Incentives

Say No More

Incentives drive behavior.

Self-interest makes the world go round.

Consider the total utility of the given incentive when predicting behavior.

This incentive story is recounted by Charles Munger in ‘Poor Charlie’s Almanack’:

From all business, my favorite case on incentives is Federal Express. The heart and soul of its system — which create the integrity of the product — is having all its airplanes come to one place in the middle of the night and shift all the packages from plane to plane. If there are delays, the whole operation can’t deliver a product full of integrity to Federal Express customers.

And it was always screwed up. They could never get it done on time. They tried everything — moral suasion, threats, you name it. And nothing worked.

Finally, somebody get the idea to pay all these people not so much an hour, but so much a shift — and when it’s all done, they can go home. Well, their problems cleared up overnight.