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Nobel AwardRemember when game designer Jane McGonigal mentioned in her talks that she is aiming to have a game designer win a Nobel Award? Well, we are closer to that. This year's Nobel Award for Economics went to Oliver Hart and Bengt Holmström for their work on contract theory. What may sound pretty dull at first glance, is actually a pretty interesting piece on human behaviors and how it can be used to make better contracts.

Their work did not only explain how contracts are negotiated, but how the contracts become better. Contracts are an important piece in our modern life. Without them we would fall into a messy chaos. Hart and Holmström described how an ideal contract would look like and created a theoretical framework for that. But theory is one thing, real life another one. Especially when we have to consider human behavior in contracts and contract negotation.

And here it becomes interesting, because the laureates elaborated in their work on specific incentives that influence human behavior to make the contract outcome better for both sides. The Nobel Committee explicitely referred to car insurance contracts and deductibles, as well as work contracts with salaries and bonus payments.

Car insurance

In a perfect world a driver signing car insurance with an insurance company would behave responsible on the road. It would be in both interests not to have any collisions. Turns out that this is not the case. Especially when they have comprehensive insurance. They tend to drive riskier, because any damage will be paid by the insurance.

That's were deductibles come in. By adding a deductible, which requires the driver in case of his/her fault to pay the amount (usually a few hundred dollars), drivers tend to driver more careful. For both the insurance company and the driver the benefit is palpable and the driver can select the amount of deductible that reflects the risk behavior of the driver. Drivers tend to have fewer claims and drive less risky if the deductible is chosen right.

While the intrinsic interest is not having a car accident and getting hurt, it's like with exercising and eating healthy often not enough to follow through. A little extrinsic motivation in the form of a punishment turns out to be exactly the nudge that drivers need to get to the best behavior and outcome for everyone involved.

Work contract

 The same conflict of interest comes up when we look at work contracts. In an ideal world employees or contractors would have the best interest of the employer in mind and a fixed salary would be sufficient. Because this is not the case - due to human nature - a little nudge in the form of bonus and success-related payments are used.

Again as with the car insurance contracts, the right balance between fixed and flexible salary is required. Also a proper connection between the right metrics as well for which bonus payments are promised.

Summary

The two Nobel laureates would never consider themselves gamification designers, and more as behavioral economists. In fact a lot here spills over in the gamification space with the way gamification design elements can be used to influence human behaviors for the benefit of both enterprises, customers, and employees.