The 6 Principles of Incentive Design

Episode at a glance:

• Incentives are a powerful and ubiquitous force. "Show me the incentive and I will show you the outcome" - Charlie Munger. Thoughtfully-designed incentives are likely to create wonderful outcomes. Poorly-designed incentives are likely to create terrible outcomes.
• Goodhart's Law says that when a measure becomes a target, it ceases to be a good measure. Because of Goodhart's Law, incentive systems often suffer from unintended consequences.
• Poorly-designed incentives typically exhibit the McNamara Fallacy (what can't be measured isn't important), a narrow focus (missing the forest for the trees), or an obsession with vanity metrics (what looks impressive versus what actually matters).
• The 6 principles to consider in crafting thoughtful incentives: (1) Objectives, (2) Metrics, (3) Anti-Metrics, (4) Stakes & Effects, (5) Skin in the Game, and (6) Clarity & Fluidity.