Overview
The incentives model holds that to understand or predict behaviour, you look first at what the system rewards and punishes. People, often unconsciously, move toward what benefits them — so a system's incentives, more than its stated goals or good intentions, shape what actually happens. Munger called misjudging incentives one of the most common and costly errors.
The corollary is powerful: if you want to change behaviour, change the incentives, not the exhortations. And beware incentives that quietly reward the wrong thing.
When to use it
Predicting or shaping how people will behave in any system.
How to apply it
Ask what's rewarded
In any system, identify what actually earns people money, status, or ease.
Follow the incentive, not the intention
Predict behaviour from the rewards, not the stated goals.
Look for perverse incentives
Check whether the system accidentally rewards the wrong behaviour.
Change behaviour by changing incentives
To shift what people do, shift what pays — not just what you ask.
Common pitfalls
- Assuming stated goals or good intentions will override the actual incentives.
- Creating perverse incentives that reward the wrong behaviour.
- Ignoring non-monetary incentives — status, ease, belonging — which often dominate.
Frequently asked questions
Why are incentives so powerful?
Because people reliably move toward what benefits them, often unconsciously — so the rewards in a system shape behaviour more than its stated aims.
What is a perverse incentive?
One that unintentionally rewards the wrong behaviour — like paying for speed and getting unsolved problems closed quickly.