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Experts still underestimate incentives
That was Charlie Munger's own assessment of himself. Never a year passed without some surprise that pushed his limit a little farther.
A perverse incentive system causes people to behave more and more foolishly, or worse and worse. Incentives are too powerful a control over human cognition and behavior for anyone to shrug that off.
For someone caught in one of these systems, there is no ready solution. It is a significant problem, and the way out has to be figured out alone.
Why do measured targets get gamed?
British economist Charles Goodhart made the underlying observation in a 1975 paper on monetary policy. Anthropologist Marilyn Strathern later phrased it as a rule: when a measure becomes a target, it ceases to be a good measure. Once pay or promotion depends on a number, people have reason to move the number rather than the thing it was meant to track. The principle is now cited in education, healthcare, and business.
How does incentive-caused bias distort judgment?
Charlie Munger listed incentive-caused bias among the tendencies in his 1995 Harvard talk The Psychology of Human Misjudgment. His point was that reasoning bends toward whatever pays the reasoner, usually without the person noticing. Upton Sinclair made the same point in the 1930s, writing that a man struggles to understand what his salary depends on his not understanding.
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