Start thinking about incentives

“Never, ever, think about something else when you should be thinking about the power of incentives.
— Charlie Munger

Everyone knows incentives are important, whether consciously or subconsciously. Companies pay salesmen through a commission structure rather than a base salary because the incentives of the two parties overlap.  The company gets higher sales figures/profits and the salesman brings home more money. Simples.

Like all human behavior, this is the direct result or byproduct of our evolutionary journey as a species. By having the ability to connect an action with an outcome we became conditioned to repeat behavior that works. Back when we roamed the grasslands, figuring out how to sneak up on prey or work in a team was rewarded with an increased food supply and living conditions. In the modern world, this same mechanism is occurring however instead being rewarded with food we get rewarded for arbitrary tasks with money that can be exchanged for food among other things.

The human ability to respond to rewards (and punishments) is normally a great thing. We consistently exercise because we are rewarded with feel-good chemicals, we don’t touch a hot stove because we know it will cause us pain. This bad side however is when we don’t understand what incentives control our current actions. This is difficult as it can sometimes reveal things about ourselves we would rather not admit. However the sooner you realize what incentives are actually responsible for your current position, the sooner you can course correct if you have been mislead.

Not coincidentally, it is the biggest decisions we make which I believe we are most prone to follow the wrong incentives. Where do you live? Why are you working in your current? What are you looking out of your relationships?

It is these decisions which we should really take a couple of years making but normally end up falling into them through coincidences and social pressure. This is because when we are feeling the stress of having to make a big choice, we react by taking the easiest, most available path.

An obvious one is where you decide to live. When you are young this is obviously not in your control but as you get older, the city you choose to live in can be a major factor in how your life turns out. For example, if your into tech, choosing to live in a start up hub can be a make or break factor in your future. Same goes for finance and acting. Outside of careers, you want to live somewhere where you can carry out your hobbies, mingle with plenty of single people or raise a family depending on your situation. These are all valid incentives that can make a difference to your quality of life however most people don’t consider these things when deciding. They end up living somewhere because they got a job, went to university/college or just happened to have grown up there.

The incentive to be be ‘lazy’ (ie. not spend valuable energy thinking up solutions to problems which are not technically broken) overrides the above incentives which leaves you stuck in the wrong location.

Another easy one to understand is your current job. Are you working in a career to currently reach your true desires? They could be building something cool, earning a lot of money,learn a new skill, working with smart people. More likely you are in your current job because of completely different but long term damaging incentives:

  • You want to look consistent with a decision you made when you were 18 of what to study in university.
  • Your friends all started applying for the same grad roles out of university so social proof made you do they same.
  • Your parents always wanted you to be a doctor/engineer/lawyer/whatever.

The point i’m trying to get across is that once you start thinking of the real  incentives that are driving your actions,you will start to see what you really desire and make better decisions with the real incentives in mind. Try it and see how your self awareness changes.

Feel free to drop me a mail or comment your thoughts.

 

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