Could you craft an incentive structure for your employees that was so perfect you would never need to lead or manage them again? Some experts would have us believe that it is possible. They claim that a system of monetary incentives and disincentives can motivate and guide the decision-making process of an entire team, thus making leadership and management unnecessary. A successful organization, in this theory, is just a matter of choosing the right “carrots” and “sticks.”
Apart from being depressing, this theory overlooks something crucial: human beings are more than self-centered calculation machines. The following two examples challenge this simplistic understanding of what humans are and how they behave:
Economics’ Shaky Foundation
“The theory of the rational actor assumes that a person can perfectly process available information about alternative courses of action, and can rank possible outcomes in order of expected utility. The actor will then choose the course of action that will maximize his personal expected utility.”
The “rational actor” concept is one of the core assumptions of modern economics. Economists build their models with this assumption in mind. Economists will readily admit that no economic model is perfect. But what many are more hesitant to admit is that the predictive power of these economic models has actually proved to be downright awful.
Need proof? The vast majority of government and academic economists failed to predict the economic crisis of 2008 and 2009. Then during the recovery the vast majority of economists employed by money managers and hedge funds failed to predict how things would pan out after the crash. After the crisis all the models suggested massive inflation, the meltdown of the European Union due to government bonds defaults, and the collapse of the dollar. None of these things came to pass. Why did the economists’ sophisticated models fail them? Could it be that their assumptions about human behavior are seriously flawed? Are we really as rational as we sometimes like to think we are?
The rising popularity of crowdfunding also challenges the notion that humans are “rational actors.” Several years ago, websites such as Kickstarter.com and Indiegogo.com began to emerge. These crowdfunding sites allow artists and entrepreneurs to raise money for their endeavors by asking for financial support from the general public. Kickstarter has already received $1 billion in pledges from 5.7 million donors to fund 135,000 projects. The rational actor purist would argue that the only way someone could raise money for a project would be to offer those contributing money equity in the endeavor. That way the contributor could benefit from the future economic prosperity that the concept generated. But people who contribute to Kickstarter don’t get equity. They simply get “tangible rewards and special experiences in exchange for their pledges.” These are usually worth less than the individual’s contribution.
In this way, crowdfunding is proof that humans’ motivations can transcend money, immediate gratification, and their own self-interest.
I’m not saying that incentives don’t matter. They do and I think that they should be prudently implemented within organizations. But if you forget that humans are driven not only by rationality but by emotions as well, you’re in for a shock. And if you reduce people to cost-benefit machines they’ll reduce you to something too, and your organization will become a very cold and uninspiring place.