Sunday, November 25, 2007

Sunday dollars+sense: Put a contract on yourself

From December.

Visit right now and all you will see is the intriguing invitation to “put a contract on yourself”.

But after the site goes live in December you’ll be able to hand over $1,000, perhaps $10,000, safe in the knowledge that you won’t get it back unless you lose weight.

Will it be an invitation to lose money? You bet. Unless you lose weight instead...

It’s the brainchild of Yale University’s Professor Ian Ayres, who’s both a lawyer and an economist. The economist in him knows that financial incentives work. The lawyer in him knows that they won’t work unless they are watertight.

It is not enough to say to your spouse or friend, “unless I lose five kilos you get to keep the $1,000”. Your friend might take pity on you and hand you back the money anyway.

Ayres has tested the system. A few months back he contracted to lose a pound a week, agreeing to permanently part with $500 for each week he failed. Now that his weight has reached the target he had to keep it there each week or face a penalty. He reckons so far he has avoided $21,000 in penalty payments.

Would such a system of voluntary coercion work? Health economist Eric Finkelstein has tried it with incentives. He found 200 overweight volunteers in North Carolina and paid some $7, some $14, and some nothing for each percentage point of weight they lost.

Three months later those who received nothing had lost 2 pounds, those who had been paid $7 had lost 3 pounds, and those paid $14 had lost 5 pounds.

He’s been working with Tangerine, a company employed by US corporations to bribe their employees to better health as a way of cutting their healthcare bills. will use sticks rather than carrots. It won’t get to keep the money that its customers sign away. It’ll send it to charity. If its customers are particularly it’ll send it to ones they don’t like.

It is not yet clear how it will monitor weight loss. Tangerine does it by workplace weigh-ins. StickK might recruit its customers to agree to keep tabs on each other.

Economists are very interested. They going to get valuable data on the sort of contracts that work… so long as they suspend their disbelief.

To classically trained economists the whole idea of voluntary coercion is laughable. People are meant to be rational, never needing to bribe or threaten themselves. If no-one signs up to StickK they’ll be proved right. I think they’ll be proved wrong.