Incentives
The forces that shape behavior. People respond to incentives — understanding what motivates someone is often the key to predicting their actions.
The Idea
“Show me the incentive and I’ll show you the outcome.” — Charlie Munger
Incentives can be financial, social, psychological, or biological. They explain behavior that otherwise seems irrational.
Types
- Financial: Money, bonuses, fines, subsidies
- Social: Status, recognition, shame, belonging
- Psychological: Curiosity, autonomy, mastery, purpose
- Perverse incentives: When the incentive produces the opposite of the intended outcome
Examples
- Cobra effect: British colonial India offered a bounty for dead cobras → people bred cobras to kill for the bounty → bounty cancelled → breeders released cobras → more cobras than before
- Goodhart’s Law: “When a measure becomes a target, it ceases to be a good measure”
- Corporate: Salespeople incentivized only on revenue will discount heavily, eroding margins
How to Apply
- Ask “What is this person/system actually rewarded for?”
- Look for misalignment between stated goals and actual incentives
- Before blaming malice, check if the incentive structure explains the behavior