What are the theories about?
According to the classical decision-making process, individuals weigh the benefits of putting effort against the cost of effort. They maximize the net return to effort to decide how much effort to exert. Benefits of effort can be both monetary (rewards gained) and non-monetary (intrinsic motivation to perform). However, what kind of benefits do individuals consider in their decision processes as well as how individuals evaluate those benefits differ across different theories.
Reward Theory
According to the classical decision-making process, individuals weigh the benefits of putting effort against the cost of effort. In Reward Theory, when for every additional unit of effort the individuals earn a piece-rate monetary reward p and a non-monetary reward s, a risk-neutral individual chooses an effort level e that maximises (s+p)e-c(e). Assuming that the cost function c(e) is increasing and convex in effort, an increase in p leads to an increase in e. This means Reward Theory predicts that individuals exert more effort when there is monetary reward to effort than when there is no monetary reward. Also, effort level increases as the monetary return to effort increases.
You can trade about this theory from April 1 to 15.
Social-Reward Theory
Social-Reward Theory combines social preference with Reward Theory, as defined above. According to Social-Reward Theory, individuals not only exert effort for their own financial interests but also for others. When the monetary reward of own effort is received by others, the effort level that individuals exert maximises (s+a*p_o)e-c(e), where p_o is the reward for others and a is the altruism parameter which is assumed to be such that 0 < a <1. Therefore, one dollar has a greater benefit to individuals when they earn it themselves than when they earn it for others. Consequently, Social-Reward Theory predicts that individuals exert more effort as the return of their effort for others increases but not as much as they would if the reward was for themselves.
You can trade about this theory from April 1 to 15.
Prospect-Reward Theory
Prospect-Reward Theory combines Prospect Theory with Reward Theory, as defined above. According to Prospect Theory individuals do not base their decisions on their final wealth level but rather on the change in their wealth with respect to a reference point. They dislike a negative change in their wealth level (loss) more than they like the same amount of positive change in their wealth level (gain). So, a loss hurts them more than a gain makes them happy.
Additionally, individuals do not perceive probabilities linearly, such that low probabilities feel larger than they are and moderate to high probabilities feel smaller than they are. This leads to overweighting of low probabilities and underweighting of moderate to high probabilities in their decision-making processes. Consequently, Prospect-Reward Theory have additional predictions about individuals’ effort levels when they face risky monetary reward.
You can trade about this theory from April 1 to 15.
Narrow Reward Theory
According to Narrow Reward Theory, nothing else but only direct financial benefits motivate people to exert effort. In this case individuals exert effort to maximise pe-c(e); other indirect monetary incentives such as giving to others, or non-monetary incentives such as intrinsic motivation, do not play a role.
You can trade about this theory from April 1 to 15.