I guess most of us feel the need to exercise as we grapple with our steadily growing waistline. Sometime we even have a go at it by going for a run or enrolling ourselves in the neighbourhood gymnasium. If you belong to the former category, most people (like me) the ‘josh’ lasts couple of days or weeks at best, before excuses start gaining their hold. An aching shin bone, sprained calf, no time, long hours- so on and so forth. Some of us feel that the gym is the better option. Why? - Because we pay a fee at the gym and chances are because of this economic penalty we get ‘locked in’. Or more simply put we feel that we need to get the value out of the economic penalty that we have paid up front. Now consider the situation when we pay a daily fee as we use the services of the gymnasium; I would assume many of us would not trust ourselves that we would continue going to the gymnasium. We would think that bunking a day would be costless simply because we will not pay for it. Now this goes against the sound economic principle of ‘time value of money’, according to which payment made at an earlier point should be costlier than payments at a later point. This cognitive bias can be explained by behavioural economic theory of loss aversion. Loss aversion signifies our higher sensitivity to losses than equivalent gains. In this case we feel that we will discipline ourselves by arousing our sensitivity to losses- the value against the gymnasium fee.
Two Harvard economics students, Yifan Zhang and Geoff Oberhofer, lean heavily on behavioural economics to motivate gym-goers to workout. The concept, Gym-Pact, employs what Zhang calls “motivational fees” – members pay more money when they do not exercise.
The students are trying to tackle a particular economic challenge: because gym fees are paid up front, there is little future economic penalty for not working out. In effect, you’ve already paid the maximum economic penalty. Gym-Pact addresses this issue by linking your economic penalty/reward to your weekly workout schedule. For example, members currently pay up to $25 per week when they fail to exercise at least three times and $75 for dropping out of the program. Conversely, members who hit the gym at least four times per week pay nothing.
What Zhang and Oberhofer did was change the factor of motivation for the gym-goers. Whereas in the standard gym payoff scenario the motivation is loss aversion, in Gym-Pact the motivation is straightforward- reward for work out.
Hopefully Gym-Pact will get more people to the gym than before. However, one wonders what will happen to Gym-Pact’s revenue if its members never default!!