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Broad incentives

'Show me the incentive and I will show you the outcome' - Charlie Munger

Thank you for joining me for blog 33, highlighting decision-making and the brain. This is my public exploration of what drives decision-making and how we can use that information to make better decisions, resulting in better outcomes.

We are currently exploring group dynamics and how that impacts decision-making. Today's question is ‘how can broad incentives create unexpected behaviour?’. We often think of incentives as paid overtime, but to really understand incentives we probably need to consider what I group as 'broad incentives'. The key take-away from today's blog is that you need to create the right atmosphere for truth-telling. If groups do not tell each other the truth they will make bad decisions.

What are incentives

An incentive is a thing that motivates or encourages someone to do something. We are used to reading about incentives as a monetary reward and it is spoken about a lot in the world of business about how we can make people work harder or smarter to improve productivity or profitability.

I think that definition of incentives is too narrow, so in my mind I replace it with a simpler idea of 'broad incentives' - people do what they see as best or easiest for them.

Examples of broad incentives in everyday life

Imagine this situation - a person older than you, asks you, ‘how old do I look?’. It seems like an innocent enough question, but then you think for a second - what if I guess too high and they get offended? What will happen if I guess too low? You weigh up what to say and guess a number lower than you really think. In that moment you have aligned with your incentives – you avoided offending someone.

It is similar if you were to see a child’s drawing, you are likely to be encouraging and say it is lovely whether that is your true opinion or not.

These two examples highlight that where broad incentives are not aligned you will skew your feedback. There are good-hearted mistruths that results in non-objective discussion. Distortions like this happen when people do not want to feel uncomfortable, wish to avoid confrontation/offence/embarrassment or save themselves mental effort. Broad incentives need to be aligned to encourage people to give you the information you want.

Shooting messengers

We are often told to not shoot the messenger. Shooting messengers is first mentioned in Greek literature and relates to a an ancient Armenian king who lost his temper when receiving bad news. Will people tell you bad news if you create an environment where messengers are not treated well?

I often wonder why leaders who have many loyal followers sometimes seem to be so poorly informed. It might be because those in their inner sanctum would prefer to avoid the hard conversation with a leader who does not want to hear bad news.

'Dumb' questions

You need to be really smart and confident to ask the 'dumb' question. We often fear asking the ‘dumb question’ because it might publicly reveal a lack of knowledge. Through wishing not to seem stupid many things go unquestioned.

So what:

How is this all relevant to decision-making? Here are three take-aways I want to leave you with before we pick it up next week:

1) Incentives are broader than money. Giving people feedback has huge social and cognitive implications. We often weigh up competing priorities and that impacts our feedback accordingly - it is not as simple as lies and truth.

2) To get people to speak the truth there needs to be no penalty for bearing bad news or asking 'dumb' questions.

3) People might skew their feedback to avoid confrontation/offence/embarrassment or save themselves mental effort.

Thank you for joining. Next week - 'Can we really be objective?'.


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