August 31, 2010
The practical problem with experimenting with these schemes, however, is that unlike some of the tests carried out in Ariely's psychology lab, these decisions have real-world consequences. Say an executive decides to follow Ariely's advice and eliminates employee bonuses entirely, or severely limits them. While that executive could indeed see productivity gains due to reduced stress, if payments are decoupled from productivity too much, workers may think they have nothing to gain by working harder, and productivity may deteriorate as a result. Some of the most productive workers may even decide to leave for another firm; a compensation system that rewards all employees the same amount, regardless of how much (or how little) they produce, after all, will only benefit the least productive among the workforce, while hurting the best performers.
Another problem is the legal and institutional barriers to the kinds of policy experiments that Ariely advocates. In his interview with me, Ariely claimed that lawyers may actually be the biggest barriers to experimentation at corporations. Things like compensation plans, after all, are often protected by contracts, and a change in compensation would often entail a breach of contract, which comes with the threat of a lawsuit. Indeed, Ariely noted, the legal hazards of policy experimentation lead many executives to conclude that finding the most rational possible compensation policy is more trouble than it's worth.
This, in turn, raises a question Ariely never really explores in his work: At what point do the costs of experimentation render the pursuit of the most rational possible solution irrational? Yale political scientist Charles Lindblom addressed this question in his classic 1959 article, "The Science of Muddling Through." While the rational calculation of ideal means to meet one's ends is an indeed a good goal to work towards, Lindblom argued, rationality has its costs. The costs of the constant research, experimentation and development needed to improve policy are often so high they outweigh the benefits of finding a better solution. In these cases, it is actually more efficient to pursue our current course of action, even if a more efficient solution may still lurk undiscovered.
Policy in the real world is thus often a process of "muddling through," of refining what we already have, and of altering our course only occasionally as conditions change.
Lindblom's argument leads one to wonder: Is Dan Ariely missing the point? Is the widespread "irrationality" he observes in the real world not, in fact, failure to find the perfect policy solution, but a rational determination that finding that perfect solution is more trouble than it's worth? As the British World War II-era aphorism that inspired Lindblom goes, "We'll muddle through somehow." Indeed, we may have no choice.
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