity, whether it’s your best friend or some faceless bureaucracy, the interaction falls into one of a handful of frameworks. There’s the financial framework that governs everything we buy, sell, and trade. There’s an “us-versus-them” framework that defines war, sports, and, unfortunately, most political activity. The “loved-one” framework covers friends and family (at least when things are going smoothly; otherwise, look out for “us-versus-them”). There’s a collaborative framework that shapes how you behave with work colleagues or in your amateur orchestra or pickup soccer team. And then there’s the “authority-figure” framework, in which someone gives instructions and someone else is expected to follow them—think of parents, teachers, police and military officers, and a certain kind of boss.

Most of us breeze in and out of these different frameworks every day without needing to think about the boundaries. We’ve been conditioned to understand that we behave differently in different frameworks, and that incentives work differently too.

Let’s say a friend invites you to a dinner party at his house. It’s a great, festive evening—who knew your friend was such a paella stud?!—and on the way out you give him a big thank-you and a $100 bill.

Oops.

Now imagine you’ve taken a date to a nice restaurant. Again, you have a fantastic time. On your way out, you tell the owner how much you enjoyed the meal and give him a big, friendly hug—but don’t pay the check.

Double oops.

In the second case, you ignored the obvious rules of the financial framework (and maybe got arrested). In the first, you polluted the loved-ones framework by bringing money into play (and maybe lost a friend).

So you can plainly get into trouble by getting your frames mixed up. But it can also be incredibly productive to nudge a relationship from one framework into another. Whether through subtle cues or concrete incentives, a lot of problems can be solved by shifting the dynamic between parties, whether it’s two people or two billion.

In the early 1970s, the relationship between the United States and China was frigid, as it had been for years. China saw the Americans as thoughtless imperialists while the U.S. saw the Chinese as heartless communists—and, worse, a staunch Cold War ally of the Soviet Union. Nearly every encounter between the two countries fell into an us-versus-them framework.

That said, there were all sorts of reasons—political, financial, and otherwise—for China and the U.S. to reach a détente. Indeed, back-channel negotiations were under way. But decades of political friction had produced a stalemate that wouldn’t allow for direct talks between the two countries. There was too much pride at stake, too much face to save.

Enter the Ping-Pong teams. On April 6, 1971, a Chinese team showed up in Japan to compete in an international tournament. It was the first Chinese sports team to play outside the country in more than twenty years. But Ping-Pong wasn’t their only mission. The team carried from Chairman Mao himself a message “to invite the American team to visit China.” And so a week later, the American Ping-Pong team found itself chatting face-to-face with Zhou Enlai, the Chinese premier, at the Great Hall of the People in Beijing.

President Richard Nixon hurriedly sent Henry Kissinger, his secretary of state, on a secret diplomatic mission to Beijing. If the Chinese leadership was willing to receive Ping-Pong ambassadors, why not a real one? Kissinger’s visit led to two developments: an invitation for the Chinese Ping-Pong team to visit the United States and, more substantially, Nixon’s historic trip to China. It was, as Nixon later called it, “the week that changed the world.” Would all this have happened without the Ping-Pong diplomacy that so coyly shifted the us-versus-them framework? Perhaps. But Premier Zhou for one acknowledged just how effective the move was: “Never before in history has a sport been used so effectively as a tool of international diplomacy.”

Even when the stakes are not so high as this, changing the framework of a relationship can produce rapture. Consider the following testimonial:

You guys are just the best. I have sent so many people to your site… . You are really doing something right!! Don’t change a bit! Thank you!!!

Who is being praised here—a rock band? A sports team? Or maybe … an online shoe store?

In 1999, a company called Zappos started selling shoes over the web. Later, it added clothing. Like a lot of modern companies built by young entrepreneurs, Zappos was driven less by pure financial incentives than a desire to be loved. Customer service, it declared, would be its defining strength. Not just your standard customer service, but way-over-the-top, call-us-anytime, there’s-nothing-we-won’t- do-for-you customer service.

To outsiders, this seemed bizarre. If ever a business were made for not having to coddle customers, online shoe sales would seem to be it. But Zappos had a different idea.

To the average company, a customer is a human wallet from which the company attempts to extract as much money as possible. Everyone understands this, but no company wants it to be so explicit. That’s why companies use super-friendly logos, slogans, mascots, and endorsers.

Zappos, meanwhile, rather than faking friendliness, seemed to actually want to become friendly with its customers—at least inasmuch as it would help the company succeed. Which is why, rather than bury its phone number deep within the website, Zappos posted its number atop every page and staffed its call center 24/7. (Some calls, so long and intimate, resemble “protracted talk therapy,” as one observer noted.) Which is why Zappos offered a 365-day return window and free shipping. Which is why, when one customer failed to return a pair of shoes because of a death in the family, Zappos sent her flowers.

To shift the framework like this—from a conventional financial one to a quasi-friendly one—Zappos first needed to shift the framework between the company itself and its workers.

A call-center job isn’t typically very desirable, nor does it pay well. (In Las Vegas, where Zappos is based, customer-service representatives made about $11 an hour.) So how could Zappos recruit a better breed of customer rep?

The standard answer would be to pay them more. But Zappos couldn’t afford that. Instead, it offered more fun and more power. That’s why company meetings are sometimes held in a bar. And why a stroll through the cubicles at Zappos feels like a trip to Mardi Gras, with music, games, and costumes. Customer reps are encouraged to talk to a customer for as long as they want (all without a script, natch); they are authorized to settle problems without calling in a supervisor and can even “fire” a customer who makes trouble.

Just how desirable is a call-center job at Zappos? In a recent year when it hired 250 new employees, the company fielded 25,000 applications—for a job that pays only $11 per hour!

The most impressive result of all this frame-shifting? It worked: Zappos smoked the competition and became what is thought to be the biggest online shoe store in the world. In 2009, it was bought by Amazon.com for a reported $1.2 billion. Amazon, to its credit, appreciated what made Zappos thrum. In its SEC filing, Amazon noted that it would preserve the Zappos management team and its “customer-obsessed culture.”

And let’s not forget how Smile Train shifted the relationship between itself and its donors. As much as people might like to think charitable giving is all about the altruism, the old ad salesman Brian Mullaney knew better. He was selling a product (in Smile Train’s case, a sad story) and the donor was buying (a happy ending).

The once-and-done campaign changed that. Rather than hound donors with a hard sell, Smile Train changed its message: Hey, we know it’s a hassle to get eighteen letters a year. You think we like having to send out that many? But we’re all in this fight together, so why don’t you send us a few bucks and we can be done with it?

Voilà! The financial framework had been recast as a collaborative one, leaving all parties—and most especially the Soccer Boys and Girls of the world—in better shape.

We don’t mean to create the impression that any problem can be fixed with a simple shift of the framework or a clever incentive. It can be frightfully hard to come up with incentives that work and continue to work over time. (Remember how easily a three-year-old girl with a taste for M&M’s played her father?) Plenty of incentives fail—and some fail so spectacularly that they produce even more of the bad behavior they were meant to stop.

Mexico City has long suffered from dreadful traffic jams. The pollution is horrendous and it’s hard to get anywhere on time. Out of desperation, the government came up with a rationing plan. Drivers would have to leave their cars home one workday each week, with the particular day determined by the car’s license-plate number. The hope was that fewer cars would clog the roads, more people would use public transportation, and pollution would fall.

How did the plan work out?

The rationing led to more cars in circulation, no increase in the use of public transportation, and no improvement in air quality. Why? In order to skirt the license-plate ban, a lot of people went out and bought a second car—many of which were older, cheaper gas guzzlers.

In another case, the United Nations set up an incentive plan to compensate manufacturers for curtailing the pollutants they released into the atmosphere. The payments, in the form of carbon credits that could be sold on the open market, were indexed to the environmental harm of each pollutant.

For every ton of carbon dioxide a factory eliminated, it would receive one credit. Other pollutants were far more remunerative: methane (21 credits), nitrous oxide (310), and, near the top of the list, something called hydrofluorocarbon-23, or HFC-23. It is a “super” greenhouse gas that is a by-product in the manufacture of HCFC-22, a common refrigerant that is itself plenty bad for the environment.

The UN was hoping that factories would switch to a greener refrigerant than HCFC-22. One way to incentivize them, it reasoned, was to reward the factories handsomely for destroying their stock of its waste gas, HFC-23. So the UN offered a whopping bounty of 11,700 carbon credits for every ton of HFC-23 that was destroyed rather than released into the atmosphere.

Can you guess what happened next?

Factories around the world, especially in China and India, began to churn out extra HCFC-22 in order to generate extra HFC-23 so they could rake in the cash. As an official with the Environmental Investigation Agency (EIA) put it: “The evidence is overwhelming that manufacturers are creating excess HFC-23 simply to destroy it and earn carbon credits.” The average factory earned more than $20 million a year by selling carbon credits for HFC-23.

Angry and embarrassed, the UN changed the rules of the program to curb the abuse; several carbon markets banned the HFC-23 credits, making it harder for the factories to find buyers. So what will happen to all those extra tons of harmful HFC-23 that suddenly lost its value? The EIA warns that China and India may well “release vast amounts of … HFC-23 into the atmosphere, causing global greenhouse gas emissions to skyrocket.”

Which means the UN wound up paying polluters millions upon millions of dollars to … create additional pollution.

Backfiring bounties are, sadly, not as rare as one might hope. This phenomenon is sometimes called “the cobra effect.” As the story goes, a British overlord in colonial India thought there were far too many cobras in Delhi. So he offered a cash bounty for every cobra skin. The incentive worked well—so well, in fact, that it gave rise to a new industry: cobra farming. Indians began to breed, raise, and slaughter the snakes to take advantage of the bounty. Eventually the bounty was rescinded—whereupon the cobra farmers did the logical thing and set their snakes free, as toxic and unwanted as today’s HFC-23.

And yet, if you look around the world, you will see that cash bounties are still routinely offered to get rid of pests. Most recently, we’ve heard of this happening with feral pigs in Georgia and rats in South Africa. And, just as routinely, an army of people rise up to game the system. As Mark Twain once wrote: “[T]he best way to increase wolves in America, rabbits in Australia, and snakes in India is to pay a bounty on their scalps. Then every patriot goes to raising them.”

Why do some incentives, even those created by smart and well-intentioned people, backfire so badly? We can think of at least three reasons:

1. No individual or government will ever be as smart as all the people out there scheming to beat an incentive plan.

2. It’s easy to envision how you’d change the behavior of people who think just like you do, but the people whose behavior you’re trying to change often don’t think like you—and, therefore, don’t respond as you might expect.

3. There is a tendency to assume that the way people behave today is how they’ll always behave. But the very nature of an incentive suggests that when a rule changes, behavior does too—although not necessarily, as we’ve seen, in the expected direction.

We should also note the obvious point that no one likes to feel manipulated. Too many incentive schemes are thinly disguised grabs for leverage or money, so it shouldn’t be surprising that some people push back. Thinking like a Freak may sometimes sound like an exercise in using clever means to get exactly what you want, and there’s nothing wrong with that. But if there is one thing we’ve learned from a lifetime of designing and analyzing incentives, the best way to get what you want is to treat other people with decency. Decency can push almost any interaction into the cooperative frame. It is most powerful when least expected, like when things have gone wrong. Some of the most loyal customers any company has are the ones who had a big problem but got treated incredibly well as it was being resolved.

So while designing the right incentive scheme certainly isn’t easy, here’s a simple set of rules that usually point us in the right direction:

1. Figure out what people really care about, not what they say they care about.

2. Incentivize them on the dimensions that are valuable to them but cheap for you to provide.

3. Pay attention to how people respond; if their response surprises or frustrates you, learn from it and try something different.

4. Whenever possible, create incentives that switch the frame from adversarial to cooperative.

5. Never, ever think that people will do something just because it is the “right” thing to do.

6. Know that some people will do everything they can to game the system, finding ways to win that you never could have imagined. If only to keep yourself sane, try to applaud their ingenuity rather than curse their greed.

That’s Incentives 101. Pretty simple, right? Now you’re ready for an advanced degree in incentive scheming. We begin the journey with a question that, to our knowledge, has never been asked in the history of humankind.