Then there are the abysmal incentives that are dreamt up by sadistic bosses. This week there were news reports of a boss who made a contest where employees should guess which person is fired next.

William Ernst, owner of the Iowa convenience stores QC Mart, found a way to earn the title “the boss from hell.” (H/T: Ethics Alarm)

Here is an excerpt of the actual memo he Ernst sent to workers in March:

New Contest – Guess The Next Cashier Who Will Be Fired!!!

To win our game, write on a piece of paper the name of the next cashier you believe will be fired. Write their name [the person who will be fired], today’s date, today’s time, and your name. Seal it in an envelope and give it to the manager to put in my envelope.

…

If the name in your envelope has the right answer, you will win $10 CASH.

…

Good luck!!!!!!!!!!

quoted in the Des Moines Register

To add insult to injury, the game was to be enforced by a set of secret shoppers who were to monitor behavior. You would get fired for infractions like wearing a hat, talking on a cell phone, not wearing the store uniform, or parking your car by the store pumps after hours.

And Big Brother doesn’t stop once they fire someone. After the first contest round, the game starts all over again.

It definitely sounds like William Ernst learned about motivating employees from Glengarry Glen Ross

We’re adding a little something to this month’s sales contest. As you all know, first prize is a Cadillac Eldorado. Anybody want to see second prize? Second prize is a set of steak knives. Third prize is you’re fired.

The backlash from the game

Naturally people were upset about the game and fought back. Several employees expressed their criticism and a few left their jobs. They were not going to put up with a degrading and humiliating game.

The interesting part is the employees then filed for unemployment (story here). William Ernst appealed, saying the workers left voluntarily and were not entitled to the benefits. As I understand it, Ernst was worried because the extra claims count against his record as an employer, so he would have to pay more towards unemployment taxes.

Thankfully for the workers, there are exceptions to the rule. Workers can get unemployment benefits if an employer causes a worker to leave through discrimination or harassment.

This week a judge ruled the workers were entitled for unemployment. The judge called Ernst’s game as “deplorable” as it created a “hostile work environment.”

Ernst lost out big on this game. But hey, maybe he can win the $10 if he guesses that he’s the next one fired.

Extension: the game was a poor motivating tool

Ernst could have greatly benefited by understanding some economics and game theory.

Of course the game is humiliating. But even if you remove that, the rules do not create the proper incentives.

Ranking employees sounds like a good way to motivate people, but in reality, the competitiveness works in unintended ways.

A recent study looked at how “social tournaments” affect employee motivation. Here is what Iwan Barankay, a management professor at the University of Pennsylvania Wharton, says about employee ranking:

Many managers think that giving workers feedback about their performance relative to their peers inspires them to become more competitive — to work harder to catch up, or excel even more. But in fact, the opposite happens. Workers can become complacent and de-motivated. People who rank highly think, ‘I am already number one, so why try harder?’ And people who are far behind can become depressed about their work and give up.

Ernst’s game was a race to the bottom. If he had wanted to remind employees about the rules, he picked one of the worst ways to communicate that.

A simple nudge like having posters with eyes or giving a random reward is a much more effective and more fun way to use a game to encourage employees to follow the rules.

But this isn’t the first time Buffett has said something interesting politically.

Now is a good time to recount an amusing proposal he made in an op-ed in 2000 about political campaign finance reform. The proposal is both funny and involves some interesting game theory.

The Billionaire’s Buyout Plan

Buffett’s op-ed ran in the New York Times and you can read it in its entiretly at GameTheory.net.

The article begins by pointing out that American businesses spend $200 billion a year to influence consumers, and there are similar special interest groups that use campaign contributions to influence politicians.

Buffett’s offers a proposal to increase individual contributions to federal candidates from $1,000 to $5,000. But additionally the reform prohibits money from all other sources, including corporations and unions.

This would no doubt be politically unpopular, and so Buffett offers a method for getting this bill to pass.

Why should this bill stand a chance in a Congress enraptured with the status quo? Well, just suppose some eccentric billionaire (not me, not me!) made the following offer: If the bill was defeated, this person — the E.B. — would donate $1 billion in an allowable manner (soft money makes all possible) to the political party that had delivered the most votes to getting it passed.

The idea is as follows: the billionaire only donates money if the plan is defeated. But at the same time, the plan makes it in each party’s interest to pass the bill.

Why is that?

Let’s think about the incentives of the majority party. It faces two actions from the minority party:

1. Suppose the minority party opposes the bill. Then the majority party has great control. It could put enough votes to support the bill, but not enough votes that it passes. Then it would win the $1 billion, and since the bill failed, it would maintain its current fundraising power.

2. Suppose the minority party supports the bill. If the majority party opposes the bill and defeats it, then it would lead to reform and it would be handing over $1 billion to its rival. So the majority party has to support the bill. In fact, to beat the minority party, that would mean it would put enough votes to make the bill actually pass.

As you can see, the majority party has to support the bill regardless of what the minority party does.

And the logic is similar for the minority party: it will want to support the bill only when the majority party does not. But if it supports the bill, the majority party will too, to block the chance the minority party wins the $1 billion.

Ultimately both parties have to support the bill. And as Warren Buffett writes:

Given this diabolical application of game theory, the bill would sail through Congress and thus cost our E.B. nothing (establishing him as not so eccentric after all).

It turns out that money can influence Congress for good, if only we could trust that billionaire’s truly had enlightened goals.

Currently only companies with a physical presence in Illinois are taxed for their online commerce. Under this measure, any online retailer with a commissioned affiliate, like Amazon.com, would classify as having a physical presence and hence would subject to tax.

To bring the story home, since I live in Illinois, and this blog includes an occasional affiliate link to Amazon, the new law interprets Amazon as having a physical presence in the state, and hence all of their sales are subject to state tax. This sets up a very interesting game theory situation.

Why Illinois did this

From a simple decision theory view, the law sounds like a great idea for Illinois. It is believed $150 million of sales tax (stated here) are lost in online commerce, and collecting this money would alleviate the state debt and avoid raising other taxes. Plus, the law touches on a local matter as it “levels the playing field” with brick and mortar stores.

It comes as little surprise the bill was very politically popular and it passed the Senate and House quickly.

But will the law work out?

It depends on how others will react. There is still the matter of Gov. Pat Quinn signing the measure into law. And this gives Amazon a last chance to react. And they are putting up a fight.

Amazon plays hardball

It’s exceedingly naive to expect Amazon to simply accept this deal. The law strikes at one of their competitive advantages, namely, their website affiliate program which generates many sales and impressions. Also, accepting the Illinois tax sitting down might give other states the same idea.

So Amazon is fighting back at Illinois with a threat. Amazon has emailed its commissioned affiliates the following message:

We regret to inform you that the Illinois state legislature has passed an unconstitutional tax collection scheme that, if signed by Governor Quinn, would leave Amazon.com little choice but to end its relationships with Illinois-based Associates. [emphasis mine]

The following logic seems to explain the motive. If Amazon ends its affiliate relationships in Illinois, then it would have no physical presence in the state, and hence it would get around the bill.

The email levies harsh criticism at Illinois and is meant to garner sympathy. In reality, the move is calculated and strategic.

Amazon is threatening all affiliates on purpose – even though it doesn’t have to. Here is an interesting tidbit the Chicago Tribune reported:

The bill applies only to affiliates that have at least $10,000 a year in revenue. But if large retailers, such as Amazon, cut off all affiliates in Illinois, it would end commission streams to small Web sites, such as bloggers, who might sell Amazon goods at their sites. Amazon could not be reached for comment.

Amazon is playing a classic retaliatory strategy. If Illinois wants to pass this law, then it will do everything to hurt the state and even otherwise innocent and small-time bloggers, who might decide its time to complain to Gov. Pat Quinn.

Amazon is telling Illinois that it will do everything to avoid the sales tax, and it will even go further to stop the program for smaller guys (perhaps it’s not worth their time?).

What might happen? Let’s think about the incentives of the situation.

The game of chicken

The retaliatory threat sets up an interesting game of chicken between the state and Amazon. Here are the possible outcomes:

–If neither flinches, then Illinois enacts the tax and Amazon ends its affiliate program. In this case both parties “crash” and lose. Illinois does not get extra revenue from Amazon, but Amazon loses out on its affiliates who generate traffic and sales.

–If either flinches, then the other side wins. If Illinois does not pass the law, then Amazon wins huge in maintaining the status quo. If Amazon keeps its affiliate program, then it will get taxed and it will have to worry other states will pass similar laws.

–If both flinch, then both lose some face and credibility. Illinois would look weak for bowing to a commercial giant, and Amazon would lose some goodwill from affiliates who felt unnecessarily threatened at losing their commissions.

One might hope that both sides take the route of avoiding conflict. But that’s not what history suggests.

Colorado passed a similar law last in March, and Amazon did end its affiliate relationships then.

In Illinois, the law would affect some big websites like FatWallet and BradDeals. These sites have already stated they would relocate to other states since they cannot afford to lose Amazon commissions.

Time will tell what happens in this horrible game of chicken. It won’t affect me too much but I feel annoyed at the seemingly inevitable dismal outlook where Illinois gets little extra tax revenue and I lose out on some modest Amazon commissions.

Who knows, maybe other states will follow. Amazon can’t avoid sales tax or discontinue every affiliate site if every single state enact such a law, can it?

Of course, that would require a level of cooperation among states and politicians never seen before. I’ll let you mull over the game theory on that one.

Youtube video: speed camera lottery

There are similar ideas for recycling and getting people to take the stairs instead of escalators at The Fun Theory website, a viral marketing campaign by Volkswagen.

Hat tip: Gamepocalypse now

Update 12-1-10: This idea won the contest!

Here is the video about the speed cameras implemented

Hat tip: autoblog

Most of you will recall the running gag. Charlie Brown would be taunted by his friend Lucy to kick a football. Lucy would hold the football and Charlie Brown would attempt to kick it. Charlie would enthusiastically run up and wind up for a powerful kick. Then, at the last moment, Lucy would withdraw the ball, Charlie Brown would whiff, and he would fly up into the air and land on his back humorously.

The funny part was how the dynamic continued year after year. Charlie Brown seemed to learn that Lucy was untrustworthy. He would often protest that he could not trust her, and that the only reason she offered to hold the ball was to pull it away and mock him. But Lucy was crafty, and time and again she came up with new reasons why Charlie Brown should trust her. Lucy would appeal to anything and everything to get Charlie Brown to attempt the kick. And inevitably, Charlie would get duped and land flat on his back.

There is a nice Youtube video about one of the attempts. Here is an incident where Lucy gives a seemingly legally binding promise to Charlie. (skip to about 7 seconds in the video to get to the clip)

Link to Youtube video Charlie Brown

Link to Youtube video Charlie Brown

Transcript of video (starting from 7 seconds)

Lucy: Say Charlie Brown, I’ve got a football. How about practicing a few placekicks? I’ll hold the ball, and you come running and kick it.

Charlie Brown: Oh brother. I don’t mind your dishonesty, half as much as I mind your opinion of me. You must think I am stupid [to fall for this gag again].

Lucy: Oh, come on Charlie Brown.

Charlie Brown: No.

Lucy: I’ll hold it steady.

Charlie Brown: No.

Lucy: Please!

Charlie Brown: You just want me to come running up to kick that ball so you can pull it away and see me lying flat on my back and kill myself.

Lucy: This time you can trust me. See, here is a signed document testifying that I promise not to pull it away.

Charlie Brown: It is signed! It’s a signed document. I guess if you have a signed document in your possession, you can’t go wrong. This year I am really going to kick that football.

[runs up to kick the ball, but Lucy pulls it away and he falls flat on his back]. AARG!

Lucy: Peculiar thing about this document–it was never notarized.

The game theory interpretation

(I became familiar with the game theory interpretation from Avinash Dixit and Barry Nalebuff’s classic lay text Thinking Strategically (this is also discussed in the revised version The Art of Strategy). Here is my take, which is largely based on Dixit and Nalebuff’s idea.)

The incident was one of my first introductions to game theory, albeit unknowingly.

The problem is that Lucy’s promises always appeared credible but they never were. There are ways to make your claims sound credible, and in this respect, Lucy was a game theory expert.

A rational player needs to think about the loopholes and incentives outside the stated claims. And amusingly, Lucy would always explain in victory the loophole to her original promise–like how a non-notarized note may be invalid and not binding.

To think about the situation more generally, we can draw out the following game tree:

Charlie can either reject Lucy’s offer or accept it. If he rejects, then the game is over and he walks away. But if he accepts, then Lucy has a choice. Lucy can either hold the ball or pull it away. What will happen?

We can use the idea of thinking ahead (backwards induction) to solve the game. If Charlie accepts, then we think about what Lucy would choose. Based on experience, it is obvious that Lucy prefers to pull the ball away. This will happen whenever Charlie accepts. And so, Charlie must reject the offer if he wants to be pain-free.

But Charlie never appropriately uses backwards induction. He is always tricked into thinking that Lucy will somehow hold the ball. He unfortunately never learns.

One can only take solace that perhaps Charlie’s fictitious misfortune can be an example that helps us avoid the same mistakes.

Have a happy Thanksgiving!