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

• Freakonomics Chapter 1 Summary on Incentives
• The Power of Incentives – Inside the Hidden Forces That Shape Behavior (Farnam Street)

Misalignment of incentives and the Principal Agent Problem

• Misalignment of Incentives and the Principal Agent Problem
  
• Medium, and The Reason You Can’t Stand the News Anymore (Incentives gone awry in the news industry)
  
• Is the staggeringly profitable business of scientific publishing bad for science? (Academia suffers from perverse incentives and rent-seeking)
• The Strategy Puzzle of Subscription-Based Dating Sites (Classic case of principal agent problem)
• Our Minds Have Been Hijacked by Our Phones. Tristan Harris Wants to Rescue Them (Incentives and the Attention Economy)
• The problem with Harvard Business School case studies (A case against the Case Method)

Skin in the game

• The Code of Hammurabi – The Best Rule To Manage Risk (Farnam Street) or Removing Risk Asymmetry 
• What the corporate world lacks: Disincentives to BS
• 5 Things You Can Learn About Investing from Nassim Nicholas Taleb’s Skin in the Game
• Lack Of Skin In The Game Is The Root Of Our Problems
• Under the Skin – Book Review and Profile
• Straight from the horse’s mouth – What does SITG mean for Nassim Taleb?

Incentives and Group Behavior

• The Dunbar Number as a Limit to Group Sizes
• Dunbar, Altruistic Punishment, and Meta-Moderation
• I can tolerate anything except the outgroup (Slate Star Codex)

Incentive Alignment and Playing Non Zero Sum Games

• Meet the Woman Who’s Created the 21st Century Finance Model for Emerging Technologies – Riva Tez
• Lambda School is mastering how to align student & school incentives
• How to Make Wealth (Paul Graham)

Tweets and Twitter Threads

• Incentives in domains with infinite variety
• Outrage culture, the attention economy and group behavior
• Incentive design and Goodhart’s Law
• Design elements in capitalism, fat tails and power law outcomes
• Incentives and capitalism
• Lambda’s mastery-based progression program and why incentives matter
• Incentive design as a multiscale problem
• Cooperation and localism
• Scale, management and bureaucracy
• Great companies are built on maximizing aligned incentives