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TODAY’S STORY
1 Dec
,
2022

It’s all about incentives!


If it's a persuasion problem, it's an incentive problem.

If it's a comprehension problem, it's an incentive problem.

If it's a sales problem, it's an incentive problem.

Almost all issues in business can be dialed down to incentives of the stakeholders involved and their resulting higher-order behaviors.

And a good part of building a good product, team, or company culture is addressing issues on the level of incentives.

Here are 10 examples of incentives I've sourced from all around the internet and how they affect the world around us in different contexts.

1. By running ads that ruin a customer's experience — for e.g., ads that run on the lockscreen or pop up inside apps, you're selecting for customers who click on ads rather than selecting for the customers you want. These customers generally have an incentive of earning money by watching and clicking on ads, not buying your product.

Also, incentivized ads that pay for user attention are the least valuable ad type; the most valuable ads have high intent, which explains why Google is Google and none of the lock-screen ad companies are anything today.

2. Speaking of ad businesses, Apple's so-called "privacy" changes that prevented third-party platforms like Facebook from getting access to your usage data has obviously turned out to be a jackpot for its own advertising business. Ad buyers are now buying Apple's own advertising real estate on its app store and other properties because it's the only avenue left.

3. In Amazon, every hiring process is assigned to an employee called a 'Bar Raiser'. A Bar Raiser belongs to a special class of individuals within Amazon who are effectively the ‘guardians’ of the interview process and ensure that every new hire "raises the bar."

The Bar Raiser is given the absolute power to veto any hiring decision. If they say no, the candidate is out.

Why does Amazon do this?

To counteract the incentives of Hiring Managers. If you are a manager and your team is understaffed, it is extremely tempting in such a scenario to temporarily drop your hiring standards, in order to get people in quickly so you can hit your quarterly goals.

Also, Bar Raisers never belong to the team that is hiring — with very different incentives from the hiring manager’s and the recruiter’s.

4. Speaking of hiring, an MBA degree from a reputed institute also works for the same reasons: it reduces cognitive load of the recruiter and takes away personal liability and blame for making a bad hiring decision down the line. If you're from an IIM, I as an HR will feel safe in hiring you.

5. A doctor won't be blamed if he gives a drug that has side-effects but risks being blamed if he doesn't prescribe a drug and the patient gets worse. There's very little incentive for any kind of placebo therapy, although it's been shown to work.

Patients being covered by health insurance makes this worse and allows doctors to charge exorbitantly for their services, which in turn fuels the insurance industry.

6. I recently read that The Nuclear Regulatory Commission in the USA charges nuclear energy companies $300 an hour to review their applications. This creates extremely perverse incentives for the regulator.

The NRC does not have a mandate to increase nuclear power, nor any goals based on its growth. They get no credit for approving new plants. But they do get blamed for any problems these plants may cause. For the regulator, there's no upside, only downside. This is why they delay approvals.

Further, the NRC does not benefit when power plants come online. Their budget does not increase in proportion to the amount of energy generated. Instead, the nuclear companies themselves pay the NRC for the time they spend reviewing applications, at something close to $300 an hour. This creates a perverse incentive: the more overhead, the more delays, the more revenue for the agency.

The result: the NRC approval process now takes several years and costs literally hundreds of millions of dollars.

7. Carbon and road taxes have massively driven up food prices in Canada. Businesses rely on a massive fleet of trucks to transport perishable food around. This creates an incentive to use more preservative-filled foods if there's uncertainty in fresh food prices and transporting them faster so that they do not get spoiled is expensive.

8. In organizations, there is always some work everyone agrees someone should do but which nobody does, because it’s inadequately rewarded in money or reputation. This kind of work mostly deals with preventing mishaps. You cannot reward someone for preventing a failure that never occurred.

9. The cooler a job title becomes, the more people want to become that for the wrong reasons. Product management is a good example. A lot of candidates who have no aptitude for product wish to become product managers. Companies who want to ease hiring noticed the hype and took advantage of it by labeling Project Manager roles as Product Manager roles. Consequently, the number of product managers in companies have skyrocketed, whereas very few are actually doing any real product work.

10. Patents are counterintuitively an incentive to innovate, versus something that halts progress, as is conventionally believed by many.

Imagine what happens in a world where businesses want to maintain their competitive advantage and protect intellectual property, but there is no such thing as a "patent."

Other businesses do not know research that has already happened or technology that has already been proven to work, because everyone is keeping their research a secret. Hence, every business is constantly reinventing the wheel — a highly inefficient proposition.

What a patent allows businesses to do is see what is working for other businesses and innovate based on that knowledge.

In a world without patents, any innovation Snapchat comes up with is quickly copied by Facebook or Instagram.

Facebook doesn't have to innovate. They can just copy. And Snapchat has no incentive to because Facebook will copy it.

Businesses like Square and Tesla who share their patents share it because their use is not their core business.

Companies want to commoditize their suppliers and complements. Build a platform on a standard. Make the standard "open" then take a cut on all the people on the platform.

For Tesla, it is their supercharger network, which is the real moat, not the patents they freely share. So, it actually benefits if there are more electric cars in the world, not just Teslas. You will find many other examples of this phenomenon in the piece linked at the start of the paragraph.

Takeaway:

"You will never make money if your thesis is someone is ‘stupid’. It means you don’t understand their incentive structure."

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