Why Prizes do not Work – why the X-Prize approach will not spur human development as much as some think

There has been a tremendous amount of interest in using large monetary prizes to help solve some of the world’s thorniest problems. Everyone has probably heard of the X-Prize, a multi-million dollar price to encourage the private development of space technology to put people into orbit. Some may have heard of Sir Richard Branson’s $25m Earth prize to find ways of converting CO2 into something more useful that destructive greenhouse gas.

In terms of behavioural theory on rewards, the prize should be an attractive stimulus to encourage individuals to take an interest in the problem, and devote their own resources to solving the problem. Some prizes may be primarily financial, others may focus more on the recognition aspect. An example of recognition would be the story of the math professor (whose name escapes me) who used to give $100 checks for students to solve very complex problems. The professor was so famous, that the very fact that one received a check from the master for solving the problem, was recognition enough, and many never cashed the check.

The problem, and I will shorten my response as I have some time constraints today, is that the winner-takes-all nature of the prize means that there is virtually no sharing between the parties working to solve the problem. Indeed sharing any information could disadvantage any or all of the players, to the extend that all the behavioural components are in place to prevent any form of sharing, beneficial or otherwise.

Now, if one looks at the real issue, one must question the intent of the prize. If the goal is to solve the problem, the prize approach itself is just one incentive method to achieving the goal. There are other, potentially better, ways of incenting behavior to achieve the same goal. These methods may be safer, less damaging to individuals, easier to explain, and faster to solving the problem itself.

In terms of problem solving, the critical behavior that has been removed from the incentive scheme is that of sharing, ‘connecting the dots’. I am a huge believer, based on a decade worth of my own research and practice at Imaginatik and before that at Cass Business School in London, in the power of collaborative innovation, joining a diverse set of brainpower and concentrating that brain energy on a specific problem.

To solve the ultimate problem, one must connect brains together.

The top prize approach stops this from happening.

Ergo, prizes are a bad approach.

Ergo, for those people with the wisdom and desire to help the world solve its thorniest problems – and who love prizes (you know who you are, I met some of you at Davos) – think again whether the ‘prize’ solution to solving the actual problem is the right approach.


7 Responses to “Why Prizes do not Work – why the X-Prize approach will not spur human development as much as some think”

  1. Mark,

    I enjoyed the post and it is something I’d love to talk through with you at some point. The natural tendency with my clients is to focus on “the prize” rather than the true goal, which is harvesting implementable great ideas that improve the company’s bottom line. However, I’m not sure I agree that “prizes are a bad approach”. I wholeheartedly concur that the “top prize” methodology is the surest way to tank collaboration, as it pits employees against one another rather than getting them together to solve a problem socially. But what about the Google approach to rewards? If you could have n number of “winners”, meaning you’ll implement any ideas that will generate good returns, and you commit to giving x % of annual revenue to the person or team that came up with the idea, is that not a potential way to really incent folks while also fostering collaboration?

  2. Sir, I liked this article and agree that there are some issues with a “winner take all approach” but I believe this could be a good approach for our government to help direct a way of thinking in our economy.

    They could develop a large prize system for companies to develop whatever type of product or system that is deemed important. Say home energy system or more efficient car motors. This is more like the X prize where the government might have a $50mil prize (just a round number) for a functional product, in the desired field. The govt would verify the system and the contestant would give up rights to the system to the public domain after 1 year.

    The idea is that they have 1 year and the prize money to go to market – since they technically have already developed the system. Research shops could get involved where they will turn the invention over to the public domain and just keep the prize money to help fund the next prize or other things. They might be able to assign their 1 year rights to another company for a fee.

    Even angel investors or VC groups could get behind contestants in the hope of a nice return. As an example, if I had an idea for a geothermal pump but no money I might go to a VC and say I need 3 million to get the idea to a practical system and they can get $25mil of the prize money..I get to invent, the public gets the invention and the investor gets a nice return on their money.

    There might be a chance to turn this into another investment vehicle that could spur further innovation. I would think large corporations might consider the funding of these as well but keep the resulting invention for themselves.

    A possible side affect would be that companies that invented but did not get the prize might still go to market with their approach.

  3. By the way, I think the math professor you refer to is actually computer scientist Donald Knuth, who gives reward checks for anyone who finds errors in his software in and typos in his published work. The checks are usually small and very prized; most of them wind up framed by the recipients rather than cashed.

    You can read more here at the Wikipedia article Knuth reward check

  4. Here is a terrific example of a successful collaborative/competitive contest, courtesy of my friend Ned Gulley. It is also a very interesting innovation podcast episode.

    I agree with Mark on his main point, but I think Steve’s ideas are worth following up. If the synthesis between them is to reward every significant contributor to a solution, then IdeaCentral could be a useful platform for documenting who added what.

    BTW, probably the best example of a recent “big prize” is John McCain’s proposed $300 million reward for a new car battery.

  5. Here’s a better link to Ned Gulley’s “addictive collaboration” programming contest. I would guess there are 50 good lessons learned here for collaborative innovation in general, including the value of cleverly defining challenges and laying out the background to increase the level of participants’ engagement.

    The idea that programmers take off work so they can focus all day on this coding contest is quite astounding. It would tend to bolster Mark’s case against monetary rewards because that is effectively a negative prize for participation.

    Here are two questions I’d like to pose to Idea Central power users:

    1. Is the secret to Idea Central’s success that it facilitates this kind of “collaborative flow” for innovators?

    2. Has anyone tried to set up a collaborative challenge contest similar to Ned Gulley’s? I could see some kind of analytics problem qualifying, where a small data set could be the revealed problem space, and where a large data set might be the final environment where submissions are run against. The work of analytics professionals is often teasing insights from massive data sets to predict future behavior. I bet this could be done with an order of magnitude more interest as a collaborative competition in Idea Central.

    Another practical application might be optimizing the spending of on-line search advertising dollars. Imagine if Google provided the ability to run two concurrent advertising schemes so that customers could run tests of various hypotheses head-to-head. Half of Google’s traffic would proceed according to one scheme, and half according to one completely different. (It would probably not be technically difficult given the way server load balancing works.) Do we get more clicks with x wording or with y? Does shifting advertising to GMail increase the quality of prospects over Google Search? I have one Fortune 100 client that won’t consider advertising in email ads because it isn’t a big enough venue. Would they try it if there were an easy way to test its impact? Would customers spend more in general if they felt more confident that the advertising spend was optimized?

    BTW, contributing insights to on-line advertising spending strategy seems like an excellent Idea Central challenge for any company because of its appeal to non-experts. For one major client, I found ads that send customers to the wrong page, links that promise non-existent information, references to an obsolete name of its largest competitor, areas where Google and Yahoo ads are operating at cross-purposes, and paid ads that cannibalize from free #1 hits. My key assets were curiosity and a fresh set of eyes, which should be in large supply in our companies’ crowds.

  6. At least at the low end of prizes there is some compelling literature: look to Freakonomics or just Google to find the stories of late parents at the Haifa daycares, or paying for blood donation in Sweden.
    Bottom line: modest cash rewards or penalties may have the opposite effect to what was intented. “I’m really busy, I don’t care about the $5 fine, I’ll be late to the daycare to get my kid”, or “$7 for a pint of my blood? I don’t have 30 minutes for that.”
    The emotional bond to the task (pride, guilt, recognition) may be far stronger than any feasible monetary bond — by creating the equation (money = behavior) you risk deflating the emotional value.

    This is one big reason why in my company we do not attach cash rewards to the dozens of diverse problem-solving challenges we run all the time.

  7. In general I agree with Mark, that big public prizes are good for buzz but not necessarily sustainable innovation. I recall a good Scientific American article about a year ago, that X-Prize and the like suffered by the winner-take-all approach: the really edgy innovators would balk because their ideas were too risky and probably would not get the big prize. Better to offer a spectrum of 1st, 2nd, 3rd and more prizes, not too steep a dropoff, to encourage diverse and risky approaches. The key, perhaps, is to be very honest about what the goal is: is it real innovation, or is it transient glam and fame (for the prize giver as well as the recipient)….

    …and by the way, the McCain example is not a prize (it’s unfunded) but rather politics. In this particular case a good argument can be made that the private sector is more efficient and effective than prizes: see this discussion of a potential $1B upcoming IPO for A123Systems of lithium iron phosphate battery fame.

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