Power of Incentives

Charlie Munger who passed on his ultimate wisdom to the human species like you and me through his valuable speeches. I’m sharing the learnings from his Speech The Psychology of Human Misjudgment.

In this speech he shares the psychology-based tendencies that, while generally useful, often mislead. The very first tendency in his list is Reward and Punishment Superresponse Tendency.

Power of Incentives

As Charlie Munger shares one of his favorite case about power of incentives is the Federal Express case. I’m borrowing the words from Poor Charlie’s Almanack to let Charlie Munger explain himself the Federal Express Case,

The integrity of the Federal Express system requires that all packages be shifted rapidly among airplanes in one central airport each night. And the system has no integrity for the customers if the night work shift can’t accomplish its assignment fast. And Federal Express had one hell of a time getting the night shift to do the right thing. They tried moral suasion. They tried everything in the world without luck. And, finally, somebody got the happy thought that it was foolish to pay the night shift by the hour when what the employer wanted was not maximized billable hours of employee service but fault-free, rapid performance of a particular task. Maybe, this person thought, if they paid the employees per shift and let all night shift employees go home when all the planes were loaded, the system would work better. And, lo and behold, that solution worked.

Like as you can learn from the Federal Express Case that just by changing the way of incentive you can get all the work done. It’s the Power of Incentives.

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