Don’t Do It For The Money – The Irony Of Why We Shouldn’t Focus On Money When Investing

Does Money Motivate? 

It is generally accepted that money is a motivator; if you link pay to performance, performance will improve. For that reason, many people’s salaries vary with their performance. This is most prevalent on Wall Street where bankers and traders receive most of their compensation in the form of incentive-based pay.  In his book, “Drive”, Dan Pink considers whether pay for performance really works. Does dangling a carrot and threatening with a stick cause people to deliver better results?  he research finds that this is not always the case.

“Money causes us to focus on something that is irrelevant to the problem.  In doing so, it complicates the puzzle, making it more difficult to solve.”

Mechanical vs Analytical Tasks:

For very mechanical tasks, incentive-based pay does work. A brick layer who is paid by the brick will work more effectively than one who is paid by the hour.  However, for tasks that require analytical thinking, his results show that performance is actually worse when it is linked to pay.

Pink cites research involving the solving of puzzles. The person who was told she would receive a financial reward if she solved the puzzle in the shortest time performed worse than a person who had no potential for financial reward if the puzzle was solved quickly.

The person who was solving the puzzle for the sake of solving the puzzle did it quickest.

Follow Rules That Work & The Money Will Follow:

I have been teaching people how to trade the stock market for years. One constant that I have seen is those who perform the best as traders are those who don’t care about the money. They trade with a set of rules and the discipline to follow the rules, making the money irrelevant.

Market Is A Puzzle That We Want To Solve:

The market is a puzzle that we want to solve. Why does a focus on money make us ineffective traders, or puzzle solvers?