Starting with Incentives

In thinking about large macroeconomic problems (healthcare, education, etc.), I often think about incentives. Incentives are an immensely powerful, somewhat quite force in today’s society that can be used to explain many of the world’s most important and valuable problems. I think my most raw naïveté glazes over human incentives – when I rush to answers I often forget to take into account the *why* behind others’ decision. Most everything can be, at least partially, explained by rational incentive-backed decision making.

So I have spent a lot more time, in analysis, trying to understand the world from a perspective informed by incentives. Munger is well known for his essays on the power of these reinforcers.

“Never, ever, think about something else when you should be thinking about the power of incentives.” According to Charlie Munger, there are only a few forces more powerful than incentives. … Sometimes the solution to a behavior problem is simply to revisit incentives and make sure they align with the desired goal.
I think I greatly underestimate, still, just how powerful and important incentives are to the world.
I think understanding rewards/compensation/reinforcement affects every area of the modern economy and society.

Even accounting for them is often not enough. As Charlie Munger cautions, “I think I’ve been in the top 5% of my age cohort all my life in understanding the power of incentives, and all my life I’ve underestimated it. Never a year passes that I don’t get some surprise that pushes my limit a little farther.”

One recent take-away I have had related to incentives is that the best products align incentives really well. In other words, if your customers’ incentives are misaligned with your core product offering, you will have a tough time getting user adoption. It is far better to justify your product market fit in the best interest of your user – that way you will not be fighting against the grain.

Incentives also help you put things in perspective, detach ego, and focus on the facts.

A helpful exercise I am trying to employ more often is to state out what the incentives are for different parties involved in making a decision. More often than not, understanding these will lead to what decision will be made.

I think it is also useful to try and understand my own personal incentives, and see how my choices materialize as a byproduct of these psychological factors.

What motivates me? Why?

Everyone wants a purpose…but why?