Incentives and marginal decision-making

Incentives are rewards and penalties that influence choices. Positive incentives, like a discount, a bonus, or a good grade, encourage an action, while negative incentives, like a fine or a late fee, discourage one, and people usually respond to them in predictable ways, which is why businesses and governments use incentives to change behavior. Incentives can also have unintended consequences, when people respond in ways the designers did not expect. Many decisions are made at the margin, meaning about a little more or a little less of something, not all or nothing: whether to study one more hour, work one more shift, or buy one more slice of pizza. Good decision-making compares the additional (marginal) benefit of that next step with its additional (marginal) cost, and it makes sense to keep going as long as the extra benefit is at least as large as the extra cost. Money or time already spent and impossible to recover, called a sunk cost, should not change that comparison.

This explanation is AI-generated and can occasionally be wrong. 🚩 Report