Incentives have a powerful influence on human behavior. The incentive super-response tendency is evident from the colonial rat infestation solution to the discovery of the Dead Sea Scrolls and modern corporate practices. Understanding this phenomenon is crucial for comprehending why individuals and organizations act as they do. In this article, we delve into incentives, their impact on behavior, and the pitfalls of misguided incentive systems.
Historical Case Studies of Incentives Gone Awry
The Hanoi Rat Problem
In 19th-century Hanoi, French colonial rulers grappled with a severe rat infestation that threatened public health and sanitation. The solution they devised was to offer a monetary reward for each dead rat brought to the authorities. This approach incentivized locals to actively hunt and dispose of the rats. However, this well-intentioned policy soon revealed its flaws. The reward system inadvertently led to a surge in rat breeding. Opportunistic individuals discovered they could profit by breeding rats to meet the carcass demand. This perverse incentive transformed the initial problem into an ongoing cycle of rat proliferation, as the very people tasked with eliminating the rats were now contributing to their multiplication. Instead of reducing the rat population, the policy exacerbated the issue, illustrating how reward systems can sometimes backfire when they fail to consider the potential for unintended consequences.
The Dead Sea Scrolls and the Finder’s Fee
The discovery of the Dead Sea Scrolls in 1947 was one of the most significant archaeological finds of the 20th century. A finder’s fee was established for each new scroll to encourage the continued discovery of these ancient texts. The intention was to accelerate the unearthing of these invaluable artifacts. However, the incentive had a detrimental effect. Instead of leading to the discovery of additional scrolls, the reward system destroyed existing ones. Motivated by the promise of monetary gain, some individuals resorted to tearing apart scrolls to increase their claim to the finder’s fee. This behavior damaged priceless historical documents and highlighted the inherent risks of incentive structures prioritizing quantity over quality. The case of the Dead Sea Scrolls underscores the importance of designing reward systems that align with broader goals and account for potential abuses.
The Dinosaur Bone Incentive in China
In 19th-century China, rewards were offered for discovering dinosaur bones, spurring a rush among farmers and locals to locate these ancient remains. The incentive was intended to promote the discovery and study of prehistoric fossils. However, this well-meaning approach had unintended consequences. Farmers, motivated by the financial reward, began to break the bones into smaller pieces to claim multiple rewards rather than preserving the fossils in their original form. This practice led to a fragmented and incomplete understanding of dinosaur history, as the pieces often had little scientific value. The situation illustrates the pitfalls of incentive systems that reward individuals based on the quantity of discoveries rather than their quality. It emphasizes the need for carefully designed incentives that consider both the desired outcomes and potential misuse.
Modern Incentive Systems and Their Pitfalls
Corporate Bonuses and Target Manipulation
In the modern corporate world, performance bonuses are a common incentive offered to employees and executives. These bonuses are typically tied to achieving specific performance targets, such as revenue goals or production metrics. While these bonuses aim to drive performance and reward success, they often lead to unintended consequences. Managers and employees, motivated by the prospect of financial rewards, may focus on manipulating or gaming the system to meet the targets rather than pursuing genuine growth and innovation. This behavior can result in short-term gains that do not translate into long-term success, as individuals prioritize achieving the targets over the strategic development of the business. The incentive super-response tendency highlights how incentives can lead to strategic maneuvering that undermines the original objectives, emphasizing the need for thoughtful design in reward systems.
The Ancient Roman Engineering Example
Ancient Rome provides a historical example of a well-designed incentive system with its approach to engineering projects. Roman engineers responsible for constructing bridges were required to stand underneath the completed structure during its opening ceremonies. This requirement was more than symbolic; it served as a practical incentive for engineers to ensure the safety and durability of their work. The risk of standing beneath a potentially unstable structure created a powerful motivation to adhere to high engineering standards. This example demonstrates the effectiveness of aligning incentives with accountability, ensuring that individuals are motivated to meet both the technical and safety standards required for successful project completion.
The Pitfalls of Censorship and Loan Incentives
Censorship is an example of a poorly designed incentive system often leading to counterproductive outcomes. When a book or piece of content is censored, the intention is to suppress or control its dissemination. However, this action frequently backfires by increasing public interest and curiosity, making the censored material more famous than it might have been otherwise. The very act of censorship can generate more attention and discussion, highlighting the complexities of incentive systems that do not account for the broader effects of their implementation.
Similarly, financial institutions incentivizing employees based on the volume of loans sold face significant risks. Rewarding employees for each loan approved can lead to reckless lending practices, as the focus shifts from assessing the quality of loans to simply increasing the number of transactions. This approach can result in a deteriorated credit portfolio and increased financial risk. The example underscores the importance of designing incentive systems that balance quantity with quality and align with the overarching goals of stability and responsible behavior.
The Transparency of CEO Salaries
The public disclosure of CEOs’ salaries was introduced to address excessive compensation and promote transparency. The goal was to create a more equitable and accountable environment by exposing high executive pay to public scrutiny. However, this measure has often had the opposite effect, with CEO salaries continuing to rise. The visibility of compensation creates a competitive environment where CEOs are motivated to secure higher pay to avoid being perceived as less successful than their peers. This competitive dynamic can drive salaries upward, contrary to the intended goal of moderation and fairness. The case of CEO salary transparency illustrates how incentives can sometimes exacerbate existing issues rather than resolve them, emphasizing the need for carefully crafted incentive systems that address both the direct and indirect effects on behavior.
The Power of Incentives Beyond Monetary Rewards
Non-Monetary Incentives and Behavioral Influence
Incentives extend far beyond financial rewards, encompassing a range of motivators that can profoundly influence behavior. Non-monetary incentives, such as academic grades, prestigious awards, and spiritual rewards, can be highly effective in shaping individual actions and decisions. For example, pursuing academic excellence can be driven by the desire to earn high grades and academic recognition. Similarly, prestigious awards like the Nobel Prize can motivate individuals to achieve significant breakthroughs in their fields. Spiritual rewards, such as the promise of an honored place in the afterlife, can drive individuals to undertake challenging and risky endeavors. These diverse forms of incentive highlight the versatility of motivational strategies and demonstrate that effective incentive systems are not limited to financial considerations.
The Crusades and Medieval Nobles
The Crusades show how a well-designed incentive system can drive individuals to undertake significant risks. Medieval nobles were motivated by the potential rewards despite being fully aware of the dangers and challenges associated with the Crusades. Successful completion of a Crusade offered the spoils of war and the prospect of spiritual rewards in the afterlife. This dual incentive structure, combining tangible rewards with spiritual benefits, illustrates how a well-crafted incentive system can effectively motivate individuals to engage in hazardous and demanding endeavors. The Crusades example underscores the power of incentives to drive behavior by aligning personal motivations with broader goals.
The Pitfalls of Hourly Rates and Commission-Based Advisers
Hourly Rates and Service Incentives
Hourly rates for professional services, such as legal counsel, architectural design, consulting, and accounting, often present significant challenges in aligning incentives with client interests. Professionals who charge by the hour may have a financial incentive to prolong their work to maximize earnings, contrary to the client’s desire for efficiency and cost-effectiveness. This misalignment can lead to extended project timelines and increased costs, as professionals may focus on extending their work rather than delivering timely and effective results. To address this issue, negotiating fixed service prices can align incentives with the client’s goals, promoting efficiency and transparency. Fixed pricing ensures that professionals are motivated to complete their work efficiently and effectively, avoiding the pitfalls of hourly billing.
Commission-Based Advisers and Conflicted Interests
Investment advisers and financial planners who earn commissions for recommending specific products may face conflicts of interest. Their primary motivation may shift from providing objective financial advice to promoting products that generate higher commissions. This conflict of interest can lead to biased recommendations that do not necessarily align with the client’s best financial interests. Similarly, entrepreneurs and investment bankers who present business plans may prioritize their own financial gain over the viability and success of their proposals. The old adage “Never ask a barber if you need a haircut” aptly captures this cautionary principle, emphasizing vigilance and critical evaluation of recommendations from those with vested financial interests. Understanding these dynamics is crucial for making informed decisions and avoiding potential pitfalls of incentive-driven advice.
Conclusion
The incentive super-response tendency reveals incentives’ profound impact on human behavior. By understanding this phenomenon, we can analyze why individuals and organizations act as 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.
This article is a part of The Cognitive Bias Series based on The Art of Thinking Clearly by Rolf Dobelli.