Candle problem
The candle problem are related experiments from the world of social psychology about overcoming assumptions when solving problems (the “Duncker candle problem”), and then what sorts of incentives work best for solving those kinds of problems (the “Glucksberg candle problem”).
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Daniel Pink popularised the candle problem in a TED Talk and with a rather good book on the topic: Drive: The Surprising Truth About What Motivates Us.
But for our purposes, it hints at what might be wrong with discretionary compensation, and why investment banks are likely to stick with it anyway.
The candle problems
The Duncker candle problem challenges participants to figure out how to attach a lighted candle to a wall so that no wax gets on the floor, using only matches and a tray of tacks. Duncker correctly predicted participants’ “functional fixedness” regarding the tray — seeing it as only a container for the thumbtacks and not otherwise relevant to the problem — would hinder their arrival at the simplest solution to the puzzle: tack the box to the wall, and put the candle in the box.
Thus, solving the problem requires a small amount of lateral thinking, to overcome the “functional fixedness”.
Enter Elton Glucksberg, who ran the candle problem with two groups, each incentivised differently. One group was not offered any incentive but told the experiment was a to test out various problems to decide which to use in a later experiment”.
The other group were offered two incentives. The winner — the fellow who solved the problem first — would win twenty-five bucks. The top quartile of problem solvers would win a consolation prize of $5. The remainder would get a donut. Zippo the hippo.
You will never guess what happened.
It turns out the group incentivised to be greedy capitalist rent-seekers behaved like greedy capitalist rent-seekers. They were disinclined to collaborate, forced themselves into a narrow, white-knuckle footrace towards a goal they didn’t well understand and as a consequence they didn’t do very well.
The group without the pressure to kill or be killed, with nothing at stake other than the satisfaction of knowing their work might be useful in some later project, collaborated unselfishly and, on average, solved the problem much more quickly.
Now, this really ought not to need a Ted Talk to point out. The incentives are all wrong: they discourage collaboration of the sort which obviously will help in solving the problem.
The end of history?
Anyway, in this way, by the simple expedient of metropolitan liberal reasoning, was naked capitalism finally falsified, vanquished and logicked out of existence. As a result, there aren’t any investment banks any more, the canals of Venice run clear, the sky over Zhengzhou is a brilliant polaroid blue, and unicorns gamble in the wildflower meadows of Rotherhithe.
Well, not quite. But the insistence of big organisations on narrow, stupid compensation models maddens Daniel Pink, giver of said TED talk, who rails at the absurdity and venality of our institutions, whose leaders stick religiously to the traditional bonus structure in the face of overwhelming evidence that it doesn’t work. It doesn’t just madden Pink, it baffles him.
What motivates investment bankers
But the puzzle isn’t understanding that “autonomy, mastery, and purpose” motivate people more than a bit of extra cash — who didn’t, instinctively, know that? — but why our corporate overlords who, in their reflective moments, surely know it as well, ignore this plain, a priori fact.
As ever, the JC has a theory: it is all about personal incentives. In the same way that the average wage-slave’s major motivator during her career is fear — and her primal instinct is the covering of her own behind, what propels the captains of our industry is personal enrichment. Solving the organisation’s, and its clients’, problems and achieving general commercial goals of the collective in a way that empowers and energises the rank and file is, you know, good, inasmuch as it generates a healthy pay packet, but it is still a second-order derivative of generating that healthy pay packet. If, by some unfortunate turn of events, the two should conflict, it should not take a clairvoyant to work out which imperative will prevail: it won’t be “the collective betterment of the whole”.
Now consider the candle incentives. The CEO is in an excellent position to decide whether to go with the individual incentive or the collective incentive because he’s the boss. He is also well placed to influence who among the workforce should get that big prize. No need to consult your local clairvoyant on that one, either, nor to predict that his management suite, if they think they might be in for a fiver, are likely to agree with him.
The remainder of the employee group, who are destined for a sugary treat with a hole in it, may have a different view, but they are in no position it advance it, because no-one with any influence is listening to them. The reason for that is because the people with influence are all on the phone to their Aston Martin dealers.
If our captains and leaders were minded to rationalise their decisions — and that would require powers of self-awareness that, as a rule, they lack, but let’s just say — they might look at it this way: to fund the individual incentive model will cost just $150 ($25 for the CEO and 150 between the 25 board members). To fund the collective incentive model, would mean giving everyone — including ourselves— either nothing, or a fiver, or the whole twenty-five bucks.
Now no-one likes the sound of a rolling donut, so that’s off the table. But funding everyone a fiver would cost $500, and giving everyone $25 would cost two and a half grand. So, unless the collective incentive would create a huge increase in productivity, purely in cost terms, the individual incentive scheme is much more attractive to our shareholders...
Gentlemen, I move that we do that. All those in favour?