Incentives
People respond to incentives. Including you. Understanding incentive structures explains behavior better than personality, intention, or willpower.
The Core Principle
“Show me the incentive and I will show you the outcome.” — Charlie Munger (Kaufman, 2005)
If a behavior persists, something is rewarding it. If a behavior doesn’t happen, something is punishing it or failing to reward it. Economists call this the “principal-agent problem”—when incentives diverge, behavior follows incentives, not intentions (Jensen & Meckling, 1976).
Incentive Types
| Type | Mechanism | Example |
|---|---|---|
| Financial | Money gained/lost | Salary, fines, bonuses |
| Social | Status, approval, belonging | Likes, praise, inclusion |
| Psychological | Pleasure, pain avoidance | Dopamine hit, anxiety relief |
| Temporal | Immediate vs. delayed | Instant gratification vs. future reward |
Second-Order Effects
First-order: Direct consequence of action. Second-order: Consequence of the consequence. Levitt and Dubner’s Freakonomics popularized this analysis—incentives often produce unintended consequences (Levitt & Dubner, 2005).
| Action | First-Order | Second-Order |
|---|---|---|
| Eat cake | Pleasure | Weight gain, guilt |
| Exercise | Discomfort | Energy, health, confidence |
| Skip savings | More spending money | No emergency fund, stress |
| Check phone | Dopamine | Attention fragmentation |
Rule: Always ask “And then what?” at least twice.
Misaligned Incentives
When what’s rewarded differs from what you want:
| Context | Incentive | Misalignment |
|---|---|---|
| Social media | Engagement | Not truth, depth, or wellbeing |
| News | Clicks | Not accuracy or importance |
| Junk food | Immediate pleasure | Not long-term health |
| Your own brain | Short-term comfort | Not long-term goals |
Cross-Domain Incentive Analysis
| Domain | Surface Incentive | Hidden Incentive | Better Alignment |
|---|---|---|---|
| Health | Taste, convenience | Long-term function | Make healthy easy, unhealthy hard |
| Wealth | Spending pleasure | Security, freedom | Automate savings, make spending visible |
| Social | Avoid awkwardness | Deep connection | Reward vulnerability, schedule contact |
| Meaning | Comfort, distraction | Engagement, growth | Environment design, accountability |
Designing Better Incentives
For Yourself
- Make good behavior easy (reduce friction)
- Make bad behavior hard (add friction)
- Create immediate rewards for long-term behaviors
- Make consequences visible (tracking, accountability)
Questions to Ask
- What am I actually being rewarded for?
- What behavior does this system encourage?
- Who benefits from my current behavior?
- What would I do if incentives were different?
The Meta-Incentive
Your environment is full of incentive structures designed by others—for their benefit, not yours.
- Social media: Designed to maximize your engagement, not wellbeing
- Food industry: Designed to maximize consumption, not health
- News: Designed to maximize attention, not understanding
Defense: Design your own incentive structures. Don’t accept the defaults.
Related
- Environment Design — Shaping incentives through friction
- Measurement Error — Metrics create incentives
- Feedback Loops — Incentives need feedback
Never attribute to personality what can be explained by incentives. Change the incentives, change the behavior.