Honestly I'd say at least 95% of gamification companies were seemingly run by con artists to begin with. Extrinsic motivation completely kills intrinsic motivation, a fact that virtually none of the gamification companies take into account in their design even though presumably most of them know about this since it comes up right away in any decent book on the topic. This means that basically none of these companies had a chance in hell of working. Yet there are tons of investors who've probably never taken more than psych 101 who see these companies and throw tons of money at them without any due diligence, because they intuitively seem like great ideas if you don't understand that they're contraindicated by the academic research. So it just encourages more people to come along and do the same thing.
Note to investors: find someone who understands psychology and the other social sciences to help with your due diligence. And not just normal psychology, but also specifically Internet psych. (Which is actually a field.) For basically all businesses you should be looking at whether they're consistent or inconsistent with what the social sciences suggest will work, work great, or be completely non-viable.
(Also, it should be noted that there are startups that use gamification to good effect, like Squidoo and Ginzametrics, but these are very rare.)
Lets say you love reading. Then someone comes along and tells you they're going to give you 20 points for every book you read, and when you get 200 points you get a pizza party. What happens is that for a few days or weeks you'll read more books, but after that you'll completely lose interest in reading and likely won't read any more books for years, so in total you'll read much fewer books than if you had never been offered the extrinsic rewards. We see this in all areas of life, e.g. studies show that people who are paid to lose weight end up gaining weight, and people who are paid to drive safer are more likely to die in car crashes. So when you see literally dozens of startups offering prizes to kids for exercising or brushing their teeth, it's highly probletic to say the least.
The original book on this is Alfie Kohn's Punished by Rewards: The Trouble with Gold Stars, Incentive Plans, A's, Praise, and Other Bribes. Pretty much the most important book for any entrepreneur to read. Daniel Pink also has a much more recent book called Drive, but I haven't read it so I can't offer any comparisons.
(And speaking of reading, one of the most cited papers on early childhood literacy, by Scarborough & Dobrich, found that reading books to your kids does not actually help their reading skills at all. Why not? They say it's because the most important determinant of later ability is intinsic motivation, and for every parent who is building up their kid's love of reading by reading aloud to them, there is another one who is diminishing it. So if your three year old doesn't like being read to, let them do other stuff for a few months and it may actually benefit them in the long run.)
I think this is broadly true, but there are niche areas, such as frequent flier miles, where extrinsic motivation works for brand loyalty. Several years ago (before 9/11) United did a really terrible job of managing customer expectations during a job slowdown by pilots. I really, really hated United during that time. I probably would never have flown them again if I didn't already have over 200k miles on my account.
"There are niche areas, such as frequent flier miles, where extrinsic motivation works for brand loyalty"
While I agree with what you're saying, I think this is a bad example because frequent flier miles work more as a barrier to switching, rather than a classical extrinsic motivator. (You overpay every time you buy a ticket, and you don't get your money back if you switch airlines.)
I wonder if it works for customers, but not for employees?
Where broadly "customer" is "you're trying to persuade them to [X]", and "employee" is defined as "additionally, you're in a position of power over them".
Extrinsic motivation takes the form of external incentives to do something, such as the promise of money. In actuality, though, it seems that these incentives actually demotivate people from performing the task, because it kills their intrinsic motivation, their innate desire to do that task (such as a true interest in the work).
So, instead of an innate desire to take on the task, the person now has an artificially incentivized desire, which results in lower motivation, since the motivation doesn't come from their own innate desire to do the work, but rather from the money.
"At least 70 studies have found that rewards tend to undermine interest in the task (or behavior) itself; this is one of the most thoroughly replicated findings in the field of social psychology." http://www.alfiekohn.org/managing/cbdmamam.htm — and see also Alfie Kohn's book Punished By Rewards.
Can gamification be considered a reward in the same context?
It's not money or physical reward, but a 'badge' or an 'achievement'. It's automatically having the system give attention and recognition to people who do something the system likes, instead of having that recognition parseled out by manually by moderators and admins.
"Can gamification be considered a reward in the same context?"
Yes, the psychology is the same whether you're talking about tangible rewards (money, physical products, digital downloads, movie tickets, etc.) or intangible rewards (grades, praise, points, stickers/badges, etc.)
Note to investors: find someone who understands psychology and the other social sciences to help with your due diligence. And not just normal psychology, but also specifically Internet psych. (Which is actually a field.) For basically all businesses you should be looking at whether they're consistent or inconsistent with what the social sciences suggest will work, work great, or be completely non-viable.
(Also, it should be noted that there are startups that use gamification to good effect, like Squidoo and Ginzametrics, but these are very rare.)