Cause of misjudgment № 1
Reward and Punishment Superresponse Tendency
People respond to incentives far more strongly than almost anyone expects, so to predict behavior, look first at what is being rewarded.
“Show me the incentive and I will show you the outcome.”— Charlie Munger
Munger put this first because he thought it was the single most powerful force in human behavior, and the one people most consistently underrate. We like to believe that reasons, ethics, and good intentions drive what people do. Far more often, the reward structure does. Change what gets paid for, praised, or punished, and you change the behavior — frequently to a degree that looks absurd in hindsight.
The classic case Munger told was FedEx. The company could not get the night shift to finish sorting packages on time, no matter how much management pleaded. The problem was that workers were paid by the hour, so finishing fast was against their interest. Once FedEx paid them by the shift instead — go home when the work is done — the bottleneck vanished overnight. Nothing about the people changed; the incentive did.
The practical lesson cuts two ways. When you design a system, assume people will do exactly what you pay them to do, including the dumb or destructive version of it, so be careful what you reward. And when you are trying to understand why an organization, a salesperson, or an “expert” behaves strangely, do not start with their stated motives — start by asking who benefits and how they are compensated. Munger’s standing advice was to distrust the advice of anyone whose income depends on the advice they give you.
