Perverse Incentives

An Orienting Principle for Human Behaviour

Moving around a lot as a kid, I learned how to observe people and ingratiate myself with them. I quickly figured out what the slang is, how to make people laugh, and how worm my way into the first available friend group.

There was one particularly interesting day that I remember, while I was in the act of worming; I was in the first grade, playing in the sandbox with a couple of my other friends, Jacob and Alex.

Jacob, being the leader of our new minted friend group, jumped off the edge of the sandbox and hurt himself on the concrete below. He ended up scraping his elbow pretty bad, and, naturally, he started crying.

The supervising teacher wanted to make him feel better, and so she gave him a caramel to distract him from the pain.

That’s not the interesting part.

The interesting part is that, Alex, observing this behaviour, quite literally launched himself over the sandbox as well, intentionally falling on his own arm. That’s right, this little kid was trying to injure himself on purpose.

Well, being a first grader, he succeeded. Much like Jacob, he got a bruise on his arm, and the pain was enough to get him crying as well. And, much like Jacob, the supervising teacher appeased the little pipsqueak by giving him a caramel.

Mission accomplished.

**

Considering the chaotic times we live in, I’ve been trying to determine some organizing principles for the world — some good rules of thumb that I can apply to every situation, big and small, in order to make it more understandable to my little mind. Simultaneously, I’ve also been trying to come up with a reliable moral framework that can help me determine good from bad from a rational point of view.

In these two seemingly disparate pursuits, I ended up converging on an orientation point.

You see, I’ve come to realize that most of the bad things in this world generally come from one of two sources. Either it is the result of

1. Bad people doing bad things, or

2. Good people doing bad things.

The former scenario is rather intuitive; bad people do things because they are… bad people. It’s only natural. The second scenario, however, is a much more interesting study.

You see, a good person does a bad thing when they believe it to be a good thing. But why would somebody believe a bad thing is a good thing? The answer is simple: when they are being rewarded for it.

And this right here has, in its heart, the organizing principle I’ve been looking for in the last little while.

The vast majority of people in this world operate according to a personal set of incentives, and when these incentives net out to a non zero value in any given moment, they will act in service to these set of incentives. The default mode of operation that comes natural to the human state is a cross between utilitarianism and hedonism, and, as such, they are constantly calibrating the respective landscape of hedonic utility.

— Me, in fancy text

Or, in plain English: People will do seemingly weird things if they find it rewarding enough.

The more I look around and observe the many facets of my own life, I see this principle in play.

At work, it explains why employees intentionally choose to be in efficient. Why be the hardest worker in the group, when the reward for this work only leads to more work?

Why phone bills are so high? The telephone companies (in Canada) do not get rewarded for competing with one another, and so they have no incentive to offer better rates so as to retain their consumers.

It even explains what I saw all those years ago in the sandbox. Alex simply copied Jacob‘s behavior, so that he could get his reward: that sweet, sweet caramel.

And that’s what I love about this principle. Simple as it is, it applies to every single level of analysis, from the personal and the mundane, to the societal and all encompassing.

For example, we can see these systems of rewards play themselves out in politics. The politicians (on either side of the aisle) have no real need to cater to children, or the extremely poor; neither of these groups have the political or monetary power to influence them. It’s much easier to spend all your time appeasing a small group of super contributors.

Similarly, these incentives explain why social media is so addictive and depressing; they need to retain your attention, so they fill your head with the most bombastic news, regardless of the accuracy or representativeness of the actual feed.

The cost of university, the 2008 housing crisis, climate change, the opioid epidemic in the U.S.… There are endless examples that can be explained quite thoroughly through the lens of rewards. The common thread is simple enough to grasp: the key decision makers were rewarded for taking action that was ultimately harmful to the broader populace. The professor chooses the textbook, but he does not have to buy it; the financial broker profits from selling the loan, but it is not his house that becomes foreclosed; the company that pollutes the river makes a handsome profit, without any obligation to clean up the river itself; the doctor makes a percentage of profits off of the pills, but he is not the one addicted.

It even explains more morbid examples, such as those who engage in the practice of self harm (cutting). For the longest time this did not make sense to me — but when I looked at it from the lens of reward, the absurdity dissipates. People who cut themselves feeling natural high from the pain; the physical act of striking the blade against one‘s flesh quite literally produces a set of endorphins (short for endogenous morphine) that feels, well, rewarding.

**

Rarely are the incentive structures of any given system completely laid out from the very beginning. If it was, companies would not need legal teams, and there would never be any unintended consequences to our actions.

In reality, any system that has many actors/players will always leave open the possibility of exploitation.

The best example of this is the Cobra Effect: when the British were in India, they paid a bounty for every snake that was killed. The snake population was very high at the time, and becoming a general nuisance. The Indians, initially obliging with the rule, eventually came to realize that they would get more money if they simply farmed the snakes and immediately killed them. After some time, the British realized the mistake, and stopped giving the reward. The Indians, however, had all of these new snakes they had created — leaving them with more nuisances than ever.

More generally, people will create rules, but ultimately the rules will be circumnavigated, or otherwise cause people to act in strange and perverse ways. This usually comes about when the people making the rules:

1. Do not understand human nature, or otherwise

2. Do not understand how these rules will be applied scale. 

A funny example.

In conclusion

So the next time you observe strange behaviour that you don’t understand, ask yourself how rewards them. It might not be immediately obvious, but I find that pondering along this line of thought generally provides clarity. It allows one to pull the thread of human behaviour and get a broader understanding of how people work in general.

It’s an organizing principle — one that allows you to occasionally understand people better than themselves.

Congratulations, you made it to the end of this article.

Here’s your caramel.