Question

For each of the phenomenon below:(i) explain why behavior is inconsistent with rational choice framework and (ii) explain how the behavior is consistent with appropriately identified behavioral heuristic or bias.

(a) At an electronic factory in China, at the beginning of the week a group of workers ( say Group A) were told that they would receive a bonus of 100 Yuan at the end of the week if they met a given production target. Simultaneously, another group of workers(say Group B) were told that they had 'provisionally' been awarded 100 Yuan as a bonus due at the end of the week, but that they would "lose" this bonus if their productivity fell short of a given target( the same production target given to Group A). It was subsequently noticed that while the productivity increased for both groups, the increase in productivity was larger in Group B compared to Group A

Answer 1

Rational choice theory uses a narrower definition of rationality. It suggests that the  behavior is rational if it is goal-oriented, reflective (evaluative), and consistent (across time and different choice situations). In the first scenario, the factory workers were told that they would receive bonus at the end of the week if they meet the target. So in addition to what they were already going to get at the end , they were given additional benefits. This means they were in a slightly peaceful situation where they did not care about anything in general and just tried to work hard for getting the extra money. But in the second scenario, the workers were told that they would be rewarded if they meet the targets and penalized if they do not. In this case, behavior was controlled or modified by a fear of punishment. So the workers worked extra hard so that they did not lose anything and also achieved their target as well.

Answer 2

(a) Electronic Factory in China: Worker Productivity and Bonuses

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(i) Why the behavior is inconsistent with the rational choice framework:

The rational choice framework suggests that individuals evaluate possible outcomes and make decisions that maximize their utility or benefit. According to this framework:

• Both Group A and Group B were offered an identical incentive — a 100 Yuan bonus if they met the production target.

• Since the reward is the same in both cases, a rational worker should respond similarly, and there should be no significant difference in the productivity increase between the two groups.

However, the observed behavior shows that Group B (who was told they would "lose" the bonus if they didn’t meet the target) showed a higher increase in productivity compared to Group A. This violates the rational choice framework because the end financial outcome is identical for both groups, yet their motivation and effort levels differ.

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(ii) How the behavior is consistent with an identified behavioral heuristic or bias:

The observed behavior can be explained using Loss Aversion, a concept from Prospect Theory developed by Kahneman and Tversky.

• Loss Aversion: People tend to prefer avoiding losses more than acquiring equivalent gains. The psychological pain of losing something is often greater than the pleasure of gaining the same thing.

In this context:

• Group A: They view the 100 Yuan as a potential gain that they will receive if they meet the target.

• Group B: They perceive the 100 Yuan as something they already possess, which they will lose if they fail to meet the target.

Since Group B is motivated by the desire to avoid losing something they feel they already own, they work harder to prevent the loss. This leads to a larger increase in productivity for Group B compared to Group A.