Higher incentives can impair performance: neural evidence on reinforcement and rationality

Abstract

Standard economic thinking postulates that increased monetary incentives should increase performance. Human decision makers, however, frequently focus on past performance, a form of reinforcement learning occasionally at odds with rational decision making. We used an incentivized belief-updating task from economics to investigate this conflict through measurements of neural correlates of reward processing. We found that higher incentives fail to improve performance when immediate feedback on decision outcomes is provided. Subsequent analysis of the feedback-related negativity, an early event-related potential following feedback, revealed the mechanism behind this paradoxical effect. As incentives increase, the win/lose feedback becomes more prominent, leading to an increased reliance on reinforcement and more errors. This mechanism is relevant for economic decision making and the debate on performance-based payment.

Keywords: Bayesian updating; ERPs; FRN; incentives; reinforcement.

Fig. 1

A. Distribution of balls in the urns. In state ‘up’, the left urn contains four blue and two green balls, and the right urn contains only blue balls. In state ‘down’, the left urn contains two blue and four green balls, and the right urn contains only green balls. B. Sequence of stimuli and decisions in Study 1.

Fig. 2

Error rates in Studies 1 and 2 for reinforcement errors of the win-stay and lose-shift type, classified according to condition (high and low incentives). Error bars indicate one standard error from the mean.

Fig. 3

Grand-average FRN as a function of feedback valence on the first draw, and corresponding topographies in Study 1. The nine panels correspond to the possible combinations of incentives (high, low, pooled) and reinforcement error rates following a median split (high, low, pooled). Waveforms were filtered (0.1/15 Hz) for presentation.