The Power of Incentives

Life is primarily about survival. And survival is learning how to not be a sucker. Here’s how you can avoid being a sucker: follow the incentives.

Charlie Munger had choice words to say about the importance of incentives in his famous speech The Psychology of Human Misjudgement – “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, but I get some surprise that pushes my limit a little farther.”

The first book that got me started thinking seriously on incentives was Freakonomics. Munger and then Taleb reinforced its importance and it has since become a handy tool in my mental model toolkit. I aspire to be in that top 5% and this resource page is a step in that direction.

Incentive design is utterly fascinating and it’s a shame there aren’t more people who talk/teach about them explicitly. Teaching people to look for incentives and misalignment makes them a BS-detector, to borrow the term from Taleb. There’s no need for an educated populace as long as they can smell BS. The upside can take care of itself once you protect the downside.

Here are some resources on incentives, alignment, the principal agent problem and what it means to have skin in the game.

Incentives and why they’re important

Misalignment of incentives and the Principal Agent Problem

Skin in the game

Incentives and Group Behavior

Incentive Alignment and Playing Non Zero Sum Games

Tweets and Twitter Threads

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