Cognitive Biases: Mistakes or Missing Stakes?
Despite decades of research on heuristics and biases, empirical evidence on the effect of large incentives – as present in relevant economic decisions – on cognitive biases is scant. This paper tests the effect of incentives on four widely documented biases: base rate neglect, anchoring, failure of contingent thinking, and intuitive reasoning in the Cognitive Reflection Test. In laboratory experiments with 1,236 college students in Nairobi, we implement three incentive levels: no incentives, standard lab payments, and very high incentives that increase the stakes by a factor of 100 to more than a monthly income. We find that response times – a proxy for cognitive effort – increase by 40% with very high stakes. Performance, on the other hand, improves very mildly or not at all as incentives increase, with the largest improvements due to a reduced reliance on intuitions. In none of the tasks are very high stakes sufficient to de-bias participants, or come even close to doing so.
We thank three very constructive referees, Thomas Graeber and Florian Zimmermann for helpful comments. The experiments in this paper received IRB approval from Harvard’s IRB. This study was funded using Hall’s research funds from Harvard Business School. For excellent research assistance we are grateful to Tiffany Chang, Davis Heniford, and Karim Sameh. We are also grateful to the staff at the Busara Center for Behavioral Economics for dedicated support in implementing the experiments. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.