BIAS 1

Incentives and
Incentive Caused
Bias
Lesson

People are hugely influenced by

incentives

This dominates their behavior

Whenever you are analyzing

any system of human behavior
always start from incentives
“Never, Ever, Think
About Something Else
When You Should Be
Thinking About The
Power Of
Incentives.”
Most Of Economics Can
Be Summarized In Four
Words: “People Respond
To Incentives.” The Rest
Is Commentary
Lesson

Capitalism and
incentives go together
Example
Freakonomics
https://www.youtube.com/watch?v=17jO_w6f8Ck
Lesson

Bad incentives
produce bad behavior
Example
Commissioned
salesforce
 Boiler Room Scene
https://www.youtube.com/watch?v=4zakyg3thfY
The Inevitable Ubiquity Of Incentive-
Caused Bias Has Vast, Generalized
Consequences. For Instance, A Sales Force
Living Only On Commissions Will Be
Much Harder To Keep Moral Than One Under
Less Pressure From The Compensation
Arrangement.
Example
Advisors
It’s Dangerous To Get Advice
From People Where Their
Compensation— And Maybe A
Very Large Compensation —
Depends On A Specific Line
Of Advice They Give You.
InCentive-Caused Bias
Requires That One Should
Often Distrust, Or Take With
A Grain Of Salt, The Advice
Of One's Professional
Advisor.
 Especially Fear
Professional Advice
When It's Especially
Good For The Advisor
Don’t Ask The Barber
Whether You Need A
Haircut.
Example
Peddling Leverage
Making Slaves
https://youtu.be/Vk7gPypWP3Y?t=7m13s
https://youtu.be/Vk7gPypWP3Y?t=7m13s
https://youtu.be/xcpOY5JrYww
I Don’t Like Consumer Credit
Getting Pushed As Hard As We
Push It In America. It’s Not My
Sort Of System.
People Have Made Fortunes Out
Of Easy Consumer Credit. I
Think Some People Always Did.
If You Could Figure Out A Way
To Own Slaves, You’d Make
Money.
Example
Credit Rating
Agencies
http://www.nytimes.com/2007/07/20/business/20norris.html
http://www.wsj.com/articles/SB118714461352698015
 WTF?

http://www.nytimes.com/2008/11/26/opinion/26friedman.html
Example
Moral Hazard
When An Executive Has
Only Upside And No
Downside, It Will Always
Lead To Excessive Risk
Taking
https://youtu.be/JsfK1aETYAs
Lesson

Do not try to reason

with a person under
the influence of
incentive caused bias
“If You Were To
Persuade, Appeal To
Interest Not Reason” -
Ben Franklin
"No One Will Really Understand Politics
Until They Understand That Politicians Are
Not Trying To Solve Our Problems. They Are
Trying To Solve Their Own Problems -- Of
Which Getting Elected And Re-Elected Are
No. 1 And No. 2. Whatever Is No. 3 Is Far
Behind". — Thomas Sowell
Lesson

People will do
incredibly stupid things
for short term greed
Example
Drug Pricing
https://twitter.com/heatinformatics/status/664126866803003397
“There Are Two Kinds
Of Companies. Those
That Work To Raise
Prices And Those That
Work To Lower Them” -
Jeff Bezos
“There Are Two Kinds
Of Companies. Those
That Work To Raise
Prices And Those That
Work To Lower Them”
- Jeff Bezos
Lesson

Bad behavior will

always get rationalized
Example
Selling Sugar
Source: How much sugar is in a Coca- Cola supersize cup?

https://youtu.be/ugFock3p2xE
Its Difficult To Get A Man To
Understand Something,
When His Salary Depends Upon
His Not Understanding It -
Upton Sinclair
Whose Bread I Eat,
His Song I Sing
Lesson

Financial independence
facilitates in becoming
a wise person
Generally, The Employment
Relationship — The Need For
Money — Causes More Terrible
Cognition Than Any Other
Single Factor.
 The Three Most Harmful
Addictions Are Heroin,
Carbohydrates, And A
Monthly Salary

Nassim Taleb
Thinking What's Good For
You Is Good For The Wider
Civilization, And
Rationalizing Foolish Or
Evil Conduct, Based On Your
Subconscious Tendency To
Serve Yourself, It's A Terrible
Way To Think.
Lesson

System Design is
Important Because
People Game Systems
Another Generalized Consequence Of Incentive-Caused
Bias Is That Man Tends To “Game” All Human Systems,
Often Displaying Great Ingenuity In Wrongly Serving
Himself At The Expense Of Others.
Example
Cost Plus Systems
 “You Can Either
Control The Price, Or
The Supply, But Not
Both!”

Jim Rogers
Example
Price vs Supply
Example
Price vs Supply
Lesson

There will be
unintended
consequences
Example
Peltzman Effect
Lesson
Ask And Then
What?
The Key Thing In Economics, Whenever
Someone Makes An Assertion To You, Is
To Always Ask, “And Then What?”

Actually, It’s Not Such A Bad Idea To

Ask It About Everything But You Should
Always Ask, “And Then What?”
 We Can Never Merely
Do One Thing.

Garrett Hardin
Lesson

You Get What You

Measure
Example
Wells Fargo
Misselling
https://www.bloomberg.com/view/articles/2016-09-09/wells-fargo-opened-a-couple-million-fake-accounts
Example
Demonitization
It Is Often Cited As A
Solution. Unfortunately, My
Sense Is The Clever Find Ways
Around It. They Find Ways To
Divide Up Their Hoard In To
Many Smaller Pieces.
Example
Executive
Compensation
Lesson

A responsible system
will always have skin
in the game
A Responsible
System
https://youtu.be/3ZzoB6xBWOI
A System Is Responsible In
Proportion To The Degree
That The People Who Make
The Decisions Bear The
Consequences
Lesson

If a system does not

have skin in the game
you should expect bad
outcomes
What Do You Think Will Happen If
You Put Decisions In The Hands Of
Those Who Don’t Pay Any Price Or
Being Wrong, Reward People For
What You Don’t Want And Set Up
The System So The Chance Of
Being Caught If People Cheat Is
Minimal?
Lesson

A responsible system
will try to minimize
gaming
Anti-Gaming Features, Therefore, Constitute
A Huge And Necessary Part Of Almost All
System Design. Also Needed In System Design
Is An Admonition: Dread, And Avoid As Much
You Can, Rewarding People For What Can Be
Easily Faked.
Lesson

A responsible system
will always be unfair
to some people
Some Systems Should Be Made
Deliberately Unfair To
Individuals Because They Will
Appear Fairer On Average For All
Of Us. Thus There Can Be Virtue
In Apparent Unfairness
Another Thing Needed Is To
Sometimes Make Some
System A Little Bit Unfair
The Craving For Perfect
Fairness Causes A Lot Of
Terrible Problems In System
Function
Example
Embezzlement
Example
Michael Sandel
on Fairness
Thank You