Anticynical #13: Incentive Structures
Incentives and Incentive Structures
Hi there 👋,
Welcome to the 13th edition of Anticynical! Last week I wrote about positive-sum games, situations where self-interest and other-interest are mutually compatible.
This week’s idea is incentives structures.
Idea: Incentives and Incentive Structures
In a nutshell: incentives appeal to an individual’s self-interest to perform a specific action; incentives are ubiquitous and effective, thus surprisingly powerful.
When I was in college, I noticed that the harshly grade-curved courses punished collaboration.
It felt like the students were playing a zero-sum game against one another. Helping others meant higher marks for others and a lower grade for yourself. Even otherwise helpful people were less generous, and many withheld information about what they knew. I admit even I was less helpful than I would’ve liked.
I remember having a discussion with a classmate about this. We talked about how if the grades were curved less harshly or against historical numbers, there would be more student cooperation and collaboration. It would be closer to a positive-sum game—which, arguably, is what good education should entail.
We were essentially talking about how the grade-curving created a counterproductive incentive structure for students.
Most people fail to appreciate the power of incentives and incentive structures. Incentive structures are like the proverbial water for the fish: they are everywhere, they have an effect on everything you do, and they are invisible unless you know how and where to look.
Incentive structures work… So you have to be very careful of what you incent people to do, because various incentive structures create all sorts of consequences that you can't anticipate.
- Steve Jobs
Simply put, an incentive is an appeal to an individual’s self-interest to perform a specific action.
There are many ways to classify incentives. An incentive can be positive (reward, satisfaction) or negative (punishment, avoiding penalty or guilt). It can be explicit (intentionally designed) or implicit (unintentionally created). Incentives can also be extrinsic (external rewards or punishments) or intrinsic (the action itself is the “reward”).
An incentive structure is a set of one or more incentives applied together in a context.
The earlier example of the harshly-curved course was a negative, implicit, and extrinsic incentive structure. Negative because it punished helpful behavior. Implicit because it wasn’t explicitly designed to promote unhelpful behavior (at least, I hope not). And extrinsic because the “punishment” of a bad grade is external to the action of helping.
I think I’ve been in the top five percent of my age cohort almost all my adult life in understanding the power of incentives, and yet I’ve always underestimated that power. Never a year passes but I get some surprise that pushes a little further my appreciation of incentive super-power.
- Charlie Munger
When an organization sets incentive structures in place, it does so to align its employees' self-interest with the organization's mission. Examples include bonuses, stocks, stock options, praise, and promotion.
Parents set up incentive structures to make their children behave and help them grow.
Governments and nations also set up incentives that guide their populace in myriad ways. For example, tax breaks or subsidies for green energy sources and punishment for crimes.
Once you internalize the idea of incentive structures, you start seeing them everywhere. You also notice how they evolve over time.
While writing this essay, I noticed a slight change in Amazon's delivery choices. Amazon used to offer small credit amounts (positive extrinsic incentive) if you selected "Amazon Day Delivery." Presumably, this allowed Amazon to batch a higher number of requests together and save costs. As the world has become more aware of climate responsibility, Amazon mostly just mentions that Amazon Day Delivery has "fewer boxes, fewer trips." The type of incentive is now intrinsic as it appeals to the customer's sense of responsibility and morality.1
It really is true that the company will build whatever the CEO decides to measure.
- Sam Altman
As you become more familiar with how they work, you can start looking at your life with a new lens—seeing the invisible web of incentives that influence your actions and the actions of those around you. You can also start questioning why you behave the way you do in different situations.
You can double down on the incented actions when the incentives align with your goals and values. If your company offers a biking commute subsidy and you enjoy biking, that's a sweet deal!
When they are not aligned, sometimes, just being aware of bad incentives is enough—acting with this awareness can often counteract their influence. Other times, you may have to actively work to change the incentive structures around you. And some other times, you can do nothing externally, but a lot you can do "internally"—like changing the story you tell yourself.
If your work culture encourages quid pro quo behavior, but you are a generous person, there is no reason why you shouldn't be a "giver”2—helping others without any expectations. You might have also fallen into purely transactional behavior without noticing the implicit incentives.
On the other hand, if your work incentives push you towards counterproductive habits, or you find yourself procrastinating because you're not excited about the tasks, then you might want to work on changing your incentives. How exactly you do that depends on your circumstance—you can change them yourself (if you have the power to) or discuss it with someone who can.
Question: What would you do if you could add any (reasonable) incentives at work or school?
At work, you might give yourself or others monetary incentives for completing challenging projects on time.
At school, you might choose to make homework optional if demonstrated you mastery some other way.
I'd love to hear from you…
What are some incentives that you were surprised to notice that affected you?
What incentives would you add?
Or anything else at all. Just hit reply.
Although it still offers small amounts of “digital” credit at times.
I’m using “giver” as in Adam Grant’s excellent book, Give and Take.