Narrator: An author takes his son to Disney World. At the ticket booth, a sign reads that children under three enter for free; those three and older pay full price. The author’s son, Ron, had just turned three. Faced with a $117 charge, the father tells the smiling cashier his son is “almost three.” He saves the money, but later, Ron confronts him. “Daddy,” he asks, “you taught me that we must not lie. Why did you lie about my age?” This simple, piercing question gets to the heart of a universal human conflict: the battle between what we say we value and what our actions—driven by incentives—reveal we truly prioritize.

In his book Mixed Signals: How Incentives Really Work, behavioral economist Uri Gneezy unpacks this dilemma, revealing that incentives are far more than simple tools for motivation. They are powerful signals that tell a story, shape our behavior, and often lead to disastrous unintended consequences when designed without understanding human psychology. The book provides a guide to decoding these signals and aligning them with our true goals.

Narrator: The core premise of Mixed Signals is that incentives are a form of communication. They send signals about what is truly valued, and people respond to these signals far more than they do to cheap talk. Anyone can say they value honesty, but the real test comes when an incentive—like saving $117 at Disney World—pulls in the opposite direction.

For a signal to be credible, it must be costly, meaning it is difficult or undesirable for someone to fake. A university degree, for instance, is a costly signal of intelligence and perseverance because it requires years of effort and tuition. In contrast, simply buying a Harley-Davidson motorcycle and leather gear is a weak signal of being a tough biker, as anyone with enough money can do it. A permanent neck tattoo, however, would be a much costlier and therefore more credible signal of commitment to that lifestyle, as it would be difficult to reverse and could harm one's professional prospects in other fields.

Companies can leverage this insight in product design. In the early 2000s, both Toyota and Honda entered the nascent hybrid car market. Honda released a hybrid version of its popular Civic, which looked nearly identical to the standard model. Toyota, however, gave its Prius a unique, unmistakable design. While early hybrids were objectively worse cars—more expensive, slower, and less comfortable—the Prius became a runaway success. A 2007 study found that 57% of Prius buyers purchased the car because "it makes a statement about me." The distinct design was a costly signal of environmental consciousness. Driving a Prius publicly announced one's values, whereas driving a Civic Hybrid sent no clear signal at all. Toyota understood that for many, the signal was more valuable than the car itself.

Narrator: One of the most common mistakes in incentive design is focusing on a single, easily measurable metric, which often leads to the neglect of other crucial dimensions like quality, safety, or ethics. This creates a mixed signal: leaders may talk about quality, but if they only reward quantity, employees will quickly learn what really matters.

History is filled with cautionary tales. In 19th-century China, paleontologists offered local peasants a reward for each piece of fossil they found. The incentive worked, but not as intended. To maximize their reward, the peasants began smashing the large, intact fossils they discovered into smaller pieces, destroying their scientific value in the process. A similar issue occurred in a Soviet-era glass factory. When workers were paid by the weight of the glass they produced, they made sheets so thick they were nearly opaque. When the incentive was switched to square meters, they produced glass so thin it shattered during transport.

A more modern and damaging example is the Wells Fargo account fraud scandal. The bank set aggressive, often unattainable, sales quotas for its employees, incentivizing them to open as many new accounts as possible. The stated value was customer service, but the signal sent by the incentive was "eight is the goal." To keep their jobs, thousands of employees created millions of fraudulent accounts without customer consent. The incentive, focused purely on quantity, led to a catastrophic ethical failure that cost the company billions and shattered its reputation.

Narrator: Incentives don't just send signals to others (social signaling); they also send signals to ourselves (self-signaling). We take actions to reinforce our own self-image as good, generous, or altruistic people. This "warm glow" of doing good can be a powerful motivator, but it can also be surprisingly fragile.

In a fascinating experiment, researchers studied a "pay-what-you-want" restaurant in Vienna. They created two conditions: one where customers paid the waiter directly (observed) and another where they placed their payment in a sealed, anonymous envelope (anonymous). Counterintuitively, people paid significantly more when their payment was anonymous. Being observed seemed to cheapen the act; the social signal interfered with the more powerful self-signal of being a generous person.

This dynamic explains why paying for certain prosocial behaviors can backfire. Most blood donation in wealthy countries is voluntary. Introducing a small payment for donating blood can crowd out the intrinsic motivation. A person who donates for free signals to themselves and others that they are altruistic. A person who donates for $50 is just doing a low-paying job. The incentive changes the story from a noble act to a financial transaction, potentially reducing the supply of high-quality blood from altruistic donors.

Narrator: Before an incentive can be a solution, it can be a powerful diagnostic tool. By observing how people respond to different incentives, we can uncover the true reason behind a problem.

A prime example is the performance of US students on the Programme for International Student Assessment (PISA), a low-stakes international test. US students consistently score lower than students in countries like Shanghai, leading to widespread concern that the American education system is failing. But is the problem ability or effort? To find out, researchers ran an experiment. They gave a PISA-like test to students in both the US and Shanghai. In the control group, the performance gap was as expected. But in the treatment group, where students were paid for correct answers, the scores of US students rose dramatically, nearly closing the gap. The scores of the Shanghai students, however, barely changed.

The diagnosis was clear: the problem wasn't that US students couldn't do the math; it was that on a test with no personal stakes, they weren't motivated to try. The Shanghai students, driven by a different cultural context of collective pride, were already giving their full effort. This changes the policy prescription from a complete overhaul of the curriculum to finding ways to motivate students. Similarly, companies like Zappos and Amazon have used "Pay to Quit" offers—paying new employees to leave—as a diagnostic tool to filter for motivation, ensuring they retain only those who are truly committed.

Narrator: Changing long-term behavior is notoriously difficult because of "present bias"—our tendency to prefer smaller, immediate rewards over larger, future ones. Incentives can be engineered to overcome this bias, both to build good habits and break bad ones.

To build a habit like exercising, the initial effort is the biggest barrier. Studies show that offering people short-term financial incentives to go to the gym can successfully jump-start the activity. Once a "habitual stock" is built, the behavior is more likely to persist even after the incentives are removed. The effectiveness of these programs can be amplified by adding commitment devices, where individuals put their own money on the line, or by leveraging social networks, as people are more likely to exercise if their friends are also incentivized.

The same logic applies to breaking bad habits like smoking. Financial incentives have proven highly effective at helping people quit. Programs that offer rewards for abstinence not only increase initial quit rates but also improve long-term success by helping people get through the critical first year. The most effective programs often combine rewards with commitment contracts, where smokers deposit their own money, which is forfeited if they fail a nicotine test. This leverages loss aversion and self-accountability to help break the cycle of addiction.

Narrator: Negotiation is a battle of signals, and the first offer is the most important one. A high but reasonable first offer works by triggering several psychological principles. First is the anchoring effect, where the initial number anchors the other party's perception of the item's value. Even experts are susceptible; real estate agents who were shown a high listing price for a house appraised it for significantly more than agents who were shown a low listing price for the exact same property.

Second is the contrast effect. A realtor in San Diego admitted she always shows clients a terrible, overpriced house first. By contrast, the second, more reasonable house seems like a fantastic deal, increasing the buyer's satisfaction. A high first offer makes the final, lower price seem like a bigger win.

Finally, a high first offer leverages the norm of reciprocity. Humans are wired to return favors. By starting high, the seller leaves room to make a concession. This act of "giving" something to the buyer creates a subconscious obligation for them to reciprocate, making them more likely to agree to a price that is still favorable to the seller.

Narrator: The single most important takeaway from Mixed Signals is that incentives are never just about the money or the reward; they are about the story they tell. A poorly designed incentive tells a story that can encourage cheating, undermine quality, and destroy motivation. A well-designed incentive, however, tells a story that aligns with our goals, clarifies our values, and empowers lasting change. From the factory floor to the classroom, and from public health campaigns to our own personal habits, the signals we send are constantly shaping the world around us.

The challenge, then, is to become more conscious designers of these signals. We must ask ourselves: What story do our incentives really tell? And is that the story we want to be telling?