Reference Points and Organizational Performance: Evidence from Retail Banking

*Douglas Frank
INSEAD

Tomasz Obloj
INSEAD

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     Last modified: March 12, 2011
     Presentation date: 03/12/2011 10:45 AM in NH 1120, Session A
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Abstract
Economic theories of organizations describe organizational decisions as rational responses to prevailing incentive structures. In contrast, behavioral theories suggest that organizational decisions reflect bounded rationality and cognitive biases. In this paper, we explore and distinguish empirically these two competing views and their performance consequences. We study the daily performance of 164 units of a retail bank throughout a two-month sales tournament. Former tournament leaders—units who have occupied a prize-eligible rank but have fallen out—have 28 percent higher daily sales than units who have never led. This is not due to underlying productivity differences; neither is it fully attributable to the prevailing incentive structure. Rather, outlets appear to be motivated to regain a lost “endowment”: the contest ranking entitling them to a prize. Our results therefore suggest that—in addition to the effects predicted by standard economic theories—a behavioral mechanism partially determines the units’ performance.