18
NEVER PAY YOUR LAWYER BY THE HOUR
Incentive Super-Response Tendency
To
control a rat infestation, French colonial rulers in Hanoi in the nineteenth
century passed a law: for every dead rat handed in to the authorities, the catcher
would receive a reward. Yes, many rats were destroyed, but many were also bred
specially for this purpose.
In 1947, when the Dead Sea scrolls were discovered, archaeologists set a
finder’s fee for each new parchment. Instead of lots of extra scrolls being found,
they were simply torn apart to increase the reward.
Similarly, in China in the
nineteenth century, an incentive was offered for finding dinosaur bones. Farmers
located a few on their land, broke them into pieces and cashed in. Modern
incentives are no better: company boards promise bonuses for achieved targets.
And what happens? Managers invest more energy in trying to lower the targets
than in growing the business.
These
are examples of the
incentive super-response tendency
. Credited to
Charlie Munger, this titanic name describes a rather trivial observation: people
respond to incentives by doing what is in their best interests. What is noteworthy
is, first, how quickly and radically people’s behaviour changes when incentives
come
into play or are altered and, second, the fact that people respond to the
incentives themselves and not the grander intentions behind them.
Good incentive systems comprise both intent and reward. An example: in
Ancient Rome, engineers were made to stand
underneath
the construction at
their bridges’ opening ceremonies.
Poor incentive systems, on the other hand,
overlook and sometimes even pervert the underlying aim. For example, censoring
a book makes its contents more famous and rewarding bank employees for each
loan sold leads to a miserable credit portfolio. Making CEOs’ pay public didn’t
dampen the astronomical salaries; to the contrary, it pushed them upward.
Nobody wants to be the loser CEO in his industry.
Do you want to influence the behaviour of people or organisations? You could
always preach
about values and visions, or you could appeal to reason. But in
nearly every case, incentives work better. These need not be monetary; anything
is useable, from good grades to Nobel Prizes to special treatment in the afterlife.
For a long time I tried to understand what made well-educated nobles from the
Middle Ages bid adieu to their comfortable lives, swing themselves up on to
horses and take part in the Crusades. They were well aware that the arduous ride
to Jerusalem lasted at least six months and passed
directly through enemy
territory, yet they took the risk. And then it came to me: the answer lies in incentive
systems. If they came back alive, they could keep the spoils of war and live out
their days as rich men. If they died, they automatically passed on to the afterlife as
martyrs – with all the benefits that came with it. It was win-win.
Imagine for a moment that, instead of demanding enemies’ riches, warriors and
soldiers charged by the hour. We would effectively be incentivising them to take
as long as possible, right? So why do we do just this with lawyers, architects,
consultants, accountants and driving instructors? My advice:
forget hourly rates
and always negotiate a fixed price in advance.
Be wary, too, of investment advisers endorsing particular financial products.
They are not interested in your financial well-being, but in earning a commission
on these products. The same goes for entrepreneurs’ and investment bankers’
business plans. These are often worthless because, again, the vendors have
their own interests at heart. What is the old adage? ‘Never ask a barber if you
need a haircut.’
In conclusion: keep an eye out for the
incentive super-response tendency
. If a
person’s or an organisation’s
behaviour confounds you, ask yourself what
incentive might lie behind it. I guarantee you that you’ll be able to explain 90% of
the cases this way. What makes up the remaining 10%? Passion, idiocy,
psychosis or malice.
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