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The reinforcement paradox: Monetary incentives and Bayesian updating

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  • Alós-Ferrer, Carlos
  • Buckenmaier, Johannes
  • Garagnani, Michele
  • Ritschel, Alexander

Abstract

We report the results of two pre-registered experiments designed to study the reinforcement paradox: increased incentives often fail to increase and sometimes even decrease performance in Bayesian updating tasks. We argue that, in the presence of win/loss cues, higher incentives have two countervailing effects: increased error rates for reinforcement behavior (win-stay, lose-shift) and increased performance for decisions resulting from Bayesian updating. We find some evidence that incentives increase performance when the win/loss cue is removed whereas when reinforcement is active the effects of incentives are mixed.

Suggested Citation

  • Alós-Ferrer, Carlos & Buckenmaier, Johannes & Garagnani, Michele & Ritschel, Alexander, 2022. "The reinforcement paradox: Monetary incentives and Bayesian updating," Economics Letters, Elsevier, vol. 211(C).
    • Handle: RePEc:eee:ecolet:v:211:y:2022:i:c:s0165176521004511
    DOI: 10.1016/j.econlet.2021.110200
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    References listed on IDEAS

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    1. Carlos Alós-Ferrer & Alexander Jaudas & Alexander Ritschel, 2021. "Effortful Bayesian updating: A pupil-dilation study," Journal of Risk and Uncertainty, Springer, vol. 63(1), pages 81-102, August.
    2. Alós-Ferrer, Carlos & Ritschel, Alexander, 2021. "Multiple behavioral rules in Cournot oligopolies," Journal of Economic Behavior & Organization, Elsevier, vol. 183(C), pages 250-267.
    3. Uri Gneezy & Stephan Meier & Pedro Rey-Biel, 2011. "When and Why Incentives (Don't) Work to Modify Behavior," Journal of Economic Perspectives, American Economic Association, vol. 25(4), pages 191-210, Fall.
    4. Papke, Leslie E. & Wooldridge, Jeffrey M., 2008. "Panel data methods for fractional response variables with an application to test pass rates," Journal of Econometrics, Elsevier, vol. 145(1-2), pages 121-133, July.
    5. Dan Ariely & Uri Gneezy & George Loewenstein & Nina Mazar, 2009. "Large Stakes and Big Mistakes," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 76(2), pages 451-469.
    6. Anja Achtziger & Carlos Alós-Ferrer, 2014. "Fast or Rational? A Response-Times Study of Bayesian Updating," Management Science, INFORMS, vol. 60(4), pages 923-938, April.
    7. Gary Charness & Dan Levin, 2005. "When Optimal Choices Feel Wrong: A Laboratory Study of Bayesian Updating, Complexity, and Affect," American Economic Review, American Economic Association, vol. 95(4), pages 1300-1309, September.
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    Cited by:

    1. Huang, Daqiang & Li, Yuzhen & Li, Jiahui, 2023. "Anodal transcranial direct current stimulation over the right dorsolateral prefrontal cortex: Less risk taking or more reflective? A tDCS study based on a Bayesian-updating task," Journal of Economic Psychology, Elsevier, vol. 99(C).

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