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Great Incentives VS. Incentives Gone Wrong (& Cobras Too)

Great Incentives VS. Incentives Gone Wrong (& Cobras Too)INCENTIVES ARE EVERYTHING/INCENTIVES GONE WRONG ARE FASCINATING!

Great incentives create great outcomes.

But unfortunately, humans are astonishingly bad at establishing incentives – a point investor, entrepreneur, and writer, Sahil Bloom recently made in a fascinating Twitter thread.

Many people, myself included, have suffered from an inability to create the right incentives, which often lead to manipulation, unintended consequences, and missed opportunities for success.

Bloom’s examples of “unintended consequences” (listed below) are so interesting that they are the main reason I am writing this blog.

I am also writing this blog for everyone who has a team or an assistant of any kind, as these tips can prove invaluable.

MEASURE VS. TARGET

Bloom explains that there are two types of incentives:

  • Intrinsic: created by self-interest or desire.
  • Extrinsic: created by outside factors (reward or punishment).

Anyone who works with people and/or manages a team will at some point need to set effective extrinsic incentives.

According to Bloom, “In a very simple model, extrinsic incentives typically involve two key components: the measure and the target. The measure is the metric that the individual or group will be judged upon. The target is the level of the measure at which a reward (or punishment) will be initiated.”

Here is where most people run into a problem though: If a measure of performance becomes a goal, people will optimize for it, regardless of the consequences.

UNINTENDED CONSEQUENCES

Bloom gives three great examples of this happening throughout history:

  1. COBRAS IN 19th CENTURY INDIA. There were too many cobras so the Brits offered bounties for every cobra head – thinking that was a good measure. The locals though started to breed cobras as a result, so the British stopped the bounty – at which point the locals released all of their captive cobras and the population of cobras ended up higher than ever.
  2. AMAZON’S TURNOVER TARGET. Amazon founder, Jeff Bezos, believed high turnover at a company was good, so managers had to hit a certain firing target every year. As a result, managers started to hire bad employees with the sole intention of firing them (to ensure they’d hit their target).
  3. WELLS FARGO’S ACCOUNT OPENING TARGET. Wells Fargo gave its employees strict targets for new accounts, and, as we all know, those employees did everything in their power to hit those targets – including committing fraud at a level that nearly brought down the entire bank.

HOW TO SET EFFECTIVE INCENTIVES

In the above examples, cobra heads, employee turnover, and new account openings were all easy to measure quantitatively but missed the bigger picture, falling victim to the McNamara Fallacy (the flawed assumption that what can’t be measured isn’t important).

Bloom reminds us that in order to avoid the pitfalls of extrinsic incentives, we need to heed these incentive fallacies: (1) don’t just measure what is easy to measure; (2) don’t measure things that will just impress the boss or the public; and (3) don’t think too narrowly about the desired outcomes.

TLDR: An incentive is only as effective as the clarity of its dissemination and the ability and willingness to adjust it based on new information.

I could discuss this in much more detail but I want to encourage readers to read the Twitter thread – b/c it is so interesting, and then create better incentives. 😊

Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167

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