Carrots and Sticks

Carrots and Sticks Plot Summary

Introduction

We all struggle with willpower at times - whether it's sticking to a diet, quitting smoking, or simply getting our work done on time. Despite our best intentions, we often find ourselves succumbing to temptation and failing to achieve our goals. Why is this the case, and more importantly, what can we do about it? The theory of commitment contracts offers a compelling answer. By creating binding agreements that impose consequences for failure, we can dramatically improve our chances of success. These contracts leverage fundamental insights from behavioral economics about how humans make decisions, particularly the fact that we tend to value immediate rewards over future benefits. Through properly structured incentives - both positive (carrots) and negative (sticks) - we can overcome our natural tendencies toward procrastination and temptation, ultimately helping us become the people we aspire to be.

Chapter 1: The Psychology of Commitment: Thaler's Apples and Hyperbolic Discounting

At the heart of our struggle with commitment lies a fascinating psychological phenomenon identified by economist Richard Thaler in 1981. In a groundbreaking study, Thaler asked people a simple question: Would you prefer one apple today or two apples tomorrow? Many chose the single apple immediately. However, when asked whether they'd prefer one apple in a year or two apples in a year and a day, most people chose to wait the extra day for double the reward. This inconsistency reveals what behavioral economists call "hyperbolic discounting" - our tendency to place disproportionately high value on immediate rewards compared to future ones. Unlike rational economic actors who should discount future rewards at a constant rate, humans apply a much steeper discount to rewards that are available right now. Essentially, we have two competing selves: a present-focused "Homer Simpson" who wants immediate gratification and a more rational "Spock" who considers long-term benefits. What's particularly interesting about this phenomenon is that it's not limited to humans. Studies with pigeons have shown similar patterns of preference reversal. When offered a choice between a small immediate food reward or a larger delayed one, pigeons overwhelmingly choose the immediate option. However, when both rewards are delayed, they're more likely to choose the larger reward. This suggests that hyperbolic discounting may be hardwired into vertebrate nervous systems. The practical implications of hyperbolic discounting are profound. It explains why we make resolutions we can't keep, why we procrastinate on important tasks, and why we indulge in behaviors we later regret. Our present self makes plans based on what would be best in the long run, but when the future becomes the present, our preferences shift dramatically toward immediate gratification. Commitment contracts address this problem by creating mechanisms that align the interests of our present and future selves. By establishing consequences that make the cost of failure immediate rather than distant, they help us overcome our natural tendency toward shortsightedness. When our present self agrees to a commitment contract, it's essentially binding our future self to act in accordance with our long-term interests, much like Odysseus had himself tied to the mast to resist the Sirens' call.

Chapter 2: Incentives vs. Commitments: Designing Effective Behavioral Tools

While both incentives and commitments can motivate behavior change, they function in fundamentally different ways. Traditional incentives guide choices by making certain options more attractive, while commitments aim to remove choices entirely. Understanding this distinction is crucial for designing effective behavioral tools. Incentives work by altering the cost-benefit calculation of a decision. For example, a company might offer employees $20 for each day they exercise, making the benefit of working out more immediate and tangible. These incentives can be either positive (carrots) or negative (sticks). A carrot might be a bonus for meeting a sales target, while a stick could be a fine for being late to work. Importantly, incentives still preserve freedom of choice - individuals can weigh the incentive against their preferences and decide whether it's worth it. Commitments, by contrast, are designed to take future choices off the table entirely. They create consequences so significant that the individual would never reasonably choose to fail. When Dr. Lisa Sanders committed to pay her friend $5,000 if she ever smoked a cigarette, she wasn't creating a price for smoking; she was making the cost so prohibitive that smoking became a non-option. Similarly, some religious individuals use "kosher phones" that charge exorbitant rates for calls placed on the Sabbath - not to price these calls, but to make them effectively impossible except in true emergencies. The power of commitments lies in how they address our tendency toward present bias. When temptation arrives, our future self often rationalizes giving in, treating penalties as mere prices. A smoker might think, "I'll just pay the $5 fine this once." But effective commitments create consequences that no reasonable person would accept, preventing this rationalization from occurring. In economic terms, they create "offers too bad to accept." Interestingly, carrots can also function as commitments when they're sufficiently large. The online retailer Zappos offers new employees $2,000 to quit after their first week of training. By turning down this substantial sum, employees signal to themselves a strong commitment to the company. This creates a powerful psychological motivation to succeed, as they've already demonstrated how much they value the opportunity. When designing effective behavioral tools, it's crucial to consider whether your goal is to guide choices or eliminate them entirely. For behaviors where occasional indulgence is acceptable, traditional incentives may be sufficient. But for addictions or other behaviors where any lapse is problematic, commitment devices that take choice off the table entirely may be more effective.

Chapter 3: Loss Aversion: Why Penalties Often Outperform Rewards

One of the most powerful insights from behavioral economics is that humans experience losses much more intensely than equivalent gains. This phenomenon, known as loss aversion, explains why penalties (sticks) often create stronger motivation than rewards (carrots) of the same monetary value. Loss aversion was famously demonstrated by Daniel Kahneman and Richard Thaler in a simple experiment with coffee mugs. They gave Cornell University students mugs worth about $5 and asked how much they would sell them for. On average, students demanded more than $7. When they asked another group how much they would pay to acquire the same mug, the average answer was less than $3.50. This asymmetry reveals that once we own something, giving it up feels like a significant loss, while gaining the same item feels like a smaller gain. This psychological principle extends beyond physical possessions to include money. In a weight-loss experiment conducted by Robert Jeffrey, participants who put their own money at risk ($300) lost significantly more weight than those who were offered equivalent rewards. The potential pain of losing money they already possessed created stronger motivation than the pleasure of gaining the same amount. Even more remarkably, the high-stakes group averaged a greater weight loss per dollar forfeited - suggesting that higher stakes can actually lower the expected cost of commitment contracts. Another advantage of penalties is their cost-effectiveness. Rewards must be paid every time someone succeeds, making them expensive when they work well. By contrast, penalties only need to be imposed when people fail. If a penalty successfully deters unwanted behavior, it costs nothing to maintain. This explains why a $500 weekly penalty helped me maintain my weight for years without costing me a penny, while similar reward-based programs would have required substantial ongoing funding. The potency of loss aversion can be further enhanced by directing forfeited funds to causes the individual opposes - what might be called "anti-charities." A pro-life individual might commit to donate to a pro-choice organization if they fail their diet, creating an additional layer of motivation beyond the financial loss itself. This approach prevents the individual from rationalizing the penalty as merely a price worth paying for indulgence. Despite the advantages of penalties, they're not always the best choice. People are often reluctant to put their own money at risk, creating a "participation constraint" that limits who will engage with stick-based programs. The optimal approach often combines carrots and sticks - offering rewards for success while also imposing penalties for failure - to maximize both participation and effectiveness.

Chapter 4: The Social Dimension: How Supporters and Referees Enhance Commitment

While financial incentives are powerful, the social dimension of commitment adds an entirely new layer of effectiveness. Our innate desire to conform to social norms and maintain a positive reputation can dramatically increase our chances of success when properly leveraged. Robert Cialdini's groundbreaking research on social influence demonstrates that people have a strong tendency to align their behavior with what they perceive others are doing. In one famous experiment at Arizona's Petrified Forest National Park, signs telling visitors about the prevalence of theft actually increased stealing, as they inadvertently communicated that such behavior was normal. By contrast, messages highlighting that most visitors leave the wood untouched reduced theft significantly. This "norm to conform" can be harnessed in commitment contracts by making success visible to others. The role of referees - third parties who verify whether commitments have been met - is particularly important. When someone else is watching, we're less likely to cheat or rationalize failure. Research on commitment contracts shows that those with designated referees have significantly higher success rates than self-monitored contracts. This reflects both our desire to appear honest to others and the practical reality that self-assessment often suffers from convenient blind spots. Beyond mere observation, supporters who actively encourage our efforts can provide crucial emotional reinforcement. Data from stickK.com reveals that contracts with two or more supporters have a 60% success rate, compared to just 45% for those without supporters. These supporters create accountability through their expectations and provide motivation through their encouragement. They also offer practical assistance during moments of weakness, such as a friend who reminds you of your commitment when you're tempted to indulge. The social dimension can be further enhanced through public declarations of intent. Yale professor Barry Nalebuff once committed to teach his final class in a swimsuit if he failed to lose weight, creating powerful social pressure to succeed. Similarly, when a business executive named James Hurman auctioned off the right to receive $1,000 for each cigarette he smoked after quitting, he leveraged both financial and social commitment. The very public nature of his pledge made it almost impossible for him to relapse without widespread knowledge. Interestingly, commitment pools where multiple people challenge each other can create especially powerful motivation. When friends compete to lose weight with the stipulation that those who fail must pay those who succeed, they create both social and financial incentives. The combination leverages our competitive instincts while also building a supportive community working toward similar goals.

Chapter 5: Maintaining Success: The Role of Mindfulness and Monitoring

Achieving a goal is only half the battle; maintaining success over the long term requires sustained vigilance. This is where mindfulness - the practice of paying deliberate attention to one's current state - becomes essential for lasting change. Weight loss provides a telling example of this challenge. Studies show that most dieters successfully lose weight for three to six months, only to regain it in the following year or two. Only about one in five people who lose 10% of their body weight manage to maintain that loss for a full year. The problem isn't just that initial motivation fades, but that people stop monitoring their behavior. They skip weigh-ins for a few weeks, lose awareness of their eating patterns, and gradually slip back into old habits before they realize what's happening. Dr. Rena Wing's National Weight Control Registry, which tracks thousands of successful long-term weight maintainers, has identified regular self-monitoring as the single most important factor in sustaining weight loss. Those who weigh themselves daily and take immediate corrective action when their weight begins to creep up are dramatically more likely to maintain their progress. This finding led Wing to develop the "Stop Regain" program, which teaches participants to monitor their weight and implement increasingly strong interventions depending on whether they are in the green zone (on target), yellow zone (slight regain), or red zone (significant regain). The power of monitoring extends beyond weight loss to virtually any behavior change. Successful commitment contracts often incorporate regular reporting requirements that force participants to maintain awareness of their behavior. This addresses what psychologists call the "fundamental attribution error" - our tendency to attribute others' failures to their character while blaming our own on circumstances. Regular monitoring makes it harder to ignore or rationalize our own behavior. Effective maintenance also requires building flexibility into commitment contracts. Rigid, all-or-nothing commitments often lead to the "what-the-hell effect," where a single slip causes people to abandon their efforts entirely. Flexibility mechanisms like "reset" provisions, which allow people to start fresh after a lapse, or "cheat day" allowances that build in occasional exceptions, can prevent minor setbacks from becoming complete failures. The behavioral psychologist B.F. Skinner discovered that lasting behavior change often requires "shaping" - reinforcing successive approximations of the desired behavior rather than expecting perfection immediately. This gradual approach helps develop new habits that can be sustained over time, rather than relying solely on willpower, which research shows is a limited resource that can be depleted through overuse.

Chapter 6: Strategic Signaling: What Commitments Communicate to Others

Beyond their role in personal change, commitments serve as powerful tools for communicating our intentions and character to others. When we willingly accept constraints on our future behavior, we send credible signals that ordinary promises cannot convey. In economics, the concept of "signaling" refers to actions that reveal private information about ourselves. A job applicant might claim to be hardworking, but employers have no way to verify this claim. However, if that applicant has completed a difficult degree program, they've demonstrated a willingness to work hard over an extended period - a much more credible signal than mere words. Similarly, commitment contracts allow us to distinguish empty promises from genuine intent by putting meaningful consequences behind our words. This signaling function is particularly valuable in business contexts. When companies make public commitments backed by penalties for failure, they communicate credibility to customers, investors, and employees. For example, when easyJet promises "our fares will be the lowest available on any route or we'll refund you double the difference," they're not just offering a guarantee - they're signaling confidence in their pricing strategy in a way that competitors making unsubstantiated claims cannot match. Commitment devices also serve as screening mechanisms that reveal information about others. If you're selling a house and a potential buyer refuses to put down a significant deposit, this suggests they may not be serious or may have financing concerns. Similarly, when an employee refuses to accept performance-based compensation, this might indicate a lack of confidence in their abilities. By observing how others respond to commitment opportunities, we gain valuable insights about their true beliefs and intentions. The strategic value of commitments extends to social and environmental causes as well. Companies participating in the Chicago Climate Exchange voluntarily commit to reducing their greenhouse gas emissions by 1% annually, with financial penalties for failure. This serves both to motivate internal change and to credibly signal environmental responsibility to consumers and investors. Unlike vague promises of sustainability, these binding commitments create a measurable distinction between genuine commitment and mere greenwashing. Perhaps most powerfully, commitment devices can facilitate cooperation by making promises more trustworthy. When individuals or organizations demonstrate willingness to accept meaningful consequences for breaking their word, they create the foundation for relationships built on trust rather than constant verification. This explains why many traditional cultures have elaborate rituals surrounding promises and why contracts remain central to modern commerce - they transform words into reliable predictors of future behavior.

Chapter 7: Balancing Act: The Challenges of Multiple Commitments

While commitment contracts offer powerful tools for behavior change, attempting to transform too many aspects of our lives simultaneously can create unexpected challenges. Successfully navigating multiple commitments requires understanding both their interactions and our limited capacity for self-regulation. Research on "ego depletion" by psychologist Roy Baumeister suggests that willpower functions like a muscle that can be temporarily exhausted through overuse. In experimental settings, participants who exerted self-control on one task (like resisting chocolate cookies) subsequently showed diminished performance on unrelated tasks requiring persistence or restraint. This indicates that our capacity for self-control is a limited resource that can be depleted across different domains of life. This limitation explains why people who successfully quit smoking often gain weight, or why those who maintain strict work discipline might struggle with healthy eating. When we focus intensely on one commitment, we may inadvertently undermine others by depleting our overall self-regulatory resources. Benjamin Franklin experienced this challenge firsthand in his famous attempt to master thirteen virtues simultaneously, finding that "while my care was employ'd in guarding against one fault, I was often surprised by another." Commitment contracts can also create psychological backlash when they're too numerous or too severe. Studies of weight-loss contracts found that participants who faced extremely high penalties initially lost more weight but were more likely to regain it after the contract ended. The strain of maintaining multiple demanding commitments can create a kind of psychological debt that eventually comes due, often leading to a complete abandonment of the changed behavior. To address these challenges, effective commitment management requires prioritization and pacing. Rather than attempting to transform every aspect of life simultaneously, focusing on one or two key commitments at a time allows for more sustainable change. Additionally, the emerging research on ego depletion suggests that, like a muscle, our self-regulatory capacity can be strengthened through regular exercise. Small, manageable commitments may actually increase our capacity to handle larger challenges in the future. Another strategy for balancing multiple commitments involves creating complementary rather than competing obligations. Commitments that reinforce each other - like exercising with friends (combining social and fitness goals) or donating to charity for each day you fail to meditate (linking spiritual and philanthropic aims) - can create virtuous cycles rather than depleting conflicts. Ultimately, the art of commitment management requires self-awareness about our limitations and wisdom about which changes matter most. As Barry Schwartz's research on "maximizers" versus "satisficers" demonstrates, endlessly pursuing the perfect commitment structure can paradoxically reduce our satisfaction even when objectively successful. The most sustainable approach recognizes that commitment contracts are tools to enhance our lives, not burdens that should dominate them.

Summary

Commitment contracts represent a powerful framework for bridging the gap between our intentions and our actions. By understanding our tendency toward hyperbolic discounting and leveraging loss aversion, social pressure, and strategic monitoring, we can design agreements with our present selves that effectively bind our future selves to behave in ways aligned with our deepest values and long-term interests. The science of commitment reveals a profound truth about human nature: our freedom often increases paradoxically when we willingly accept certain constraints. While traditional economic thinking emphasizes maximizing options, behavioral economics shows that sometimes having fewer choices - particularly when temptation looms - allows us to become more truly ourselves. Through thoughtfully designed commitments that balance accountability with flexibility, monitoring with forgiveness, and ambition with sustainability, we can overcome our inherent psychological limitations and unlock our capacity for meaningful, lasting change.

About Author

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Ian Ayres

Ian Ayres is the William K. Townsend Professor at Yale Law School and the Yale School of Management, and is editor of the Journal of Law, Economics and Organization. In addition to his best-selling SuperCrunchers, Ayres has written for the New York Times, the Wall Street Journal, Financial Times, International Herald Tribune, and The New Republic. He lives in New Haven, Connecticut.Barry Nalebuff is Professor of Economics and Management at the Yale School of Management. His books include The Art of Strategy (an update of the best-selling Thinking Strategically) and Co-opetition. He is the author of fifty scholarly articles and has been an associate editor of five academic journals. He lives in New Haven, Connecticut.

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