Incentive Superpower
Tendency #1 in Munger's 25 tendencies. Munger places it first because, despite everyone thinking they understand incentives, almost everyone underestimates their power — including Munger himself, who says he gets surprised by incentive effects every year.
Core Principle
"Never, ever, think about something else when you should be thinking about the power of incentives." Incentives don't just change behavior — they change cognition. People unconsciously rationalize bad behavior that serves their incentives. Munger calls this incentive-caused bias: the surgeon who genuinely believes every gallbladder needs removing, the broker who sincerely recommends the high-commission product.
Key Examples
| Case | Incentive Mechanism |
|---|---|
| FedEx night shift | Paid per hour → slow. Paid per shift (go home when done) → fast. |
| Xerox sales force | Commission structure pushed inferior machine over superior one |
| Mutual fund industry | Raise commissions → bribe brokers → trillion dollars in sales of suboptimal products |
| Soviet communism | "They pretend to pay us and we pretend to work" |
| Cash registers | Made dishonesty mechanically difficult → moral instrument |
Antidotes
- System design — make bad behavior hard (cash registers, sound accounting, internal audits)
- Distrust proportional to advisor benefit — especially fear advice that is especially good for the advisor
- Learn your advisor's trade — reduces information asymmetry
- Granny's Rule — structure your own incentives: unpleasant task first, reward after (grannys-rule)
Connection to Other Concepts
- gaming-of-systems — incentive-caused bias is the psychological engine behind all system gaming
- trading-edge — understanding what incentives drive other market participants reveals edge opportunities
- four-laws-of-behavior-change — Clear's "make it satisfying" is the constructive application of reward superpower