Yerkes-Dodson Law

Performance increases with anxiety and excitement, but only to a point.

Formed by psychologists Robert Yerkes and John Dodson in the early 20th century, it looks like this:

At one level, excitement increases attention and helps you focus. At another higher level, you choke.

Highly relevant to incentives, I think of the Yerkes-Dodson law in investing, where the rewards for being right can be so high that smart people fumble their ability to manage risk in ways they never would when dealing with smaller, less exciting, rewards.

Words:  Morgan Housel
Image: CC0 1.0
Original Source: Collaborative Fund