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The Effect of Incentive Structure on Heuristic Decision Making: The Proportion Heuristic

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Author Info
Robert J. Oxoby () (University of Calgary and IZA)

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Abstract

When 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 influences 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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Publisher Info
Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2857.

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Length: 21 pages
Date of creation: Jun 2007
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Handle: RePEc:iza:izadps:dp2857

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Related research
Keywords: performance judgments heuristics incentives experiments

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Find related papers by JEL classification:
C9 - Mathematical and Quantitative Methods - - Design of Experiments
M5 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics

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  1. John Conlisk, 1996. "Why Bounded Rationality?," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 669-700, June. [Downloadable!] (restricted)
  2. Matthew Rabin, 1998. "Psychology and Economics," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 11-46, March. [Downloadable!] (restricted)
  3. Terrance Odean, 1998. "Are Investors Reluctant to Realize Their Losses?," Journal of Finance, American Finance Association, vol. 53(5), pages 1775-1798, October. [Downloadable!] (restricted)
  4. Nathan Berg, 2005. "Decision-making environments in which unboundedly rational decision makers choose to ignore relevant information," Global Business and Economics Review, Inderscience Enterprises Ltd, vol. 7(1), pages 59-73, January. [Downloadable!] (restricted)
  5. Joel L. Schrag, 1999. "First Impressions Matter: A Model Of Confirmatory Bias," The Quarterly Journal of Economics, MIT Press, vol. 114(1), pages 37-82, February. [Downloadable!] (restricted)
  6. Oxoby, Robert J., 2002. "Status characteristics, cognitive bias, and incentives in teams," The Journal of Socio-Economics, Elsevier, vol. 31(3), pages 301-316. [Downloadable!] (restricted)
  7. Sendhil Mullainathan, 2002. "A Memory-Based Model Of Bounded Rationality," The Quarterly Journal of Economics, MIT Press, vol. 117(3), pages 735-774, August. [Downloadable!] (restricted)
  8. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March. [Downloadable!] (restricted)
  9. Todd L. Cherry & Peter Frykblom & Jason F. Shogren, 2002. "Hardnose the Dictator," American Economic Review, American Economic Association, vol. 92(4), pages 1218-1221, September. [Downloadable!] (restricted)
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  10. Berg, Nathan, 2003. "Normative behavioral economics," The Journal of Socio-Economics, Elsevier, vol. 32(4), pages 411-427, September. [Downloadable!] (restricted)
  11. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March. [Downloadable!] (restricted)
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