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. This article delves 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. They devised a solution: offer a monetary reward for each dead rat brought to the authorities. This approach incentivized locals to hunt and actively dispose of rats.
However, this well-intentioned policy soon revealed its flaws. The reward system inadvertently led to a surge in rat breeding. Opportunistic individuals discovered that they could profit by breeding rats specifically to meet the demand for carcasses. This perverse incentive transformed the initial problem into an ongoing cycle of rat proliferation, as the 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 This behavior damaged priceless historical documents and highlighted the inherent risks of incentive structures prioritizing quantity over quality.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.
This bizarre yet revealing historical example exemplifies the concept of incentive super-response tendency, a term popularized by Charlie Munger, a renowned investor and thinker. It encapsulates the idea that people, when presented with an incentive, will not only act in ways that best serve their interests but often subvert the original intent behind the incentive.
What makes this phenomenon so striking is the speed and magnitude of the behavioral shift triggered by incentives and the fact that individuals focus on the incentive itself rather than the broader goals or values it was supposed to promote.
The Power of Incentives: Intent vs. Action
At the core of human decision-making lies the fundamental concept of incentives. Incentives are powerful motivators that guide people’s behavior, consciously or unconsciously. However, for incentives to truly work in a way that produces the desired results, there must be a harmonious alignment between the reward offered and the intended goal. When structured thoughtfully, incentives can drive positive outcomes and encourage individuals to act in beneficial ways not just for themselves but for the greater good.
A brilliant historical example of how incentives can work in harmony with their intended outcome comes from Ancient Rome. Roman engineers building the empire’s bridges were made to stand beneath their creations during the grand opening ceremonies. This act wasn’t just ceremonial; it was a powerful incentive system that aligned the engineers’ pride and reputation with the quality of the work they produced. They knew that the more enduring and well-crafted the bridge, the greater the honor they would receive. Their reputation for skill and reliability was directly tied to the success and longevity of the bridges they built.
In this system, the reward—public recognition—was closely connected to the intent of building solid, lasting infrastructure. The engineers were incentivized to do their best work because their public honor and career success were linked to the quality of their construction. This is a perfect example of how a well-designed incentive system can lead to achieving long-term goals and higher standards.
However, not all incentive systems are so well thought out. Poorly designed incentives can lead to behavior that diverges sharply from the original intent, often with unintended consequences. For example, in the case of book censorship, authorities may have aimed to suppress certain ideas or prevent the distribution of controversial material. Yet, censoring a book often created a “forbidden fruit” effect, making it more appealing and increasing its readership. This reverse psychology exemplifies how incentives can backfire when not aligned with the larger goal of limiting influence or controlling information.
Similarly, rewarding employees for each loan they sell may seem like a good strategy to increase profits in the banking industry. Still, it often results in loan officers pushing through risky loans to meet sales targets. Rather than encouraging prudent lending practices, the incentive system promotes behavior that could lead to financial instability. Instead of supporting the greater goal of building a sustainable financial system, the incentives focus narrowly on individual sales targets, ultimately undermining the broader purpose of responsible lending.
The Crusades: A Lesson in Incentives
The Crusades offer a powerful historical example of how incentives can drive large-scale, high-risk behavior. Many nobles from across Europe enjoyed comfortable and prosperous lives and embarked on a dangerous journey to Jerusalem during the Crusades. Despite the significant risks—such as the long and arduous journey, the likelihood of death, and the harsh conditions—these nobles chose to participate. What could have possibly motivated them to take such a monumental risk?
The answer lies in the carefully structured incentive system designed to reward participation. The rewards were tangible and material for the nobles who survived the Crusades. The spoils of war were the most apparent incentive—wealth, land, and power awaited those who successfully captured Jerusalem. This material reward was a strong motivator, especially for nobles seeking to increase their wealth and status.
However, the incentive was more spiritual for those who did not survive. The promise of martyrdom and a guaranteed place in heaven was a powerful motivator for individuals who believed in the afterlife. In this context, the Crusades were seen as a war for land and riches and a spiritual mission that promised eternal rewards for those who sacrificed their lives. Whether the nobles succeeded in their earthly endeavors or died in battle, they stood to gain something valuable.
The dual nature of these rewards—earthly and spiritual—created a win-win situation for the nobles. The incentive system was designed so that there was no real downside to participation, as the benefits were so significant. This powerful alignment of rewards with individual motivations drove the nobles to risk their lives, demonstrating how incentives can shape even the most extreme behaviors.
Had the incentive system been different, such as a fixed monetary reward for simply showing up or an hourly wage for participation, the motivation to join the Crusades would have been much weaker. Instead of fighting for a larger cause, the nobles would have been more inclined to drag out the process for personal gain, leading to a less effective and more inefficient campaign. This highlights the importance of designing incentive systems that align with the individuals’ goals and the larger objectives of the system as a whole.
The Problem with Hourly Rates
The hourly rate system is one of the most common compensation methods in many service industries, including law, consulting, architecture, etc. At first glance, it might seem fair and straightforward to compensate professionals for their time and expertise. However, the reality is that the hourly rate system often creates an incentive structure that encourages inefficiency rather than productivity.
When professionals are paid by the hour, they have a direct financial incentive to prolong the time spent on a project, even if doing so is unnecessary. For example, a lawyer paid by the hour has a financial reason to drag out a case, filing unnecessary motions or requesting repeated meetings, as each additional hour spent on the case translates to more income. The client, however, is likely seeking a resolution to their legal issue in the most efficient manner possible, not to pay for the lawyer to drag out the proceedings.
The same incentive structure applies to other professions that charge by the hour, such as consultants, architects, and contractors. When these professionals are incentivized to bill more hours, they are less motivated to find streamlined, cost-effective solutions. This leads to higher costs for the client and inefficiencies in the execution of the work.
In contrast, a fixed-price contract, where the total price for the project is agreed upon in advance, changes the incentive structure. The service provider is incentivized to complete the job as efficiently as possible with a fixed price since they will not earn more by taking additional time. This shifts the focus away from time spent and toward delivering value and achieving the desired outcome.
By moving away from hourly rates and negotiating fixed-price contracts, both parties are incentivized to achieve the same goal: completing the work efficiently and to the client’s satisfaction. This system better aligns the interests of the service provider and the client, ultimately leading to better results and a more transparent pricing structure.
Be Wary of Financial Incentives
In the world of finance, incentives can profoundly impact the decisions of investment advisers, entrepreneurs, and even large corporations. While incentives are often framed as a way to motivate individuals to make decisions in the best interest of others, there is a darker side to financial incentives that can lead to conflicts of interest and self-serving behavior.
One of the most common examples of this is found in the world of investment advising. Investment advisers are often paid commissions for recommending certain financial products to clients. While these products may be presented as ideal solutions for the client’s needs, the adviser may be motivated more by the commission they stand to earn than by the client’s best interests. As a result, clients may be steered toward products not well-suited to their financial goals simply because the adviser stands to gain from the sale.
This is not limited to personal finance. In business, entrepreneurs and investment bankers often present business plans or financial products that are designed to benefit themselves rather than their investors or clients. These plans may include inflated projections, aggressive marketing tactics, and promises of high returns not supported by sound financial logic. In this case, the vendors have a vested interest in selling their ideas, even if they may not be the best fit for the investor.
The adage, “Never ask a barber if you need a haircut,” is a perfect analogy for this situation. When seeking advice or making decisions that will impact your finances, knowing the incentives at play is crucial. Always question whether the advice or proposal is genuinely in your best interest or whether it serves the interests of the person giving it.
Recognizing these hidden incentives can help you make more informed decisions and avoid falling victim to self-serving advice that could hurt you in the long run. In today’s fast-paced, profit-driven world, understanding the dynamics of financial incentives is essential for safeguarding your interests.
Identifying the Hidden Incentive
When faced with perplexing or seemingly irrational behavior, one of the most powerful tools at your disposal is the ability to identify the underlying incentive driving that behavior. Often, behavior that appears illogical or inexplicable is simply the result of a hidden incentive that has not been fully understood.
Human behavior can be explained in many cases by uncovering the incentives at play. For instance, when a company decides to cut production or service delivery corners, it may seem like a poor business decision. However, looking deeper, you may find that the incentive driving this behavior is financial—short-term profits are prioritized over long-term quality. Similarly, if a colleague seems to be acting out of character, there may be an incentive driving that behavior, whether it’s personal gain, competition, or even a desire for recognition.
Once you ask yourself, “What incentive might be influencing this behavior?” you’ll find that many of life’s mysteries become much clearer. This understanding can be particularly valuable in business, negotiations, and leadership, where the motivations of others can often seem opaque. By recognizing the incentives driving decisions, you can respond more effectively, align your incentives with those of others, and navigate complex situations with greater clarity.
Once you start analyzing behavior through the lens of incentives, you’ll likely find that you can explain the vast majority of actions you encounter. The remaining 10%? Those may be driven by factors like passion, misunderstanding, or malice—which are harder to quantify but are still influenced by underlying incentives. Understanding incentives is one of the most powerful tools for decoding human behavior and predicting outcomes.
Conclusion: The Influence of Incentives
Incentives are a powerful force that shapes human behavior in profound and sometimes unexpected ways. They are not merely rewards but can dictate the very actions we take and the paths we follow. The incentive super-response tendency explains why people often act in ways that subvert the original intent of the incentive system, sometimes with dramatic consequences.
Whether you are designing an incentive system for a business, a community, or even for yourself, it is vital to keep in mind that the rewards you offer will guide behavior in ways you may not anticipate. The key is to structure incentives in such a way that they align with the intended goals, ensuring that they do not lead to unintended consequences. Understanding the power of incentives and how they shape actions will help you navigate the complex dynamics of human behavior, ultimately allowing you to design systems that promote the desired outcomes.
This article is a part of The Cognitive Bias Series based on The Art of Thinking Clearly by Rolf Dobelli.