Reward & Punishment Superresponse
People respond powerfully to incentives—often in unintended ways.
Key Principle
Show me the incentive and I will show you the outcome.
Understanding Reward & Punishment Superresponse
Munger considers this the most important bias because incentives drive so much behavior. People and organizations will do almost anything that's rewarded, and avoid almost anything that's punished—regardless of whether those behaviors are wise or ethical.
The danger is that incentive systems often reward the wrong things. Sales commissions can encourage pushy tactics. Quarterly earnings targets can promote short-term thinking. Academic publishing incentives can favor quantity over quality.
FedEx famously solved a shift-change productivity problem by paying workers per shift completed rather than per hour. The night shift, which had been slow and inefficient, suddenly became the fastest. The workers were the same; only the incentive changed.
Real-World Examples
- Wells Fargo employees created millions of fake accounts because they were incentivized by account opening quotas.
- Surgeons perform more surgeries when paid per procedure vs. salary.
- Lawyers bill more hours when paid hourly vs. fixed fee.
- Salespeople push products with higher commissions regardless of customer fit.
How to Apply This
Before trusting advice, ask: How is this person compensated?
Design incentive systems to reward outcomes you actually want
Look for misaligned incentives when systems produce bad results
Remember: you respond to incentives too, often unconsciously
Common Mistakes to Avoid
- Believing people will "do the right thing" despite contrary incentives
- Creating incentives without considering gaming and unintended consequences
- Ignoring your own susceptibility to incentive effects
- Assuming good intentions override bad incentive structures
Notable Quotes
"Never, ever, think about something else when you should be thinking about the power of incentives."
— Charlie Munger
"Show me the incentive and I will show you the outcome."
— Charlie Munger