Carrot and Stick

"Intentions may be pure, but incentives shape behaviour." — Kenneth H. Blanchard

Before 2002, most people in Ireland would use plastic bags for shopping. I don’t think the Irish didn’t care about improving waste management. But it was easy and convenient for everyone. Maybe they knew the environmental consequences of this habit. But it wasn’t enough to act on it.

In 2002, the Irish government started taxing plastic bags. It was the first European country doing so. The aim was reducing its consumption, and it was a spectacular success.

In only 3 months, the number of plastic bags in circulation fell by 90%. Thanks to the €0.15 levy, the Revenue Commissioners took in €3.5 million, which was put to environmental use.

Photo by Anna Shvets on Pexels

You and me, baby, ain’t nothin’ but mammals

Most people have good intentions. Both for themselves and others. We want to get in shape, save money, and fight climate change. But there’s a gap between what we desire and what we do. At the end of the day, our behaviour is shaped by things that escape our control.

We have paleolithic emotions, medieval institutions, and godlike technology.

— E. O. Wilson

We’re glorified apes with iPhones. Deep down, all we want is food, sex, and comfort. Before the dawn of civilisation, these resources were scarce. We wouldn’t eat every day and we would sleep under a tree if we were lucky. Finding sexual partners was a struggle. I mean, dating apps aren’t much better, but we have more options.

Now we have fast food, heated seats on our cars, and ready access to adult content on the internet. Our emotions haven’t changed, but our environment has nothing to do with what it used to be. This is a problem. We’re overstimulated and overfed. Scarcity was the norm and now we dwell in abundance.

Genetics plays a primary role on our behaviour too. The nature vs. nurture debate is obsolete. Both things are equally relevant. Contrary to popular belief, genes don’t determine, but predispose behaviour. Some studies conclude that genes affect a wide array of behaviours. These include our financial decisions, choices of mates and friends, or leadership styles. If you have some genes, you’re more likely to engage in some specific behaviours.

This bears a truth that many find upsetting: people have innate differences. Some are good at foreign languages and others have a knack for maths.

You see our environment and our genes can be stacked against us. But does this mean we can’t do better? Nope, we can.

Pain and pleasure

As mammals, we respond to pain and pleasure. If a behaviour results in a reward, we’re more likely to repeat it. If it’s painful, we avoid it. We like to think we’re more sophisticated than that, but we aren’t. Raising awareness of abstract problems is like giving a speech on the desert — it doesn’t work.

If you ask anyone if they care about climate change, they’ll say they do. If you then ask them to name some actions that prove it, they’ll probably go quiet. The consequences of climate change aren’t immediate or certain, so people don’t find it urgent.

Irish people didn’t become more environmentally friendly overnight. When the levy on plastic bags was introduced, it was painful to pay €0.15 extra. As a result, people preferred reusable bags.

Evil incentives

The levy on plastic bags by Irish government was a successful policy. But taxes have a dark side too.

The politician and the government expert receive their revenues, not from service voluntarily purchased on the market, but from a compulsory levy on the populace. These officials, therefore, wholly lack the pecuniary incentive to care about serving the public properly and competently.

— Murray Rothbard

Companies experience pain and pleasure in a free market. If they go bankrupt, that’s painful. And if they make money, that’s pleasant. The management teams have clear incentives. They need to provide valuable services and goods to customers. If they don’t, they get wiped out from the market — except if they’re big banks.

Governments, however, only get to experience pleasure. Whether they do a good or bad job, they will get paid. There are no negative consequences to poor policy-making. Not delivering what was promised has no repercussions either. They can lose votes, but they will still have a stable salary. A salary, by the way, debited from the taxpayers hard-earned money. As Taleb would say, they don’t have skin in the game.

Big banks are similar. The executives get to enjoy astronomic compensations when things go well. But if they go bankrupt, the government bails them out with public funds. They’re too big to fail. The survival of the fattest it is.

Microincentives

Incentives don’t only apply to policy-making or business strategy. They permeate our personal and professional lives too. Most jobs are rife with the principal-agent problem. Business owners want the best for the company. Employees want the best for themselves. These are incentives at play. An employee will get paid every month if he does a good job. But he doesn’t have any financial incentive to do any better than that — unless his pay is based on performance.

Jobs aside, love is a Nash equilibrium.

Nash equilibrium is a concept in game theory where the game reaches an optimal outcome. This is a state that gives individual players no incentive to deviate from their initial strategy. The players know their opponent’s strategy and still will not deviate from their initial chosen strategies because it remains the optimal strategy for each player.

When you choose a partner it means you prefer them to any other alternative. When they choose you back, well, that’s a relationship. A relationship lasts so long as there are no incentives to end it. Sometimes this is within our control, other times, beyond. Zooming out, this applies to any kind relationship at all. Nobody keeps a relationship if they can’t get anything out of it.

Incentives apply to more mundane matters too. If you want to wake up early no matter what, put your phone away from you. When the alarm goes off, you’ll have the incentive to stand up to turn it off. Voilà, now you woke up and you can start your day.

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How do you use incentives to accomplish your goals?

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Photo of the week

This week I went to León for Easter. This is the cathedral — one of the most beautiful in Spain.

Alejandro Lopez — The Psychology of Wealth