"I don't think rationality is the golden standard," says Dan Ariely, a Duke professor and author of "The Upside of Irrationalilty" and "Predictably Irrational." "We need to think about what creates the best structures, incentives, motivation - and rationality is not always that." He thinks that businesses need to "understand the irrationality" of their employees and customers and take that into account when making decisions.

Take employee pay, for instance. It is often assumed that money is the greatest motivator of performance. It's a rational belief, but people often behave irrationally. In a series of experiments , Ariely found that offering more money works with mechanical tasks, but with cognitive tasks more money led to worse results. And if people were asked to perform a task in front of others, they actually did twice as poorly as when they did it privately. It seems that in some cases (public performance and a very large bonus), stress had a negative impact on performance.

When Ariely discussed his finding with some bankers, they said bankers are different; they thrive on stress. Since the bankers were not interested in taking part in an experiment, Ariely evaluated the performance of "clutch players" in basketball instead. These were the players that did the best in the last five minutes of a game. When the researchers counted the points the clutch players scored it was clear they did better. But when they evaluated their success rate in making a basket they did not do better than other players. So how did they score more points? They tried more times to get those baskets (i.e. with more fouls so they got more chances at scoring).

What does this mean when it comes to setting employee pay? One cannot assume that a big bonus is the right incentive. It may, in fact, have the opposite effect if a lot of stress is built into achieving it. In addition to money, people are motivated by other factors, such as competition, completion, self-fulfillment, friendship and obligation. In an interview in McKinsey Quarterly, Ariely describes a situation where a team spent two years designing a product for their company. A week before Ariely met with this team the CEO canceled the project and they were devastated. Ariely asked the team two questions that everyone in the group assented to: How many people show up for work later? How many people go home earlier than you used to? He also asked them what the CEO could have done differently. A lot of ideas surfaced, including letting them present their ideas in front of the whole company or, at least, in a few demos. The CEO didn't do that. He just killed the project and with it the team's internal motivation. People "dramatically underestimate" internal motivation, says Ariely.

Has your motivation ever been trampled by a project cancellation? It happened to me. I was working hard on a project that was going to be published in the magazine I wrote for. Right near the deadline the project was cancelled. I too was devastated. My boss said, "Just remember you still get paid whether or not your work is published." At the time I accepted that statement as a business reality. But in hindsight I realize it was demoralizing. The money was less of a motivator than the recognition I would have received from publishing the report.

Motivation is something managers need to remember when a project has to be cancelled. How do you handle the people who work on that project? Do you find a way for them to get recognized for the work they did do even if it doesn't see the light of day?