Notes

In the 19th century, French colonial rulers in Hanoi introduced a reward system to control a rat infestation: a bounty was given for each dead rat presented to the authorities. This led to not only the extermination of rats but also their breeding for the purpose of collecting the reward.

When the Dead Sea Scrolls were discovered in 1947, archaeologists offered a finder’s fee for each new parchment. Instead of finding more scrolls, they were torn apart to increase the reward. A similar incentive was offered in China in the 19th century for discovering dinosaur bones. Farmers found some on their land, broke them into pieces, and cashed in.

Modern motivators are no different: Company boards offer bonuses for achieving targets. As a result, managers invest more energy in trying to lower the targets than in growing the business. These are examples of what Charlie Munger calls the incentive super-response tendency: People respond to motivators by doing what is in their best interests.

Good motivator systems balance the reward. For example, in ancient Rome, engineers were made to stand underneath their bridges during opening ceremonies. Poor incentive systems overlook and sometimes even pervert the bad aim. For example, censoring a book makes its contents more famous.

If you want to influence people or organizations’ behavior, motivators often work better than talking about values and visions.

Think about this: In old times, smart nobles would leave their nice homes, get on horses, and go to the Crusades. They knew that the tough trip to Jerusalem took at least six months and went through places where enemies lived; but they still went. If they came back alive, they could keep the things they won in war and live as rich people. If they died, they would go to the afterlife as heroes—with all the good things that came with it.

What if soldiers got paid by the hour instead of taking enemies’ stuff? We would be making them want to take as long as possible, right? So why do we do this with lawyers, architects, consultants, accountants, and driving teachers? It’s better to forget about hourly rates and always agree on a fixed price before.

Also, be careful of investment advisers who say good things about specific financial products. They don't care about your money but about earning a commission on these products. The same goes for business plans of entrepreneurs as well.

In the end: Watch out for the super-response tendency of incentives. If you don't understand why a person or a group is doing something, ask yourself what reward might be behind it. I promise you that you’ll be able to understand 90 percent of the cases this way.