Woolworths learns the hard way that incentives change behaviour

In their book Think Like a Freak (which I reviewed here), Steven Levitt and Stephen Dubner give an explanation of how incentives lead to unintended consequences:

• No individual or government will ever be as smart as all the people out there scheming to take advantage of an incentive plan;
• It’s easy to envision how people who think like you do will react to an incentive plan, but not everyone thinks like you do; and
• We assume that people will always behave the same way they do today. But incentives by their very nature change people’s behaviour, sometimes in unexpected ways.

Woolworths learned this the hard way this week, as explained in this New Zealand Herald article:

A loophole in the new Woolworths Everyday Rewards loyalty programme has seen some shoppers create burner accounts and claim hundreds of dollars in points to spend in-store.

A generous 1000 points for downloading the app and registering an account has seen people create multiple accounts to claim the reward.

The points were then shared back to the main account. A $15 voucher to spend in-store or online was given for every 2000 points.

One man who worked with computers had heard through friends about the loophole and was surprised it was so easy.

“I heard about people making multiple burner accounts and stocking them each with $150-plus in rewards, then driving around buying up the sports supplements,” he said.

He said Woolworths had since shut the loophole by disabling the ability to share points between cards.

How did this happen? Woolworths is clearly not as smart as all the people who try to take advantage of the new rewards scheme. It's easy for Woolworths to anticipate how their own marketing team (or whoever devised the rewards scheme) will react to the scheme, but not everyone thinks that way. And, if they based the scheme on people's past behaviour on the OneCard loyalty scheme, making a change to the scheme (by giving away 1000 free points) will change their behaviour. This was a classic case of unintended consequences, and an expensive lesson about human behaviour for Woolworths.

[HT: The incomparable Gemma Piercy-Cameron]