Last Thursday was “comp day” at one of the premier investment banking firms, Goldman Sachs. This is the day when employees are handed their bonus for their previous year’s performance. Unfortunately, some reportedly received nothing. If you’ve never received a bonus for your work, that’s not a big deal. If you have, it is a big deal. Let’s find out why.
Imagine you’re babysitting a friend’s child, Jimmy, for the day and he’s been happily playing in your yard. The day is growing long and you decide to reward Jimmy’s good behavior. “Hey Jimmy,” you shout, “you’ve been such a good boy today how ‘bout I take you down to the store and get you a new ball?”
“Awesome!” Jimmy replies as he runs to hop in the car. “Can we get a kickball?” he asks as he slides onto the car seat.
“Sure thing,” you reply. “You’ve been really good today, Jimmy, and I want to reward you for that.”
“Works for me, Mr. Leider. Thanks!”
Anxious to give his new ball a try, Jimmy slides out of the car and onto the driveway without even closing the car door. Stepping to the edge, he holds the ball in front, one hand on each side and swings his right leg back. Hesitating for a moment, he then swings his leg forward in a graceful, powerful arc, sending the ball to the other side of the yard and squeals, “Yippee! Thanks Mr. L. This is awesome!” “You’re welcome Jimmy. I’m glad you enjoy it.”
Jimmy kicks the ball back and forth in the yard, enjoying each kick just as much as the one before. But as he tires, Jimmy has some difficulty keeping the ball in the yard. You watch as he winds up for another powerful stroke. The second his leg connects with the ball you see a car speeding down the street, oblivious to the ball hurled into its path. In an instant the ball is under the car, and then POW! Without hesitating, the car speeds on past, either unaware of the damage inflicted or unwilling to face a dejected child deprived of his precious toy.
“Mr. Leider, Mr. Leider!” Jimmy calls. “Awwww.” Tears begin to stream down his face and you rush to console him.
While it is certainly expected that Jimmy would be sad that his ball has been crushed, let’s step back for a moment to analyze this logically. In the first part of this story Jimmy is quite content playing in the yard without a ball. He has a certain reference point in terms of toys to play with and games he is able to play. You introduce a new toy and new modes of play follow. You have changed the reference point, raising the bar, so to speak.
As a leader, every time that you give your team members something you are changing the reference point. If you don’t give as much as before or take something away you generate unhappiness. While this may not be logical, it is a fact of human behavior.
So be careful what you give. While you can take it back—it won’t be pretty.
Concepts:
• Every time you give team members something you generate a new reference point
• As humans, once we have an enjoyable experience we desire to keep it or repeat it
Keywords: leadership, rewards, happiness, endowment effect, loss aversion, reference point
References:
Kahneman, D., Knetsch, J. L., & Thaler, R. H. (1990). Experimental tests of the endowment effect and the Coase theorem. Journal of Political Economy, 98(6), 1325-1348.
Kahneman, D., Knetsch, J. L., & Thaler, R. H. (1991). Anomalies: The endowment effect, loss aversion, and status quo bias. The Journal of Economic Perspectives, 5(1), 193–206.
Munger, C. (1995, June). The psychology of human misjudgment. Lecture given at the Harvard University.
Tversky, A., & Kahneman, D. (1991). Loss aversion in riskless choice: A reference-dependent model. The Quarterly Journal of Economics, 106(4), 1039-1061.
Veenhoven, R. (1991). Is happiness relative? Social Indicators Research, 24(1), 1-34.
