Search

The Power of Incentives

"An incentive is a bullet, a key: an often tiny object with astonishing power to change a situation."

Steven Levitt

 

Incentives are what govern every action, sentence, and idea that are the makeup of everyday life. Steven Levitt categorises incentives into three main groups: social incentives, economic incentives, and moral incentives. As a race primed for a social environment, it’s likely that these incentives have grown in complexity, and necessity, as society has become increasingly difficult to navigate.


Seldom do we truly realise the implications of meta-interactions on platforms like social media, a melting pot of opinion and narrative. The social incentive to integrate ourselves into a wider community and identify with the thoughts, feelings, and (potentially controversial) viewpoints of others leads us to act in a potentially unnatural way; consider the attention-seekers and the self-qualified ‘experts’. Some people just cannot shake the pull of the crowd.


Economic incentives have now also become increasingly intertwined with social incentives. Social media is not only a platform for communication but also commerce; formal and informal marketplaces are ubiquitous now on almost all social media platforms. Individuals play to the crowd to foster an active market for their products, often posing as (or genuinely being) a confidant and friend. ‘This is no different from the salesperson strategy employed for hundreds of years’! I hear you say. Alas, never before have these two incentives been more symbiotic. The proliferation of internet fraudsters is an egregious example of how the internet is becoming a hotbed and breeding ground for opportunists. By being part of the crowd, there is often an opportunity to profit from your neighbour.


The final incentive could be considered the force that drives this complex equation into a stable equilibrium. ‘Moral incentive’ is effectively a synonym for ‘moral compass’, and affects the decisions we make that require value judgements. For many, moral judgements are weighted more heavily than social and economic incentives, often due to the pang of guilt experienced when engaging in an activity creating negative externalities, and the warm sensation that is derived from altruism (a cynic might argue that altruism is actually a social incentive, and that we donate to charity to be held in higher esteem by our peers.) Ethics-induced vegans would perhaps be more comfortable financially if they chose to eat meat, and its derivatives. In terms of value for calories, it is ostensible that veganism could be a financially counter-productive activity. Furthermore, assuming the position of the average person, they would not be ostracized in following the crowd and adopting an omnivorous diet; in fact, they might even be more socially integrated due to their ability to discuss cuts of steak at cocktail parties. For them, the deciding incentive is the moral one.


To Levitt and Dubner, there are very clear relationships between actions and outcomes, and the catalysts for these actions are incentives. To truly understand an outcome, one must understand why the decision was made, even if the answer is not glaringly obvious; many incentives are underlying and hidden. This is especially true in the case of organisations with esoteric operations; their opacity can make it difficult to create a biopsy of their behaviour. One such example is Wall Street. The sub-prime mortgage lending meltdown that catalysed the near implosion of the world economy in 2008 has been explained, convincingly, by Michael Burry. He argues that the toxic economic incentives associated with the monstrous returns derived from the mortgage bond business and the incredibly low mortgage payments for individuals eventually proved too powerful for both consumers and lenders, resulting in the compromise of moral incentives. Again, this economic incentive was aided by a social incentive for both parties. The lenders looked around and saw their fellow bankers using similar practices, and felt that by doing the same thing they weren’t accountable; or that is at least the people who understood what they were doing. Furthermore, they likely knew that in the case of their investments failing, they knew they would be bailed out, furthering the perverse economic incentive that they had been dealt. On the other hand, the borrowers saw their neighbours, friends, and family all getting themselves a great deal on their mortgage, and felt that by doing the same they were somewhat invincible. Safety is, in the short-run, in numbers.


So, what can we do? When we question a judgement, an action, or provocation, we should take a step back, and consider the economic, moral, and social incentives that may be at play. By doing this you may better understand a friend or an enemy. Furthermore, it may be of great personal utility to examine your own personal incentives, and make sure that they are aligned with your beliefs and intentions. It may be easy for us to idealise about what we would do in a hypothetical situation, but if the correct set of incentives are not present then we have a much lower chance of realising our intentions. The friction created and destroyed by incentives creates endless opportunities. Never underestimate the power of incentives.




24 views0 comments

Recent Posts

See All