Incentives have a powerful influence on human behavior. From the colonial rat infestation solution to the discovery of the Dead Sea scrolls and modern corporate practices, the incentive super-response tendency is evident. Understanding this phenomenon is crucial for comprehending why individuals and organizations act the way they do. In this article, we delve into the concept of incentives, their impact on behavior, and the pitfalls of misguided incentive systems.
THE COLONIAL RAT INFESTATION
To combat a rat infestation in Hanoi during the nineteenth century, French colonial rulers devised a system: they offered a reward for every dead rat turned in. While this approach initially seemed effective, it inadvertently led to an unintended consequence. Some individuals began breeding rats solely to claim the rewards, resulting in a perpetuation of the problem rather than its eradication. This illustrates how incentives can backfire when they fail to align with the desired outcome.
THE DEAD SEA SCROLLS DISCOVERY
In 1947, archaeologists sought to incentivize the discovery of new Dead Sea scrolls by offering a finder’s fee for each new parchment. However, instead of unearthing intact scrolls, individuals began tearing them apart to increase their rewards. This destructive behavior highlights how incentives can distort the very purpose they were designed to serve, emphasizing the importance of aligning incentives with the intended goals.
MODERN INCENTIVES AND BUSINESS TARGETS
The influence of incentives extends to modern business practices. Company boards often promise bonuses to managers for achieving specific targets. However, this approach can lead to unintended consequences. Instead of focusing on growing the business, managers may invest more energy in manipulating targets to lower expectations, undermining long-term success. This illustrates how incentives can drive behavior that deviates from the broader objectives of an organization.
THE INCENTIVE SUPER-RESPONSE TENDENCY
The term “incentive super-response tendency,” coined by Charlie Munger, encapsulates the phenomenon of individuals responding to incentives in their best interests. It emphasizes the rapid and drastic changes in behavior that occur when incentives are introduced or altered. People respond primarily to the incentives themselves, rather than the underlying intentions behind them. This tendency sheds light on why incentive systems play such a significant role in shaping behavior.
DIFFERENTIATING GOOD AND POOR INCENTIVE SYSTEMS
Effective incentive systems incorporate both intent and reward. Ancient Rome provides an example where engineers were required to stand underneath their newly constructed bridges during opening ceremonies. This incentive system aligned with the underlying aim of ensuring structural integrity. In contrast, poor incentive systems overlook or even pervert the intended goals. For instance, censoring a book only serves to increase its notoriety, while rewarding bank employees for each loan sold can lead to a compromised credit portfolio. The public disclosure of CEOs’ pay fails to dampen exorbitant salaries but instead fuels a race for higher compensation.
HARNESSING THE POWER OF INCENTIVES
When seeking to influence human behavior, incentives often prove more effective than appeals to values or visions. Incentives need not be solely monetary; they can encompass a range of rewards, from recognition through awards like Nobel Prizes to special treatment in the afterlife. The historical example of nobles joining the Crusades reveals how incentive systems motivated individuals to undertake perilous journeys. The promise of wealth and the status of martyrdom provided a win-win scenario, driving their participation.
THE PITFALLS OF HOURLY RATES
Despite the efficacy of incentives, many professions continue to rely on hourly rates. Lawyers, architects, consultants, accountants, and driving instructors, for instance, charge by the hour. However, this incentivizes them to prolong their services, compromising efficiency. To avoid this pitfall, it is advisable to negotiate a fixed price in advance, ensuring a fair arrangement for both parties.
THE PERILS OF CONFLICTING INTERESTS
It is crucial to be cautious when receiving recommendations from investment advisers or entrepreneurs promoting financial products or business plans. These individuals often have their own interests at heart, such as earning commissions or securing funding. Seeking advice from those with potential conflicts of interest may not lead to objective and unbiased guidance. As the saying goes, “Never ask a barber if you need a haircut.”
UNDERSTANDING BEHAVIOR THROUGH INCENTIVES
To decipher perplexing behavior in individuals or organizations, it is useful to consider the underlying incentives at play. The incentive super-response tendency provides a framework for explaining approximately 90% of cases. However, the remaining 10% may involve factors such as passion, idiocy, psychosis, or malice, which go beyond the influence of incentives alone.
CONCLUSION
The incentive super-response tendency reveals the profound impact that incentives have on human behavior. By understanding this phenomenon, we can analyze why individuals and organizations act the way they do. Recognizing the importance of aligning incentives with intended outcomes and avoiding the pitfalls of misguided incentive systems allows us to harness the power of incentives effectively. Whether in business, personal relationships, or society at large, comprehending the incentive super-response tendency provides valuable insights into human behavior and decision-making processes.