Show me the incentives and I will show you the outcome. – Charlie Munger
Munger, Warren Buffett’s wise partner, thinks incentives matter; indeed, he thinks they’re everything. I wish I’d understood this at an earlier age. If I had, then I probably would have understood better myself and others and been more effective at my endeavors. And life would have been just a bit easier to navigate.
Patrick O’Shaughnessy wrote about misguided incentives.
In Vietnam, under French colonial rule, there was a rat problem. To solve the rat infestation, the French offered a bounty on rats, which could be collected by delivering a rat’s tail as proof of murder. Many bounties were paid out, but the rat problem didn’t improve. Officials soon noticed rats running around without tails–people were cutting off the tails and releasing the rats to breed, so as to increase the pool of potential bounty revenue for themselves.
The same thing happened in Colonial India: a bounty was offered on cobras because they were attacking people, which caused people to breed cobras for more bounties, and ultimately resulted in a higher cobra population when the bounty system was abandoned and the breeders released their now worthless snakes.