"Loss Aversion," Teacher Bonuses and Student Performance

by Christopher Shea

Wall Street Journal
July 27, 2012

Here’s a new twist on teacher bonuses that may produce better results than the standard approach: Give instructors the bonuses at the start of the school year but yank them back if students underperform. (The current economics literature finds that standard bonuses are effective in poor countries where teacher absenteeism is a serious problem — bonuses get them to at least show up — but in the United States so far researchers have turned up little evidence they do much.)

In an experiment described in a new National Bureau of Economic Research paper, 150 teachers in nine poor K-8 schools in Chicago Heights, Illinois took part in the experiment. One group of teachers got $4,000 in a lump sum at the start of the school year, but were told they’d lose some of all of it if their students did not improve sufficiently. (They could get more, up to $8,000, for exceptional performance.) The other group was simply offered a traditional bonus, also $4,000, payable at the end of the year. (That figure could also grow).

The standard bonuses had little to no effect, but students taught by teachers who got the advance bonus saw their relative standing, on a math test, rise 6.8 to 9.6 percentile points—an effect comparable to that caused by reducing class size by a third, the authors said. In more technical terms, the results were the same as raising the quality of a teacher by more than one standard deviation — that is to say, by quite a lot.

The study was inspired by three decades of psychological research into “loss aversion”: People fear financial losses more than they are excited by potential gains.

Bonuses always raise the likelihood of cheating, but the authors found no evidence of this: Students’ performance on the math test that was used to give or strip away bonuses correlated closely with their performance on other standardized math tests they took.

The effects of the intervention were stronger in lower grades than in higher grades.

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Do social incentives matter? Evidence from an online real effort experiment

by Mirco Tonin and Michael Vlassopoulos

Vox
July 26, 2012

Money matters, but is that all? This column presents evidence that social incentives can boost productivity in sectors that rely on pro-social behaviour such as health, education, and social care. It argues that this may help explain the growing popularity of Corporate Social Responsibility programmes within firms.

Corporate Social Responsibility (CSR) activities, ranging from corporate philanthropy to the adherence of firms' operations to code of conducts involving, for instance, environmental protection or labour standards, are important and growing in their importance. As the Economist (2008) puts it, "it is almost unthinkable today for a big global corporation to be without [a corporate CSR policy]". Given their heterogeneous nature, it is not easy to quantify CSR activities in a comprehensive manner. However, the available figures suggest that CSR is more than a declaration of intents. For instance, the 139 US companies surveyed by the Conference Board gave $8.45 billion in charitable donations in 2010 (Tonello and Torok 2011).

One rationale for CSR is that various stakeholders have some demand for corporations to engage in philanthropy on their behalf (Benabou and Tirole 2010). Usually it is underlined how CSR may be valued by customers (Casadesus-Masanell et al. 2009, Elfenbein and McManus 2010) or employees and investors. Additionally, CSR activities may be rewarded by regulators or by social activists and NGOs (Baron 2001). There is, however, not much evidence on the impact of CSR on employees, despite the fact that, as The Economist (2008) emphasises, "[a]sk almost any large company about the business rationale for its CSR efforts and you will be told that they help to motivate, attract and retain staff".

In recent research (Tonin and Vlassopoulos 2012), we set up a ‘real effort’ experiment to assess the impact of social incentives brought about by CSR activities on productivity.

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Bubbles without Markets

by Robert J. Shiller

Project Syndicate
July 23, 2012

A speculative bubble is a social epidemic whose contagion is mediated by price movements. News of price increase enriches the early investors, creating word-of-mouth stories about their successes, which stir envy and interest. The excitement then lures more and more people into the market, which causes prices to increase further, attracting yet more people and fueling “new era” stories, and so on, in successive feedback loops as the bubble grows. After the bubble bursts, the same contagion fuels a precipitous collapse, as falling prices cause more and more people to exit the market, and to magnify negative stories about the economy.

But, before we conclude that we should now, after the crisis, pursue policies to rein in the markets, we need to consider the alternative. In fact, speculative bubbles are just one example of social epidemics, which can be even worse in the absence of financial markets. In a speculative bubble, the contagion is amplified by people’s reaction to price movements, but social epidemics do not need markets or prices to get public attention and spread quickly.

Some examples of social epidemics unsupported by any speculative markets can be found in Charles MacKay’s 1841 best seller Memoirs of Extraordinary Popular Delusions and the Madness of Crowds.The book made some historical bubbles famous: the Mississippi bubble 1719-20, the South Sea Company Bubble 1711-20, and the tulip mania of the 1630’s. But the book contained other, non-market, examples as well.

MacKay gave examples, over the centuries, of social epidemics involving belief in alchemists, prophets of Judgment Day, fortune tellers, astrologers, physicians employing magnets, witch hunters, and crusaders. Some of these epidemics had profound economic consequences. The Crusades from the eleventh to the thirteenth century, for example, brought forth what MacKay described as “epidemic frenzy” among would-be crusaders in Europe, accompanied by delusions that God would send armies of saints to fight alongside them. Between one and three million people died in the Crusades.

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Compassion Made Easy

by David DeSteno

New York Times
July 14, 2012

ALL the major religions place great importance on compassion. Whether it’s the parable of the good Samaritan in Christianity, Judaism’s “13 attributes of compassion” or the Buddha’s statement that “loving kindness and compassion is all of our practice,” empathy with the suffering of others is seen as a special virtue that has the power to change the world. This idea is often articulated by the Dalai Lama, who argues that individual experiences of compassion radiate outward and increase harmony for all.

As a social psychologist interested in the emotions, I long wondered whether this spiritual understanding of compassion was also scientifically accurate. Empirically speaking, does the experience of compassion toward one person measurably affect our actions and attitudes toward other people? If so, are there practical steps we can take to further cultivate this feeling? Recently, my colleagues and I conducted experiments that answered yes to both questions.

In one experiment, designed with the psychologist Paul Condon and published in the Journal of Experimental Social Psychology, we recruited people to take part in a study that was ostensibly about the relation of mathematical ability to taste perception — but that in actuality was a study of how the experience of compassion affects your behavior.

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Ruth Gwily

Endowment Effect in Chimpanzees Can Be Turned On and Off

Science Daily
July 5, 2012

Groundbreaking new research in the field of "evolutionary analysis in law" not only provides additional evidence that chimpanzees share the controversial human psychological trait known as the endowment effect -- which in humans has implications for law -- but also shows the effect can be turned on or off for single objects, depending on their immediate situational usefulness.

In humans, the endowment effect causes people to consider an item they have just come to possess as higher in value than the maximum price they would have paid to acquire it just a moment before. Economists and lawyers typically assume this will not be the case. And some consider the endowment effect a human-centered fluke, subject to widespread and seemingly unpredictable variation. The origins of the quirk, and satisfying explanations for how it varies, have proved elusive.

In this new research, Vanderbilt University professor Owen Jones, who is one of the nation's few professors of both law and biology, and evolutionary biologist Sarah Brosnan of Georgia State University, developed and tested predictions rooted in evolutionary theory about when and how the endowment effect would appear.

Drawing on prior theoretical work by Jones on the evolution of seemingly "irrational" behaviors, Brosnan and Jones found consistency between chimpanzees and humans with respect to the existence of the endowment effect and, more importantly, showed that variations in the prevalence of the effect could be predicted.

"These results strongly support the idea that the endowment effect reflects the deep influence of evolutionary processes -- notably natural selection -- on psychological predispositions that affect how brains ascribe value to objects. The endowment effect, and several other seemingly quirky psychological predispositions, may trace to the sharp differences between modern environments and ancestral ones, in which these predispositions may once have minimized losses and maximized gains," said Jones, the New York Alumni Chancellor's Chair in Law, professor of biological sciences and director of the MacArthur Foundation Research Network on Law and Neuroscience.

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Bankers and the neuroscience of greed

by Ian Robertson

Guardian
July 2, 2012

On 11 August 2011, Bob Diamond, chief executive of Barclays, delivered the BBC Today Programme business lecture. In it he declared that "culture" was the critical element in responsible banking, and the best test of it is "how people behave while no one is watching." We now know that banking failed the test and so must ask why, in Sir Mervyn King's words, "excessive compensation", "shoddy treatment of customers", "mis-selling" and "the deceitful manipulation of a key interest rate", flourished in the banking sector. Cognitive neuroscience can point to some answers.

Senior bankers hold enormous power, greater than that of many elected national leaders. Largely unaccountable except to occasional shareholders meetings and often quiescent boards, their power is much less constrained than that of democratically elected leaders. And given that power is one of the most potent brain-changing drugs known to humankind, unconstrained power has enormously distorting effects on behaviour, emotions and thinking.

Holding power changes brains by boosting testosterone, which in turn increases the chemical messenger dopamine in the brain's reward systems. Extraordinary power causes extraordinary brain changes, which in their extreme form manifest themselves in personality distortions, such as those seen in dictators like Muammar Gaddafi.

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