A Model of Financial Incentive Effects in Decision Making

This paper proposes a model of the mediating processes whereby performance-contingent financial incentives influence decision quality and provides empirical evidence relevant to assessing the model. We hypothesize that performance-contingent incentives impact both cognitions and emotions, and that these cognitive and affective changes mediate the relationship between incentives and decision quality. To test these hypotheses, 84 undergraduate students were randomly assigned to conditions in which financial incentives were either performance contingent or randomly distributed. Participants used software that collected data on their information processing behavior to make choices from multiattribute choice information displays. After completing their choices, participants′ level of negative affect was assessed. Consistent with the predictions of the model, participants offered performance-contingent incentives took longer to choose, examined more information, had higher levels of negative affect, and used decision strategies that led to more accurate choices than participants offered randomly distributed incentives. Path analyses using structural equations modeling indicated that the changes in information processing behavior induced by financial incentives increased decision quality, while the increased levels of negative affect associated with incentives decreased decision quality. The paper concludes that identifying and measuring mediating variables is an important component of a research agenda designed to generate predictive theory of the relationship between financial incentives and decision quality.