The Not-So-Secret, Secret Power of Incentives

HomeMental Models

If you ask anybody about the power of incentives, they're likely to say they understand just how powerful they are. But when you start probing how they make their decisions, you'll likely see they're not practicing what they're preaching.

This enlightenment comes from one of Charlie Munger's famous speeches titled "The Psychology of Human Misjudgement." This speech, better described as a manifesto, is a 50-page document outlining 25 characteristics humans tend to be oblivious to—the first one– not understanding the power of incentives.

Munger's favorite example illustrating this point is the Federal Express system. This system works in the first place because every package gets shipped to a central airport every night, where it is moved and sent to its final destination. Obviously, this system falls apart if the people working at night can't complete the sorting and shipping– which is exactly what was happening. In Munger's words,

"... Federal Express had one hell of a time getting the night shift to do the right thing. They tried moral suasion. They tried everything in the world without luck. And, finally, somebody got the happy thought that it was foolish to pay the night shift by the hour when what the employer wanted was not maximized billable hours of employee service but fault-free, rapid performance on a particular task."

Instead, they started paying the night shift employees per shift and let them go home when all the planes were loaded. Maybe, they thought, that would make the system work better. "Lo and behold," says Munger, "that solution worked."

In the words of Ben Franklin, "If you would persuade, appeal to interest and not to reason."

If you lead a group of people, why are they doing what they're doing? Maybe you're wondering what's taking them so long to get work done, but they're being paid by the hour.

Perhaps you're trying to build a newsletter through a referral program, but your rewards suck (excuse the language).

Get the incentives right.

Written by
Dalton Mabery