We’ve known for a century that laboratory rats choke under pressure. Back in 1908, two researchers, Robert Yerkes and John Dodson, repeatedly placed rats in a cage and gave them a choice between two pathways. Each time, one of the pathways was lined with black card and delivered an electric shock; the other pathway was lined with white card and was safe.

Yerkes and Dodson varied the intensity of the shock: some rats always got a ferocious zap, other rats always got a mild buzz. The rats which learned quickest were the ones receiving neither mild shocks nor strong shocks, but shocks somewhere in the middle. When the “incentive” to learn was too big, the effect was counterproductive.

So much for rats. Is the same true of humans offered financial incentives? To answer the question, four economists, Dan Ariely, Uri Gneezy, George Loewenstein and Nina Mazar, decamped to rural India to conduct an experiment. They knew that when the experiment’s volunteers were very poor, it would be easier to pay them enough money to make heads spin and hands shake.

The remainder of this column can be read here. Please post comments below.

July 5th, 2008 in Undercover Economist | Permalink