Do incentive schemes have things back to front?

Posted by adi on Oct 15, 2008 in The world of the web

Cashback websites are well established now and with Microsoft deciding last month to start rewarding people for using their products it seems that incentivizing people to use a service is an effective means of honing behaviour.  But could it be done better?

The whole notion rests on that of reciprocity.  Game theory went to great lengths to investigate just how people react in such circumstances and by and large found that a tit-for-tat approach is taken.  In a gift exchange game, where two persons in turn determine how large gifts to give to one another, a large gift by the first mover is reimbursed by the second mover.

In incentive schemes however the onus is very much on the user to complete an action, and for them then to be rewarded for so doing by the website.

Whilst this clearly works to an extent, could it work that much better?

Another theory that appears to support the giving by the website in return for action by the user is Endowment theory.  The endowment effect suggests that the value assigned to an item rises once a person has ownership of it.  So in other words, we value things more once they’re ours than when they are not.

So in this context the user would be rewarded outright and would then have to earn the right to keep their reward.

Incentivized websites are big businesses at the moment, with the cashback sector drifting wholesale towards a 100% cashback model.  Is there room for something a little bit different in the market?

Tags: cashback, endowment, Endowment effect, game theory, incentives, reciprocity, Tit for tat