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The Complexity of Money

Very high financial rewards provide motivation to work well, but they also cause stress and preoccupation that can actually hurt performance

Over the last two weeks I have come to realise that people share a very complex relationship with money. A friend of mine who makes more than Rs 50 lakh a year, owns two homes, a couple of cars, and holidays abroad in exotic locations every year, has constantly been cribbing about the 10 per cent increment he got after the yearly performance appraisal.

“So were you expecting more?” I asked my friend. “Not really. The company hasn't been in a great shape, so even 10 per cent is very good. The average increments this year have only been around 6-7 per cent,” he replied. “So then what is the issue?” I asked. “Well you know,” he said, such and such person, “who I tend to compete with got an increment of 11 per cent.”

This difference of 1 per cent (actually I should be saying 100 basis points, but that sounds too technical) had been bothering him to no end. I tried telling him that his salary was nearly 50 per cent more than the other person he was talking about. “So in absolute terms your increment is greater than his,” I explained. “Yeah. But it would have been better if I made more in percentage terms as well,” my friend replied. What this little story tells us is that people share a complex relationship with money.

How else do you explain what my friend earning more than Rs 50 lakh per year was going through? There is no doubt that money motivates. An experiment carried out in 1953, showed just that. As Margaret Heffernan writes in Wilful Blindness -- Why We Ignore the Obvious At Our Peril, “Patients were asked to hang on horizontal bars for as long as they could; most could take it for about 45 seconds. When subjected to power of suggestion and even, in some cases, hypnosis, they could stretch to about 75 seconds. But when offered a five dollar bill the patients managed to hang from the bar for 110 seconds.” So money does motivate people to work longer. And in many organisations that is equivalent to working harder. But as Heffernan puts it, “Money has a more complex influence on people than just making them work longer.”

Experiments carried out by behavioural psychologist Dan Ariely suggest that the less appreciated we feel our work is, the more money we want for it. Ariely gave research participants a piece of paper that was filled with random letters. The participant were divided into three groups, and had to find pairs of identical letters on the sheets of paper given to them and mark them out. While returning their papers, the participants in the first group wrote their names on the sheets of paper and handed it back to the experimenter. He took the sheet, looked it over, said “Uh huh” and put it in a pile.

The participants in the second group did not write their names on the sheets of paper. The experimenter took their sheets without looking at them and without saying anything. He placed them in a pile. The sheets handed over by the participants of the third group were immediately shredded, as soon as they handed them over. In order to be a part of another round of the experiment, those in the third group whose sheets were shredded wanted twice the amount of money in comparison to those in the first group, whose sheets were simply put in a pile. Those in the second group whose work was saved but ignored wanted as much as participants of the third group whose sheets were shredded.

As Ariely put in a blog on www.ted.com, “Ignoring the performance of people is almost as bad as shredding their effort before their eyes.” And when that happens people want to be paid more.

The next question that crops up is that does paying people more money make them work smarter? This question is of utmost importance given the fact that some of the highest paid people in the world brought it to the verge of economic collapse a few years back in late 2008. Ariely and a group of researchers tested this out in an experiment they carried out in India (to control the costs involved in running the experiment). In this experiment, research participants were asked to play memory games and assemble puzzles while they were throwing tennis balls at a target. One third of the participants were promised one day's pay, if they performed well. Another one third were promised two weeks pay. And the final third were promised five months pay (the real reason behind conducting the experiment in India), if they did well.

The results were surprising. Those who were promised a day's pay and two weeks pay as a financial reward, performed equally well. But those who were offered five months pay, performed the worst. Ariely explained this surprising finding in an article he wrote for The New York Times. Very high financial rewards act as a double edged sword, Ariely wrote. “They provide motivation to work well, but they also cause stress and preoccupation with the reward that can actually hurt performance.” Of course this in no way means that people don't want to be paid more, even though the prospect of earning more money starts hurting their performance beyond a point. Also, more money doesn't always make people happier.

Research carried out by economist Angus Deaton and psychologist Daniel Kahneman (who won the Noble Prize in economics) in 2010 found that more money makes people happier up to an income of $75,000 per year. As Kahneman writes in Thinking, Fast and Slow, “The satiation level beyond which experienced well being no longer increases was a household income of $75,000 in high cost areas (it could be less in areas where the cost of living is lower). The average increase of experienced well-being associated with incomes beyond that level was precisely zero...Higher income brings with it higher satisfaction, well beyond the point at which it ceases to have any positive effect on experience.”

So earning more money is not always directly proportional to greater happiness. But then why does money continue to bother people (as we saw in my friend's case) so much? Nassim Nicholas Taleb perhaps has an explanation for it in Anti Fragile “The worst side of wealth is the social association it forces on its victims, as people with big houses tend to end up socialising with other people with big houses.” Beyond a point the need for more money is an essential part of being seen at the top of the rat race. More money is also equated with higher intelligence and leads to greater respect from the society at large.

As John Kenneth Galbraith, one economist who thoroughly deserved a Nobel prize, but never got it, put it in A Short History of Financial Euphoria, “Individuals and institutions are captured by the wondrous satisfaction from accruing wealth. The associated illusion of insight is protected, in turn, by the oft-noted public impression that intelligence, one's own and that of others, marches in close step with the possession of money.” Hence, money after a point becomes a measure of intelligence and success and that creates problems of its own.