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

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  • Oxoby, Robert J.

    (University of Calgary)

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.

Suggested Citation

  • Oxoby, Robert J., 2007. "The Effect of Incentive Structure on Heuristic Decision Making: The Proportion Heuristic," IZA Discussion Papers 2857, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp2857
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    References listed on IDEAS

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    More about this item

    Keywords

    incentives; heuristics; performance judgments; experiments;
    All these keywords.

    JEL classification:

    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • M5 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics

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