Sometimes the World is confusing.
Things don’t go your way and people do things you can’t understand.
As a result, you spend a huge chunk of your precious time & energy feeling frustrated, angry or disillusioned.
The solution is simple.
Understand Incentives.
Unless you live in a cabin in the woods, you’ll spend most days dancing within the confines of human systems. Think your employment, or the economy you work in, or the law you abide, or the politics of your nation. All these are shaped by human interaction.
Humans are selfish. We do things that serve us. Even seemingly selfless acts, when you scratch past the surface, are rooted in selfishness. We give to charity because of the way it makes US feel.
Our self interest drives us. Which means people take action based on their personal incentives to do so.
When you understand this, and start to question the incentives of the people or person behind the system affecting you, the pieces of the puzzle will start to fit.
Or as Charlie Munger put it:
show me the incentive, and I’ll show you the outcome.
Charlie Munger
Let me share an example from my career.
Working Into A Day Off
The airline I work for has a policy that pays pilots a lump sum for working into their day off. If, on your last working day, you operate a flight touching down after Midnight, a meaningful amount of cash is added to your next pay packet.
So with the incentive identified (the cash payment), try to put your best Charlie Munger hat on, and predict the outcome?
Imagine you’re a pilot operating a flight on your last working day, and the estimated time of arrival is showing as 11:40pm.
Will you operate the flight completely normally? Will you fly and taxi the aircraft at normal speeds?
If you answered ‘yes’, then you’re a better man than me, Reg.
Any flight I operated at that time of the evening would either land before 11:30pm or 00:01am and absolutely nothing in between!
And, it wasn’t just me. If anyone in airline management cared to view the statistics of UK flight arrivals, they’d see a wildly disproportionate number of flights touchdown just past midnight.
- Incentive = payment to pilots on flights landing after Midnight
- Outcome = huge number of flights landing after Midnight which should’ve landed earlier
Consider this…
If just one flight with an average of 200 people on board is deliberately delayed by 20 minutes, that’s 66 cumulative hours, or 2.5 days, of human life completely wasted. All because of the perverse incentive of one person.
This is just a small, benign example of incentives at play.
When you get better at spotting incentives Reg, you’ll be able to understand (and even predict) outcomes that would otherwise seem surprising.