King's College London

The study, by Teresa Esteban-Casanelles (King's) and Duarte Gonçalves (University College London), is among the first to separately identify how a person's own stakes and the other participant’s stakes shape behaviour in strategic settings such as auctions, elections, negotiations and pricing.

The researchers ran controlled experiments with more than 1,600 participants across two games that differed in strategic complexity, independently varying how much each player and their opponent could win.

They found that when participants stood to gain more, their choices became more sophisticated and less prone to obvious mistakes. Higher incentives reduced the likelihood of selecting “dominated” strategies - choices that are clearly inferior - and encouraged decisions that better matched participants’ expectations about others’ behaviour.

The research also revealed that beliefs changed alongside behaviour. Participants facing higher incentives were more likely to expect their opponents to make thoughtful decisions, and their predictions about others’ actions became more accurate overall.

However, opponents who themselves faced higher stakes became harder to predict, as their behaviour grew more varied.

The study also found participants with higher incentives took significantly longer - response times increased by more than 40 per cent - and longer deliberation was linked to better performance and more sophisticated reasoning.

Dr Esteban Casanelles said: “The evidence points to two main channels through which incentives affect strategic behaviour: a reduction in payoff-dependent mistakes and an increase in effort devoted to reasoning, for which response time provides an informative, though imperfect, proxy.”

However, the researchers add the findings offer a cautionary message for interpreting behaviour in low-stakes settings. Evidence gathered under weak incentives may underestimate how strategically people can act, while predictions that rely on highly sophisticated behaviour may prove unreliable when tasks are complex but the rewards are small.

You can read the paper in full here: Incentives and Strategic Behaviour: An Experiment.