Power of Incentives: If you would persuade, appeal to interest not to reason. If you don't allow for self-serving bias in the conduct of others, you are again, a fool.

Charlie Munger is 99 years young, he is generous in sharing his wisdom and experience, and the story below caught my attention.

“I watched a Brilliant and worthy Harvard Law Review-trained general counsel of the Salomon Brothers lose his career there.

When the able CEO was told that an underling had done something wrong, the general counsel said, "Gee, we don't have any legal duty to report this, but I think it's what we should do. It's our moral duty."

The general counsel was technically and morally correct. But his approach didn't persuade.

He recommended a very unpleasant thing for the busy CEO to do and the CEO, quite understandably, put the issue off, and not with any intent to do wrong.

In due course, when powerful regulators resented not having been promptly informed, down went the CEO and the general counsel with him.

The correct persuasive technique in situations like that was given by Ben Franklin. He said, "if you would persuade, appeal to interest, not to reason."

The self-serving bias of man is extreme and should have been used to attain the correct outcome.

So the general counsel should have said, "Look, this is likely to erupt into something that will destroy you, take away your money, take away your status, grossly impair your reputation.

That approach would have worked. You should often appeal to interest, not to reason, even when your motives are lofty”

Another thing to avoid is being subjected to perverse incentives and second-order effects.

Perverse incentives system rewards if you behave more and more foolishly, or worse and worse.

Cobra effect

In 1900’s India, Delhi suffered a proliferation of cobras. The local government placed a bounty on them to cut the number of cobras.

The bounty was generous enough that many people took up cobra hunting, which led exactly to the desired outcome: The cobra population decreased. And that’s where things get interesting.

People became rather entrepreneurial. They started raising cobras in their homes, killing them to collect the bounty as before.

This led to a new problem: Local authorities realized that very few cobras were evident in the city, but they were still paying the bounty to the same degree as before.

City officials did a reasonable thing- cancelled the bounty.

In response, the people raising cobras in their homes also did a reasonable thing: They released all of their now-valueless cobras back into the streets.

In the end, Delhi had a bigger cobra problem after the bounty ended than it had before it began.

To be continued...

What do you think?

Laugh, and Learn every day.

You can read my writings at view all blogs.