To the man with a hammer, every problem looks like a nail. But the power of incentives is a lot more pervasive than that.
'Well 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. And never a year passes [without me] getting some surprise that pushes my limit a little farther.' That was Charlie Munger, Berkshire Hathaway Vice-Chairman, speaking before the Harvard Law School on the psychology of human misjudgement.
Munger is resolutely focussed on the power of incentives to influence human behaviour. In his speech he recounts a number of examples where incentives have been used for both good and ill. Federal Express was one such example. It has to transport packages within its network to a central location for sorting before sending them on to their final destination. For the system to work, the sorting must be quick and efficient. The trouble was that, for a time at least, it wasn't. The company tried all sorts of incentives without much success. Then management came up with the idea of paying their staff by the shift, instead of for the shift. In other words, when the sorting was done the staff could go home. As you can guess, along with the staff at the end of their shift, the problem vanished almost immediately.
Getting rich at others' expense
It's a fantastic example of building a better system through incentives. But have a look around and you'll see all sorts of incentive systems that don't operate in the interests of those who generally fund the system; Does your fund manager charge a base percentage fee on the amount under management regardless of performance? Does your financial advisor receive trailing fees and commissions from those funds and investment houses whose products he sells, even if they fail to provide an adequate return? What about stock brokers? Don't they get a clip of the ticket every time a stock is bought or sold regardless of the profit or loss sustained? In the finance industry there are no shortage of incentives, it's just that most of them are structured to benefit not you but someone else.
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