October 27, 2006
Skin in the game—A Commentary by Ian Ayres '86 and Barry Nalebuff
The following article appears in the November 13, 2006, issue of Forbes.
Skin in the game
By Ian Ayres '86 and Barry Nalebuff
In 1519 Hernán Cortés scuttled his ships upon arrival in Veracruz, Mexico. Vastly outnumbered, his 600 soldiers decided that they would either defeat the Aztecs or perish trying. By making defeat worse, Cortés increased his chance of victory. And conquer he did.
While we can't all scuttle our ships, we can use this same type of commitment strategy to help us lose weight, stop smoking, exercise more or achieve just about any goal.
Imagine a Commitment Store that offered a financial incentive to lose weight. You promise to lose a pound a week for the next 20 weeks and then keep the 20 pounds off for the remainder of the year. You back up the promise with a $1,000 weight-loss bond. Weigh-ins are biweekly. Every time you meet your goal, you get back $60. Over the course of the year you could earn back $1,560. Of course, each time you miss, that costs you $60.
Here's a diet system that literally pays you to lose the weight. If you miss your goal weight one week, you still have an incentive to get back on track to collect the next payout. If $60 a weigh-in isn't enough to get your attention, then buy two or more bonds.
The 56% interest rate might seem high, but the fact is that more than 95% of dieters fail to keep their weight off for a year. Even if half the dieters succeed under this new regime, the store can still turn a healthy profit. Putting aside the interest it could earn on deposited funds (and the overhead costs), it would be taking in $2,000 from a pair of dieters and paying out $1,560 to one of them.
We're not the first to suggest the idea of financial incentives. This season's edition of NBC's The Biggest Loser will pay $250,000 to the person who loses the largest percentage of his or her body weight. We tried something like this ourselves with ABC's Primetime. Five volunteers were photographed in bikinis. Unless they lost 15 pounds in two months, those photographs would be splashed on Primetime and the Web. As one of the dieters, Cynthia Nacson-Schechter, explained, she knew all about the dangers of being overweight--the increased risk of diabetes, heart attack and death--and yet that wasn't enough to scare her into action. What she feared most was the possibility that her ex-boyfriend would see her hanging out of a bikini on national TV. She lost the weight and then some.
The stick is mightier than the carrot. People hate losing their own money even more than they love gaining a windfall of the same amount. Psychologists call this phenomenon loss aversion. The great thing about the weight-loss bonds is that the overweight investors have put their own skin in the game.
You might be worried that it's unethical to profit from people's failure to lose weight. But the Commitment Store would publish detailed statistics on the distribution of results. You'd know going in the chance of losing money. And you might rationally decide that getting halfway to your goal is not a bad outcome--you'd lose some of your principal but lose some pounds, too. Even if weight-loss bond buyers lose $200 on average, if the dieters lose ten pounds this would be a bargain. And those buyers who lose the full 20 make out like bandits, earning interest rates that would make loan sharks proud.
Of course, financial incentives aren't for everyone. The idea of putting a dollar price on every morsel of food that you put in your mouth might ruin the pleasure of eating. (For some people that might be the point.) The store can serve people who react better to financial incentives than to other types of encouragement. Indeed, financial incentives have been shown to help drug addicts abstain. Prizes of cash, computers and even iPods are being used in Vacaville, Calif. and elsewhere to reward school attendance.
This needn't be a question of either financial incentives or nonfinancial weight-loss support. It can be both. Right now people spend about $10 a week to attend Weight Watchers weigh-ins. Weight Watchers should offer people the option of paying $1,000 up front and then to be paid $15 a week for every time they come over the next year.
The commitment idea isn't just about weight loss. Any action that can be monitored can be subject to commitment contracts. The American Cancer Society should offer nonsmoking bonds. You invest $10,000 and agree to have your hair tested for nicotine over the course of the year. If your hair is nicotine free, you get your money back with interest; if not, your money is forfeited to the charity. The Cancer Society is a winner either way.
Ian Ayres and Barry Nalebuff are professors at Yale Law School and Yale School of Management and coauthors of "Why Not."