Tuesday, January 26, 2010

Incentives Matter

While getting my MBA, I was happy to learn one very important lesson: incentives matter. This shouldn't be a controversial statement, but when broadly applied complications arise; because if we are to believe this statement's veracity, there is an underlying premise which some cannot come to terms with.

In order for incentives to matter we must acknowledge the immutability of our nature. To be more clear, incentives can only matter when there is a static relationship between inputs and outputs. That we are predictable and act in predictable ways.

I believe most people are selfish by nature. That people generally prefer their own welfare to that of others and when given the chance, they will act in their own self interest. Someone else believes people hate to lose more than they love to win (a Nobel prize winning insight). These general statements about people may or may not be true, but if we are ever to make sense of people and their actions, we have to adopt some view of human nature.

Human nature must be constant for incentives to matter. Anyone developing policy that affects people must do two things: discern human nature and deal with it. The biggest problem we face is believing that systems which require men to act against their natures have any chance of success. They don't. Remember, "If men were angels..."


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