CODEXCard 5 of 12 · 12 Mental Models
Power of incentives
Show me the incentive.
The power of incentives is the principle that behaviour follows rewards. In his 1995 talk on the psychology of human misjudgment, Munger said that he had underestimated the force of incentives for most of his life, even though he already thought he understood it well. He put reward and punishment at the top of his list of tendencies.
It works because incentives operate quietly and constantly. People rarely announce that they are following the money or the scorecard, and many do not notice it themselves. Yet when a salesperson is paid on volume, a team is judged on a single number or a department is funded by how much it spends, behaviour bends toward those signals far more reliably than toward mission statements.
The limit is sliding into cynicism and assuming people care about nothing but rewards. Many act from loyalty, pride or principle. The model is most useful as a diagnosis: when the same unwanted behaviour keeps recurring, and speeches and reminders do not change it, the incentive structure is usually the explanation.
This model connects to Goodhart's law, where a metric used as a target distorts what it was meant to measure, and to second-order thinking, since changing an incentive always triggers new reactions.
Example
A call centre rewards agents for keeping calls short, then wonders why customers keep calling back with the same problem. Agents are doing exactly what the scoreboard asks: ending calls fast. Measuring whether problems were solved on the first call would point their effort in a better direction.
Try it this week
Pick one behaviour that frustrates you this week and write down exactly what that person is rewarded for.
From 12 Mental Models (Charles T. Munger · 1995).
