There’s nothing like an incentive to motivate people. And if you really want to drive them, make it a cash incentive.
— “The Merits Of Incentive Prizes For Driving Innovation” on Forbes
by Peter H. Diamandis and Jeremy Howard

It’s incredible how this kind of bad advice still spreads, and it’s delivered without context or grounding in an article in a spotlight like Forbes.

The problem is that they are talking in a very narrow and specific case, but it’s not clarified to the reader. The context is:

1. Contest-based prizes
2. High prize visibility
3. High prize value
4. Compared with traditional research funding
5. Mostly team based

Yes, in this very narrow context, economic incentives work. The problem is that they then make two generalizations:

• If you want to motivate people, use cash incentives
• Innovative thinking is fostered by cash incentives

These two generalizations are unfortunately for the reader they absolutely false and given the Forbes spotlight now more people, probably in management positions, are going to think about economic incentives more.

So, let’s see the wider field.

First of all, there are two big kinds of motivation:

• Intrinsic motivation, the kind of push coming from an internal reason, like your own passion, a pleasure in the task itself, a higher end, a moral value, a sense of rightness.
• Extrinsic motivation, the kind of push coming from an external reason, like a monetary prize, a voucher or a travel reward.

This is a really basic distinction, but it’s useful because it’s already able to make motivations (and incentives to elicit them) clearer. For example, the Candle Experiment explained quite clearly how a monetary compensation practically kills any creativity, while at the same time makes mechanical tasks faster.

In the words of Dan Pink (or if you prefer, there’s also this wonderful RSA Animate video):

Question: How much faster did this group solve the problem? 
Answer: It took them, on average, three and a half minutes longer. Three and a half minutes longer. Now this makes no sense right? I mean, I’m an American. I believe in free markets. That’s not how it’s supposed to work. Right? (Laughter) If you want people to perform better, you reward them. Right? Bonuses, commissions, their own reality show. Incentivize them. That’s how business works. But that’s not happening here. You’ve got an incentive designed to sharpen thinking and accelerate creativity, and it does just the opposite. It dulls thinking and blocks creativity.
— Dan Pink (2009) The surprising science of motivation

And we know this… since 1945.

One of the best quote I often use is by Barry Schwartz from the excellent talk “Our loss of wisdom” at TED:

I’ll just give you one example because time is racing. In Switzerland, back about 15 years ago, they were trying to decide where to site nuclear waste dumps. There was going to be a national referendum. Some psychologists went around and polled citizens who were very well informed. And they said, “Would you be willing to have a nuclear waste dump in your community?” Astonishingly, 50 percent of the citizens said yes. They knew it was dangerous. They thought it would reduce their property values. But it had to go somewhere and they had responsibilities as citizens. The psychologists asked other people a slightly different question. They said, “If we paid you six weeks’ salary every year would you be willing to have a nuclear waste dump in your community?” Two reasons. It’s my responsibility and I’m getting paid. Instead of 50 percent saying yes, 25 percent said yes. What happens is that the second this introduction of incentive gets us so that instead of asking, “What is my responsibility?” all we ask is, “What serves my interests?” When incentives don’t work, when CEOs ignore the long-term health of their companies in pursuit of short-term gains that will lead to massive bonuses, the response is always the same.
Get smarter incentives.
—  Barry Schwarts (2009) Our loss of wisdom

Get smarter incentives. Yes. Find the incentive you need for the task you want to accomplish. If you are trying to build a community, to foster creativity, to solve problems, DON’T use monetary incentives.

Ladies and gentlemen of the jury, some evidence: Dan Ariely, one of the great economists of our time, he and three colleagues, did a study of some MIT students. They gave these MIT students a bunch of games, games that involved creativity, and motor skills, and concentration. And the offered them, for performance, three levels of rewards: small reward, medium reward, large reward. Okay? If you do really well you get the large reward, on down. What happened? As long as the task involved only mechanical skill bonuses worked as they would be expected: the higher the pay, the better the performance. Okay? But one the task called for even rudimentary cognitive skill, a larger reward led to poorer performance.

Then they said, “Okay let’s see if there’s any cultural bias here. Lets go to Madurai, India and test this.” Standard of living is lower. In Madurai, a reward that is modest in North American standards, is more meaningful there. Same deal. A bunch of games, three levels of rewards. What happens? People offered the medium level of rewards did no better than people offered the small rewards. But this time, people offered the highest rewards, they did the worst of all. In eight of the nine tasks we examined across three experiments, higher incentives led to worse performance.
— Dan Pink (2009) The surprising science of motivation

But please, go on and watch the entire Dan Pink video. It’s well presented and provides more evidence in just 15 minutes.

Then again, there’s an incongruence. Why then the Diamandis and Howard say it works? Well, because of the context I referred to above. Point by point:

1. Contest-based prizes: contests create competition, that is an intrinsic motivation itself because of the activity and the natural competitive system built-in in our biology.
2. High prize visibility: visibility is another intrinsic motivation, because it’s all about social recognition, is about showing how good we are.
3. High prize value: given that these kinds of task are open to the public, there are people that might dedicate a huge amount of time trying to get it. It means that you can organize better and (as the article says) you can get more funding to work on it. This simply means that it’s not anymore a prize, but a startup. ;)
4. Compared with traditional research funding: traditional research funding can be incredibly bad not much for the task itself, but for the kind of isolated context where it often operates. This is however a wider discussion, and has many good exceptions.
5. Mostly team based: if the prize is handled by someone else, so the team just does the work without having the prize in focus, that gets outside the field of view and so it doesn’t act as much as a push.

However, if we factor in the context and all, the article is not bad, containing a couple interesting passages. In particular I want to highlight this one:

In order for someone to solve a problem, they first need to believe that it is solvable. Incentive prizes help create that belief.

This is a very good point that is able to foster innovation a lot. By creating a prize, it makes the target obtainable, because it creates the social proof that someone else believes in it. Not only: that someone believes in it so much to create a prize and create a contest.