NCPA - National Center for Policy Analysis

Enhancing the Efficacy of Teacher Incentives through Loss Aversion

July 31, 2012

While it is widely accepted that improved teacher quality is a necessary ingredient for superior educational outcomes, the means to achieve this remain muddled. Observable characteristics such as college-entrance test scores and grade point averages are not highly correlated with teacher value-added on standardized test scores, and teacher-targeted programs have proven ineffective.

This has led many to advocate for attempts to use financial incentives for teachers to increase student achievement. Yet while tying teachers' compensation to student outcomes has been found to be highly beneficial in developing countries, domestic results remain ambivalent if not negative.

Researchers with the National Bureau of Economic Research (NBER), however, believe that the fundamental idea of financial incentive is a powerful one, and that results have remained lacking due only to implementation style. Conducting their own field test, they experimented with a teacher compensation model centering on aversion to financial loss instead of self-interest in financial gain.

  • A large literature on reference-dependent preferences demonstrates behavior consistent with the notion of loss aversion.
  • Lab experiments have consistently demonstrated that subjects are more responsive to protocols framed as losses than to protocols framed as gains.
  • During the 2010-2011 school year, NBER researchers conducted an experiment in nine schools in Chicago Heights, Ill., where they randomly selected teachers to participate.
  • Some teachers were provided with traditional financial gains incentives, acting as the control group, while others were presented with a financial loss scenario.
  • In the financial loss group, teachers were given a lump sum payment at the beginning of the school year and informed that they would have to return some or all of it if their students did not meet performance targets.

Consistent with behavioral and psychological literature, students whose teachers were subject to potential loss saw greater gains than the control group.

  • Students whose teachers were in the loss treatment show large and statistically significant gains between 0.201 and 0.398 standard deviations in math test scores.
  • This is equivalent to increasing teacher quality by more than one standard deviation.
  • In line with previous studies in the United States, the researchers did not find an impact of teacher incentives that are framed as gains.

Source: Roland G. Fryer, Jr., et al., "Enhancing the Efficacy of Teacher Incentives through Loss Aversion: A Field Experiment," National Bureau of Economic Research, July 2012.

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