Under-recognition of the power of what psychologists call ‘reinforcement’ and economists call ‘incentives.’
Well you can say, “Everybody knows that.” Well I think I’ve been in the top 5% of my
age cohort all my life in understanding the power of incentives, and all my life I’ve
underestimated it. And never a year passes but I get some surprise that pushes my limit a
little farther.
One of my favorite cases about the power of incentives is the Federal Express case. The
heart and soul of the integrity of the system is that all the packages have to be shifted
rapidly in one central location each night. And the system has no integrity if the whole
shift can’t be done fast. And Federal Express had one hell of a time getting the thing to
work. And they tried moral suasion, they tried everything in the world, and finally
somebody got the happy thought that they were paying the night shift by the hour, and that
maybe if they paid them by the shift, the system would work better. And lo and behold,
that solution worked.
Early in the history of Xerox, Joe Wilson, who was then in the government, had to go back
to Xerox because he couldn’t understand how their better, new machine was selling so
poorly in relation to their older and inferior machine. Of course when he got there he
found out that the commission arrangement with the salesmen gave a tremendous incentive
to the inferior machine.
And here at Harvard, in the shadow of B.F. Skinner -- there was a man who really was into
reinforcement as a powerful thought, and, you know, Skinner’s lost his reputation in a lot
of places, but if you were to analyze the entire history of experimental science at Harvard,
he’d be in the top handful. His experiments were very ingenious, the results were counter
intuitive, and they were important. It is not given to experimental science to do better.
What gummed up Skinner’s reputation is that he developed a case of what I always call
man-with-a-hammer syndrome: to the man with a hammer, every problem tends to look
pretty much like a nail. And Skinner had one of the more extreme cases in the history of
Academia, and this syndrome doesn’t exempt bright people. It’s just a man with a
hammer…and Skinner is an extreme example of that. And later, as I go down my list, let’s
go back and try and figure out why people, like Skinner, get man-with-a-hammer
syndrome.
Incidentally, when I was at the Harvard Law School there was a professor, naturally at
Yale, who was derisively discussed at Harvard, and they used to say, “Poor old Blanchard.
He thinks declaratory judgments will cure cancer.” And that’s the way Skinner got. And
not only that, he was literary, and he scorned opponents who had any different way of
thinking or thought anything else was important. This is not a way to make a lasting
reputation if the other people turn out to also be doing something important.
This was speech by Mr. Munger in harvard in 1995. He clearly said that incentives can greately motivates one, and can manipluate his will even if its wrong thing to do,
Raghuram rajan said same thing in 2006 and in 2008. Incentive culture of wallstreet led to the biggest loss to the Banks which FED is still trying to recover by pumping 4.2 trillion$ in last 4 years.
indirectly, he was right even before the problem occurs.
