The supine support offered to the new US President by multiple technology billionaires may be frustrating to some people but should be a surprise to nobody. They are responding to incentives, and incentives, more than anything else, drive behaviour. Our desire to understand and map the intricacies of human activity can sometimes lead us to overlook this inescapable truth. 

In his wonderful talk: ‘The Psychology of Human Misjudgement’, Charlie Munger states:

“I think I’ve been in the top five percent of my age cohort almost all my adult life in understanding the power of incentives, and yet I’ve always underestimated that power.”

Humans are, of course, wonderfully complex, intricate and often irrational beings, but in some ways we are simple and predictable – particularly when it comes to incentives. If we had to anticipate the behaviour of an individual or group, the one thing we would want to know, far more than anything else, is the incentives at play.

This raises the question – but what incentives? We can be motivated and incentivised by many things, but if we start with money and power (and everything related to those aspects) we are probably on safe ground.

Despite the importance of incentives, it still feels like a neglected subject. Corporations spend vast amounts of money and time trying to understand individual and team behaviour, with barely a passing reference to the thing that is inevitably driving most of it – incentives.

One of the central reasons that big groups struggle to make good decisions or large companies become woefully inefficient is because with size comes increasingly divergent and misaligned incentives.

Misplaced incentives can have a profound impact on society. The seeming inability of corporations and governments to favour long-term thinking over the prospect of short-term wins is largely an incentive problem. Neither the CEO focused on the market reaction to their company’s next set of results, nor the politician two years away from re-election have incentives that encourage taking a longer-term perspective.

If incentives are so important to our behaviour, why do we so often ignore their influence? An undoubted issue is that few of us are willing to admit that our choices are driven by such brazen and base things. We almost always cloak behaviour driven by incentives into some more fulsome and thoughtful justification to make it palatable – both to other people and ourselves.

A key element of behaviour change is shifting incentives. If we observe divergent behaviour then we should immediately check whether the incentives have altered. While if we want to promote new behaviours then incentives are the most effective place to begin.

The first question we should ask when we are considering anything to do with behaviour or decision-making is – how are people incentivised? The answer will explain a lot.

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My first book has been published. The Intelligent Fund Investor explores the beliefs and behaviours that lead investors astray, and shows how we can make better decisions. You can get a copy here (UK) or here (US).