The Effect of Incentive Structure on Heuristic Decision Making: The Proportion Heuristic
AbstractWhen making judgments, individuals often utilize heuristics to interpret information. We report on a series of experiments designed to test the ways in which incentive mechanisms influence the use of a particular heuristic in decision-making. Specifically, we demonstrate how information regarding the number of available practice problems influences the behaviors of individuals preparing for an exam (the proportion heuristic). More importantly the extent to which this information infleunces behavior depends critically on the way in which performance incentives are structured. In particular, relative compensation schemes magnify the influence of this heuristic while joint compensation schemes dampen its influence. We discuss these results with respect to the literature on effective compensation.
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Bibliographic InfoPaper provided by Department of Economics, University of Calgary in its series Working Papers with number 2007-10.
Date of creation: 26 Oct 2007
Date of revision: 26 Oct 2007
Other versions of this item:
- Oxoby, Robert J., 2007. "The Effect of Incentive Structure on Heuristic Decision Making: The Proportion Heuristic," IZA Discussion Papers 2857, Institute for the Study of Labor (IZA).
- C9 - Mathematical and Quantitative Methods - - Design of Experiments
- M5 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-11-17 (All new papers)
- NEP-CBE-2007-11-17 (Cognitive & Behavioural Economics)
- NEP-EXP-2007-11-17 (Experimental Economics)
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