Markets, Relationships and Trust

Dan Ariely’s Predictably Irrational is one of several in the “Malcolm Gladwell” category of books.  Such books point out the counter-intuitive, and debunk the rational, linear, deductive explanations that we so often assign to social phenomena.

It’s an antidote to any professional (economists come to mind) who believe man is a rational, transacting, self-interest-maximizing calculator.

One of his most compelling points happens at the intersection of relationships and markets.  In his example, imagine a great Thanksgiving dinner at your mother in-law’s—all the fixin’s.  And then you offer to pay her, say $150, for the experience.  To your surprise, she feels insulted!

You are now persona non grata at your in-laws’.  As Ariely explains, you reacted to a social situation with a market response. 

What happens when social norms collide with market norms?  As Ariely says: “the social norm then goes away for a long time.”

Ariely channels Alfie Kohn, who 15 years ago in Punished by Rewards  pointed out the de-motivating effect of monetary rewards.  The intrinsic pleasure children took in games was destroyed when researchers paid the kids to play the same games. 

Extrinsic incentives work, said Kohn: they work to incent more extrinsic incentives.  But at the cost of destroying intrinsic motivation.

Ariely cites a day care center where parents occasionally came late to pick up their kids.  To reduce tardy pickups, a penalty was assessed.  Whereupon tardiness increased.  Parents were grateful for the “permission” to pay a fine rather than incur social guilt.

On the face of it, then, companies ought to use more social incentivizing.  Or should they? Companies built around devotion to shareholder value and metrics that devolve to financials are asking for trouble when they try to play an honest game of relationships. Then the social norms are gone, for a long time.

Markets do two great things: they tend to make things less costly or more efficient.  And, they require more transparency.

Take my blogpost of two days ago, A Case Study in Low Trust, about untrustworthy behavior in the financial planning sector.  The problem with industry associations like NAPFA is that, despite failing the public, they insist on concocting arguments to transparency.  Here’s a case where markets—in the sense of freely available information, and a reduction in personal relationships—is precisely what’s required.

Too many policy debates these days take place on the ideologically rigid dimensions. 

-in finance, “markets” vs. “relationship” is a useless debate; it depends
-in health care, it isn’t “markets” vs. “socialism;" it depends
-“government should be run like a business” vs. “government should be run for the people” is a red herring; it depends.

Where corruption exists we need markets and transparency.  Where children are educated, as Ariely suggests (and Gladwell and Kohn tend to agree), we need focus on relationships and intrinsic motivation. 

Trust is not automatically the province of either one–again, it depends.  Market-driven transparency  can increase our trust in financial planners.  More relationships can increase our trust of suppliers.  It depends.

How about your issue?  Is it better served by markets, or by relationships?

2 replies
  1. Paul Hebert
    Paul Hebert says:

    Charles – thanks for bringing to light the most important answer to the debate about how to influence behavior – "It depends."

    I don’t mean that sarcastically – I mean that managing these types of situations and getting to acceptable solutions is hard work – if I could just apply a rule and be done with it, we wouldn’t need half the consultants and high-priced executives now would we.

    I spend my business life looking at employee and channel motivation – I get a few clients that like to throw Kohn in my face and tell me incentives aren’t effective – and when dealing with already strong internal motivations – they are probably right.  But, like your great answer "it depends" – how many business people, sales people, customer service poeple – have  strong internal motivation to fill out paperwork, work 24/7 to get  a proposal done or get chewed out on by irate customers?

    Not many – therefore, incentives do work – just not on children who love to read!

    I’m not sure I made any sense here or if I’m right – or maybe it just depends.

  2. Charlie (Green)
    Charlie (Green) says:


    You make a great deal of sense, at least to me!  The whole "it depends" viewpoint is not a cop-out, or a hopeless throwing up of hands. 

    Larry Bennigson taught me years ago a great one: should you decentralize, or centralize?  It depends, of course, and the ability to define and enunciate on what it depends requires solid careful thought–which is the only thing that will make the centralized or decentralized answer work in the final analysis anyway.

    "It depends" is the beginning line of solid thinking.  Maybe that’s just a way of saying I agree with you, but in any case I do.

    Regarding motivation, you’re the expert, Paul, but I find Ariely’s distinction to be slightly different from Kohn, and in some ways more powerful. Kohn says extrinsic incentives work–in the same way that crack cocaine works.  Both are addictive (my characterization, not his).  Ariely says social incentives are more powerful than market incentives–but they can be undermined by market incentives.  Ariely is clearly talking about more than kids (so was Kohn, but never mind). 

    That resonates to me in the field of customer loyalty.  As originally conceived, customer loyalty implied all the richness that term used to evoke (’til death do us part, semper fi, etc.).  Now of course it’s a hollow shell of an image of the original, having been strip-mined down to cents-off coupons and minute behavioral tweeks.  Semper fi caused men to die for each other in a way frequent-donut-clubs never will; but frequent donut clubs have eaten away at the deeper forms of loyalty.  Try running a branch of the military on ‘the few, the proud, the frequent-donut-eaters.’  Something is lacking.

    I’m not sure on what those distinctions depend. 

    Thanks for writing, please continue to say more.


Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published. Required fields are marked *