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Upside of Irrationality: Bonus Size and Worker Productivity
Essay Instructions:
FIN 335
Part A is very much like an typical essay assignment (each question is worth 5 points so 50 point total). Part B is a deeper dive (5 question-10 points each—50 total points). The typical answer in part B would probably be about 2-3 full paragraphs for each question (except the 2.5 or 5 point questions which could be 1-2 paragraphs). And there may be overlap in the questions (some of your answers in one question—may apply to others). Answer the following questions.
Part A (From Introduction, Chapter 1, 3-6 of the Upside of Irrationality) (each question is worth 5 points, 50 points total))
- Why was Ariely the only one in the study able to rid himself of hepatitis C?
- What is the relationship between bonus size and worker productivity (for cognitive tasks)?
- According to Ariely, why do Big Bonuses actually hurt worker productivity?
- Why do we perform better in private than in public?
- What is the IKEA effect and why does it hold?
- What is the Not-Invented Here bias and why does it hold? Explain.
- What is idiosyncratic fit?
- What is the power of saying sorry?
- What is the downside of adaptation? That is, how does adaptation cause us to do things that actually lead us be less happy?
- What is the upside of adaptation? That is, how can you make adaptation work for you to make you happier?
Part B (Longer Questions (50 points))
- (10 points) Ariely’s main point is that we are pawns in a game whose forces we largely fail to comprehend. Indeed, we do not really learn from our mistakes. Instead we are predictability irrational. With this as background, I want you to answer the question of why do not we not learn from our mistakes better
- (10 points) Read Chapter 11 of the Upside of Irrationality, “Lessons from Our Irrationalities: Why We Need to Test Everything”. Then answer this question: Why are we so resistant to testing our ways of doing things? Consider the example of leeches in this chapter. Or how we teach the same material over and over again in finance even though it does not seem to work in reality. Or how Ariely found that the nurses would rip the bandages off very fast rather than test to see what worked better.
- Read Chapter 2 of the Upside of Irrationality “The Meaning of Labor: What Legos Can Teach Us About the Joy of Work”. Then I want to answer the following questions:
- (2.5 points) Why do we need so much meaning at work?
- (2.5 points) Why are the economic models so wrong?
- (5 points) What we have learned in the class is so many things in finance are not quantifiable. These include social norms, emotions, meaning, etc. Yet in finance, we love things that quantify risk like Value at Risk or mark to market accounting (which as we saw can be really flawed). Why are we so seduced by numbers and put off by qualitative things in finance and economics?
- (10 points) There is a video on amazon called “The Inventor: Out of Blood in Silicon Valley”(you can watch on amazon or HBO but I don’t think you have to watch the entire video to understand my question). The video is about Theranos and its founder Elizabeth Holmes. You will see that so many smart people fell for Theranos and invested lots of money into the company. The same can be said for Enron, or Bernard Madoff or countless other examples. My question is why? Why are smart people so easily fooled? Use the biases we have learned in class (particularly the availability bias) to answer this question.
- (10 points) One criticism that is levied against traditional economic and finance models is that they are often formulated as if the typical decision maker were an individual with unlimited cerebral RAM. Such a decision maker would consider all the relevant information and come up with the best choice. However, we know from this course that normal human beings are imperfect. And the information requirements for these models are totally egregious. Consider CAPM for a moment. This model assumes that investors are capable of studying the universe of securities in order to come up with all required model inputs. These inputs include expected returns and variances for all securities, as well as the co-variances among all securities. My question to you is why do we do this in finance? Why do we create models that people really cannot follow? Why do we assume people can do all these calculations? Why does assume we are so rational? Indeed, I mentioned the example of Harry Markowitz, the founder of Modern Portfolio Theory, who uses regret theory than his own modern portfolio theory to come with his allocations in his retirement portfolio.
Essay Sample Content Preview:
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Part A
1 Why was Ariely the only one in the study able to rid himself of hepatitis C?
He was the only one who managed to stick faithfully and strictly to the treatment regime. As he narrates it, the treatment regime wasn't so pleasant. He, however, manages to stick to it, despite the routine vomiting and nausea. Essentially, he successfully endured immediate negative effects to realize a long-term positive impact. The others in the study failed to keep up with the consistency and discipline needed.
2 What is the relationship between bonus size and worker productivity (for cognitive tasks)?
Cognitive involvement and bonus size are usually inversely proportional to worker productivity. A worker will always be more excited by the increased bonuses that he gets from carrying out a particular task to the extent that they will eventually want to do more, increasing their productivity. However, when the cognitive aspect comes in, it becomes difficult to do any further than what the mental limits allow, whichever the bonus amount.
3 According to Ariely, why do Big Bonuses actually hurt worker productivity?
Big bonuses usually hit on the person's mind. It is a constant reminder that he was given a big bonus and was therefore supposed to carry out a certain duty in a certain way. To this end, it increases pressure on the person, which results in lower productivity instead of the expected high productivity.
4 Why do we perform better in private than in public?
While in private, we are sure and aware that no one is watching us. We are, therefore, quite genuine and authentic in our goals and actions. There is no pressure to deliver because of being watched. However, when in public, the opposite is true. There is too much attention and hence too much pressure to perform, so we end up not performing well.
5 What is the IKEA effect, and why does it hold?
IKEA effect is the state in which an individual gets attached to his things or belonging. It is based on the fact that people always find more value in those things that they make by themselves. It is an inherent sense of pride that comes with that aspect of personal ownership. It holds because it is typical human behavior. Humans always get more attached to those things that they have worked hard for.
6 What is the Not-Invented Here bias, and why does it hold? Explain.
This bias simply means that people will always look at their products or belonging to a higher value than what comes from outside. They will therefore deride ideas from outside in favor of their own. It holds because it is a direct product of the IKEA effect. People always want to have a sense of ownership, and that is how they can value theirs more. So, however difficult it might be or expensive, people will always go for what they feel is their idea.
7 What is idiosyncratic fit?
This is the behavior whereby one would always prefer their idea over that of others. It is a sense of both conscious and unconscious bias. Sometimes, these ideas might not necessarily be of their own conception, only that they might be satisfying or fulfilling a certain aspect of their personal interests and perspectives.
8 What is the power of saying sorry?
There is a very strong power in offering an apology. This is, to some extent, due to the psychological underpinnings of the same. One will, for example, feel more relaxed and understand the empathetic or sympathetic manner in which the other offers that apology. Ariely's experiment showed that people were easy with returning the cash after the apology.
9 What is the downside of adaptation? That is, how does adaptation cause us to do things that actually lead us to be less happy?
Adaptation is often taken as part of life and survival, but it has its downsides. It is worth noting that adaptation often goes hand in hand with commitment. Sometimes, one is forced to adapt to certain situations, leading them to commit to them, yet they might not result in their happiness. They simply commit to get through something or achieve a certain goal. Adaptation, therefore, has a downside of making people do things that will make them less happy.
10 What is the upside of adaptation? That is, how can you make adaptation work for you to make you happier?
An upside of adaptation is that if taken in a hedonistic manner, it leads to shorter bursts of pleasure, an important element of happiness. If done for a long time, it can result in long-term happiness. Therefore, one can make adaptations to result in them being happier by focusing on prolonging the short-term adaptations or hedonistic adaptations.
Part B
1 (10 points) Ariely's main point is that we are pawns in a game whose forces we largely fail to comprehend. Indeed, we do not learn from our mistakes. Instead, we are predictability irrational. With this as background, I want you to answer the question of why do not we not learn from our mistakes better?
Ariely, first of all, tries to make it a point that we are usually so irrational most of the time. He does this by breaking down and explaining several topics such as relativity, anchoring, and imprinting. After explaining these terms concerning our decision-making tendencies, Ariely then comes to the second point. In the second point, he talks about a door game. The relevance of this game is that human beings like trying things out, even if the outcome might be painful to them. They are wired like that, and this is why people never learn from their mistakes any better.
Ariely also takes note of the beer experiment as another pointer to people's decisions. People usually have a preset collection of expectations of conditions when it comes to certain issues. Those who knew about the vinegar in the beer did not want it, while those who knew nothing about it were just fine. At no one time do we usually have that independence of thought when making decisions. Most of our choices are always hinged on previous experiences, what we miss, expect, or want. We always forget that there are opportunity costs to every decision we make. In that manner, we end up making mistakes while failing to learn from them.
2 (10 points) Read Chapter 11 of The Upside of Irrationality, "Lessons from Our Irrationalities: Why We Need to Test Everything". Then answer this question: Why are we so resistant to testing our ways of doing things? Consider the example of leeches in this chapter. Or how we teach the same material over and over again in finance even though it does not seem to work in reality. Or how Ariely found that the nurses would rip the bandages off very fast rather than test to see what worked better.
The case of the medical application of leeches meant a complete dismissal of the previous medical practices or embracement of untried new practices. Therefore, the participants would have to be exposed to a lack of the previo...
Professor's Name
Course
Submission Date
Part A
1 Why was Ariely the only one in the study able to rid himself of hepatitis C?
He was the only one who managed to stick faithfully and strictly to the treatment regime. As he narrates it, the treatment regime wasn't so pleasant. He, however, manages to stick to it, despite the routine vomiting and nausea. Essentially, he successfully endured immediate negative effects to realize a long-term positive impact. The others in the study failed to keep up with the consistency and discipline needed.
2 What is the relationship between bonus size and worker productivity (for cognitive tasks)?
Cognitive involvement and bonus size are usually inversely proportional to worker productivity. A worker will always be more excited by the increased bonuses that he gets from carrying out a particular task to the extent that they will eventually want to do more, increasing their productivity. However, when the cognitive aspect comes in, it becomes difficult to do any further than what the mental limits allow, whichever the bonus amount.
3 According to Ariely, why do Big Bonuses actually hurt worker productivity?
Big bonuses usually hit on the person's mind. It is a constant reminder that he was given a big bonus and was therefore supposed to carry out a certain duty in a certain way. To this end, it increases pressure on the person, which results in lower productivity instead of the expected high productivity.
4 Why do we perform better in private than in public?
While in private, we are sure and aware that no one is watching us. We are, therefore, quite genuine and authentic in our goals and actions. There is no pressure to deliver because of being watched. However, when in public, the opposite is true. There is too much attention and hence too much pressure to perform, so we end up not performing well.
5 What is the IKEA effect, and why does it hold?
IKEA effect is the state in which an individual gets attached to his things or belonging. It is based on the fact that people always find more value in those things that they make by themselves. It is an inherent sense of pride that comes with that aspect of personal ownership. It holds because it is typical human behavior. Humans always get more attached to those things that they have worked hard for.
6 What is the Not-Invented Here bias, and why does it hold? Explain.
This bias simply means that people will always look at their products or belonging to a higher value than what comes from outside. They will therefore deride ideas from outside in favor of their own. It holds because it is a direct product of the IKEA effect. People always want to have a sense of ownership, and that is how they can value theirs more. So, however difficult it might be or expensive, people will always go for what they feel is their idea.
7 What is idiosyncratic fit?
This is the behavior whereby one would always prefer their idea over that of others. It is a sense of both conscious and unconscious bias. Sometimes, these ideas might not necessarily be of their own conception, only that they might be satisfying or fulfilling a certain aspect of their personal interests and perspectives.
8 What is the power of saying sorry?
There is a very strong power in offering an apology. This is, to some extent, due to the psychological underpinnings of the same. One will, for example, feel more relaxed and understand the empathetic or sympathetic manner in which the other offers that apology. Ariely's experiment showed that people were easy with returning the cash after the apology.
9 What is the downside of adaptation? That is, how does adaptation cause us to do things that actually lead us to be less happy?
Adaptation is often taken as part of life and survival, but it has its downsides. It is worth noting that adaptation often goes hand in hand with commitment. Sometimes, one is forced to adapt to certain situations, leading them to commit to them, yet they might not result in their happiness. They simply commit to get through something or achieve a certain goal. Adaptation, therefore, has a downside of making people do things that will make them less happy.
10 What is the upside of adaptation? That is, how can you make adaptation work for you to make you happier?
An upside of adaptation is that if taken in a hedonistic manner, it leads to shorter bursts of pleasure, an important element of happiness. If done for a long time, it can result in long-term happiness. Therefore, one can make adaptations to result in them being happier by focusing on prolonging the short-term adaptations or hedonistic adaptations.
Part B
1 (10 points) Ariely's main point is that we are pawns in a game whose forces we largely fail to comprehend. Indeed, we do not learn from our mistakes. Instead, we are predictability irrational. With this as background, I want you to answer the question of why do not we not learn from our mistakes better?
Ariely, first of all, tries to make it a point that we are usually so irrational most of the time. He does this by breaking down and explaining several topics such as relativity, anchoring, and imprinting. After explaining these terms concerning our decision-making tendencies, Ariely then comes to the second point. In the second point, he talks about a door game. The relevance of this game is that human beings like trying things out, even if the outcome might be painful to them. They are wired like that, and this is why people never learn from their mistakes any better.
Ariely also takes note of the beer experiment as another pointer to people's decisions. People usually have a preset collection of expectations of conditions when it comes to certain issues. Those who knew about the vinegar in the beer did not want it, while those who knew nothing about it were just fine. At no one time do we usually have that independence of thought when making decisions. Most of our choices are always hinged on previous experiences, what we miss, expect, or want. We always forget that there are opportunity costs to every decision we make. In that manner, we end up making mistakes while failing to learn from them.
2 (10 points) Read Chapter 11 of The Upside of Irrationality, "Lessons from Our Irrationalities: Why We Need to Test Everything". Then answer this question: Why are we so resistant to testing our ways of doing things? Consider the example of leeches in this chapter. Or how we teach the same material over and over again in finance even though it does not seem to work in reality. Or how Ariely found that the nurses would rip the bandages off very fast rather than test to see what worked better.
The case of the medical application of leeches meant a complete dismissal of the previous medical practices or embracement of untried new practices. Therefore, the participants would have to be exposed to a lack of the previo...
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