The incentive super-response tendency was first espoused by businessman Charlie Munger. In short, he said that incentives are the most important element in work for hire and that often people respond to incentives by doing what is in their best interest. Munger says, “One of the most important consequences of incentive superpower is what I call ‘incentive caused bias.’ A man has an acculturated nature making him a pretty decent fellow, and yet, driven both consciously and subconsciously by incentives, he drifts into immoral behavior in order to get what he wants, a result he facilitates by rationalizing his bad behavior [like a salesman who harms her customers by selling them the wrong product because she gets paid more for selling it, versus the right product]. The power that incentives and disincentives have on the actions of others cannot be overstated.”
For instance, in its early days FedEx struggled with a critical problem. Their reputation depended on delivering packages on time and a key requirement was getting packages loaded on planes during the night. The nightshift workers were paid by the hour for their eight-hour shift. In theory, eight hours was enough time to complete the work. But that wasn’t happening. The night workers did work eight hours but weren’t getting the job done. Then management changed the incentive. Since the goal was to load the planes rapidly, they began paying the night workers for work done; they could go home when the planes were loaded and still get paid for a full eight hours. The new system worked.
Obviously, the theory behind incentives is a large, multifaceted topic. In this post I’m going to focus on one subtlety suggested by the title of this post: never ask a barber if you need a haircut. The lesson is: don’t frame an option in such a way that it will incentivize someone toward a self-serving effect.
For instance:
Be suspicious of situations in which a vendor’s personal interest may bias his position.
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- Investment advisors often endorse a particular financial product because they will profit most from selling them.
- A roof contractor may try to sell you a particular type of shingle because he’s overstocked on that product.
In certain instances, avoid paying someone by the hour; if possible agree on a fixed price in advance. When being paid by the hour, lawyers, architects, consultants, accountants, and contractors are incentivized to slow down the tempo of their work.
When interviewing someone for a job, realize that his resume will be biased and even the interview will have vestiges of self-interest. For instance, when interviewing someone for a job, don’t ask “Do you think you can do this job well? or “Do you think you’ll be a good fit in our organizations’s culture?” The average person will respond “yes” to both questions because there’s little incentive to be honest and forthright.
I’ll end with this humorous anecdote.
Patient: Lately I’ve had the feeling that everyone wants to take advantage of me.
Doctor: That’s nonsense.
Patient: Really? Thank you very much, doctor. I feel so much better now. How much to I owe you?
Doctor: How much have you got?
Don’t ask a barber if you need a haircut.
I really enjoyed this article. I have seen the incentive practice work often as described and used the practice myself when in charge of others. I even used it while active duty in the Navy. I couldn’t give my people bonus payments, but allowing them to leave early after a good job was complete served as a great incentive. Thanks Again. Blessings.
Lindsey, thanks for commenting. How long were you in the Navy and what did you do?
Your example is correct in my case .before I started my construction company i notice I could do my estimated time and add 10% to that . Then when the project was complete most of the time the labor was 25 to 30 % higher than I had planned for .I went to owner and addressed this problem with the owner .I suggested to him we tell the subs that we were going to start paying by the project they were doing . That we should firgure how much time it would .for instance. If we figured 30 working hours to complete we should just tell them .we have 4 days figured to do this job .if you finish sooner you still get the full 30 hour money. How ever if you take 42 hours you still get the 30 hour money .he response was I don’t want to pay s gut for 30 hours if he only takes 20 hours to complete. I couldn’t get him to see that paying a guy to preform at his best was not cost effective.
When I started my own company 28 years ago I put this plan in effect from the start .my previous boss told me I would never make it . Since then we have done a little over 62 million in bathroom and kitchen remodels. I have a very good group of workers .most men have been with me over 20 years with 6 the whole 28 years . Faster ,clear work sites . All most know warranty work from their mistakes and my customers love my crews .we only have 4 office workers ,the rest are all subs .
Paying people to be their best produces the best results and is also very profitable . Great article .
Barry, thanks for sharing a plan that works and has been working for 28 years. You’re a good businessman and a good friend to me. Thanks
Well said Don! I find this behavior in myself and have to fight it when I am most afraid of a negative outcome. Trusting in God helps, but oh how deceitful is my heart. Currently I am working with Investment Bankers who buy and sell businesses. They have told me that they are all taught at an early age to always ask “How can I profit from this transaction/activity/effort?” Some of them are very nice, but you always have to keep their perspective in mind when talking to them. I like the way you framed the issue is this post, as well as your humor.
Thanks, Paul, for taking the time to write. What part of town do you work in?
Don…You tend to make me think around the corner…looking for the exception to the rule. So here goes:
In truth, I think that many of us often “ask the barber” when we want affirmation for our own ideas. Who better to ask than the biased barber? I think I do it unconsciously, when making a purchase…evaluating a school…choosing a girlfriend…considering a corporate transfer… deciding a vacation destination…debating whether chemo. It’s tempting to find someone you know will support your “leaning”.
But I agree with your point…don’t expect an objective opinion from the barber…unless, of course, your wife said “ask the barber.”
Neil, you share insightful thoughts. Sometimes we’re just wanting affirmation of our bias. Thanks for taking the time to write. Don