One size fits all? Designing financial incentives tailored to individual economic preferences

STEFAN A. LIPMAN

doi:10.1017/bpp.2020.21

Abstract

AbstractFinancial incentives are often designed to benefit from behavioral insights. Individuals’ preferences for such behaviorally inspired incentives are rarely studied, nor is the role played by the behavioral insights that motivated them. This study aimed to let individuals design their own incentives (i.e., tailored incentives) and to explore which individual characteristics are associated with these preferences for tailored incentives. A sample of students (n = 182) tailored hypothetical incentives for visiting the gym. Incentives could be tailored by: (1) committing personal funds; (2) picking weekly payouts (increasing or decreasing); and (3) introducing payout risk while increasing value. Afterwards, (inter alia) loss aversion, probability weighting, time discounting, present bias, cognitive reflection and trait self-control were measured. A large majority indicated being willing to deposit their own money, and only very few individuals selected risky incentives. These heterogeneous preferences for financial incentives are poorly predicted by the individual characteristics measured (i.e., economic preferences and psychological traits). These results suggest that preferences for tailored incentives could be studied as input for the design of financial incentives. However, it is unclear whether tailoring incentives improves cost-effectiveness, as the lack of association between tailored incentives and the behavioral insights that motivate them has multiple conflicting interpretations.

Highlights

Financial incentives appear to be a promising public policy tool to promote behavior change for the most prominent causes of chronic, non-communicable disease (WHO, 2009), such as tobacco use, poor diet and physical inactivityDownloaded from https://www.cambridge.org/core
It is unclear who responds to financial incentives and why (Paloyo et al, 2015), which may explain why a one-sizefits-all approach is often applied, offering all respondents the same type of financial incentives
To further explore who responds to financial incentives and why, the association between these economic preferences and tailored incentives is investigated

Summary

Introduction

Financial incentives appear to be a promising public policy tool to promote behavior change for the most prominent causes of chronic, non-communicable disease (WHO, 2009), such as tobacco use, poor diet and physical inactivity. Financial incentives have been used that capitalize on behavioral insights such as loss aversion (e.g., deposit/commitment contracts: Bryan et al, 2010; Giné et al, 2010; Bhattacharya et al, 2015; Volpp et al, 2008) or probability weighting (e.g., lottery incentives: Volpp et al, 2008; Haisley et al, 2012; Kimmel et al, 2012; van der Swaluw et al, 2018). The effectiveness of such financial incentives, which Galizzi (2014) refers to as behaviorally inspired incentives, is hypothesized to be amplified by deviations from traditional rationality

Objectives

Results

Conclusion