Show me the Incentives, I'll show you the Outcome

I had to let the Twitter army slow their roll on this before I weighed in, but for the past 10 years, I've looked up to Charlie Munger and Warren Buffett like they were grandfathers to me. I've watched every annual shareholder meeting, I've read most of the shareholder letters, I've read all the books written by them, and nearly all of the books about them. I'm a Berkshire stan. Charlie Munger passed away last week in Santa Barbara, and it felt like an old friend had passed. He was a brilliant man. He was also the king of one-liners; my favorite being, "If you have a dumb incentive system, you get dumb outcomes." I think about this daily and I think more people should as well.

I'll give you a story of how this dynamic played out for me once. My wife and were planning a big trip, we were gonna do a week in Italy and a week in Switzerland. In planning this trip, we wanted to kick our feet up and let someone else do all the heavy lifting on the itinerary - so we hired a travel agent. In the first meeting, I let this person know that we don't like hotels (we like AirBnBs). I don't like guided tours (I want to be told what areas are cool and explore). We like to eat at cool restaurants and would like to get some reservations made beforehand. And we had a specific bed and breakfast we loved and wanted to stay at in Tuscany. When we got the itinerary, the stays were hotels, the activities were guided tours, there were no dinner reservations, and the BnB in Tuscany was not picked. I was perplexed, so I asked the question, "What happened to our requests?" To this I was met with the real answer, "Well.... travel agents only get paid by the hotels, guided tours, and paid excursions. I don't get paid if you book this other stuff."

Now don't get me wrong here, I hold no ill will at all, I get it. You gotta make money, but had I simply asked the incentives, I would have been more expectant of the outcomes. Also, if I had asked and known the answer, I would've just offered to pay for her services outright before she did all this work to plan our trip. We did not book the trip with this travel agent, but I did write her a check for the commission she would've received.

While this holds true in travel planning, consider the nuances of the workplace, where incentives shape not only actions but also the very culture of an organization. The business world is rife with examples of incentive systems gone wrong, where the pursuit of short-term gains often eclipses the long-term health of the company. This is the Munger principle in action: an organization that rewards quarterly profits over sustainable growth inevitably finds itself in a cycle of short-sighted decisions. It's a reminder that the incentive system is not just a part of the strategy, but often the strategy itself. The wise leaders I know understand this and design incentives not just to elicit certain behaviors, but to cultivate an ethos that aligns with the company's long-term vision.

This ethos extends beyond the boardroom and into every aspect of our lives. It's present in the schools where our children study, in the health care systems we rely on, and in the governmental policies that shape our country. Munger's adage about dumb incentives leading to dumb outcomes is a universal truth, a lens through which we can examine the structures around us. By asking what incentives are at play, I gain insight into why systems function the way they do, and more importantly, how they might be improved. In doing so, I not only honor Munger's legacy but also empower my peeps to build more thoughtful, effective, and equitable systems.