Decision-makers perform worse as financial incentives increase
Research by behavioral economist Dan Ariely (see video below) found that high financial incentives actually make individuals perform worse than when given low to moderate financial incentives. These results were most dramatic when the tasks involve cognitive elements as opposed to mechanical elements. The reason is that loss aversion (people’s tendency to strongly prefer avoiding losses to acquiring gains) causes stress that negatively impacts performance. So if highly compensated individuals are counting on their salaries and bonuses they are afraid of losing them, and are more likely to feel stress and make poor decisions.
So what does this tell us about highly compensated CEOs, other executives, and highly incentivised Wall Street traders? Might their high compensation cause loss aversion resulting in stress and worse decision-making than average employees? Is it possible their fears about losing their high levels of compensation cause them to make decisions that are in their own best interest as opposed to the organization or society?