Dr. Froeb absolutely agrees with Jon. "Problem-solving proceeds in two steps. First, reduce a problem to a bad decision, and then figure out who made it and why. Second, figure out how to ensure that the bad decision won't be made again. Both steps require a model of how people behave. We use the "the rational actor" paradigm, which assumes that people act rationally, optimally, and in their self-interest. Under this paradigm, bad decisions are made for one of two reasons: (i) either decision-makers do not have enough information to make good decisions, or (ii) they lack the incentive to do so. Incentives have two pieces: a metric to measure how well an employee is performing, and a link from pay to performance.

1. Describe what economic incentives are, and identify at least 3 incentives you have experienced.
2. Discuss how they influence businesses and entrepreneurs.