Incentives That Have Unexpected Results

The Wells Fargo banking scandal is a classic tale of incentives gone wrong.

The Wells Fargo Story

Through new account quotas, management’s goal was to increase fees and generate customer loyalty. The fees would come from new debit and credit cards and different kinds of banking accounts. As for the loyalty, the key was multiple ties to Well Fargo that would discourage customers from going elsewhere for a mortgage.

As we know, it did not work out that way.

Not only were the quotas unattainable (not enough customers) but the penalties were unthinkable. You could get fired or at the least, have to remain after working hours. So employees responded with 2.1 million fake accounts

Other Incentive Stories

In Tim Harford’s new book, Messy, he has a wonderful chapter on incentives.

When the British government proclaimed a 48-hour directive for their National Health Service, the results were not what they expected. To diminish wait time, the incentive required that physicians see their patients within 48 hours of an appointment call. Instead the doctors got worried that they would not have enough open slots to book everyone who wanted to see them. So they avoided advance appointments and strategically answered the phone. That 48 hour incentive increased frustration and diminished care.

Harford also tells us that surgeons need healthy patients when their rank is based on survival rates. And universities need to reject more students when their rank relates to competitiveness. (That is why the University of Chicago switched to the Common App.) Even punctuality becomes a perverse incentive when it encourages bus drivers to skip stops that have too many people.

Our Bottom Line: Incentives

Knowing that incentives shape our behavior,  let’s just conclude with this quote from former Treasury Secretary Lawrence Summers;

“In the history of the world, nobody has ever washed a rented car.”

My sources and more: Like his podcasts, Tim Harford’s books have great stories that make economics come alive. I do also recommend this econtalk podcast in which Harford talks about Messy. More serious but equally interesting, this Bloomberg article has a good description of the Wells Fargo scandal.