Picture this: It’s the 19th century, and the British government has a problem. They’re shipping prisoners to Australia, but only 40% are surviving the journey. Humanitarian groups propose improvements, the government tries various solutions, but nothing works. The survival rate remains stubbornly at 40%.
Enter Edwin Chadwick, a visionary economist with a different perspective. He realizes the problem isn’t the voyage conditions - it’s the crew’s behavior.
Why? Because captains were paid for each prisoner shipped from England. Their reward came before the job was done. Result? They had little interest in keeping prisoners healthy on the journey to Australia.
Chadwick, understanding the power of incentives, proposes a simple change: Pay captains for every prisoner who arrives safely in Australia.
The result? The survival rate skyrockets to over 98%.
The Double-Edged Sword of Incentives
As Morgan House says in his book Same As Ever, “incentives are the most powerful force in the world”. The problem is that, as well as having a positive effect, as in the case of prisoner transport, they can also have the opposite effect. And the role of space regulators is a clear example of this.
SpaceX is an American company whose mission is to colonize Mars and transform humanity into a multi-planetary species. To achieve such an ambitious goal, it is necessary to act in a different way than the old companies in the industry are used to. For example, you have to challenge conventional wisdom. Often you have to fight to change certain rules because they don’t encourage innovation and they’re stupid.
And that is exactly what is happening on many occasions between SpaceX and the Federal Aviation Administration (FAA), the organization responsible for aviation safety and regulation in the US.
In a meeting with SpaceX to discuss some routine approvals of a launch, a regulator pointed out some of the rules that SpaceX was in violation of. Elon Musk challenged the regulator’s reasoning, saying that some of the rules needed to be changed because they didn’t encourage the innovation needed to get to Mars. And then he claimed:
There is a fundamental problem with regulators. If a regulator agrees to change a rule and something bad happens, they can easily lose their career. Whereas if they change a rule and something good happens, they don’t even get a reward. So it’s very asymmetric. So it’s very easy to understand why regulators are reluctant to change the rules. It’s because there is a big punishment on one side and no reward on the other. How would a rational person behave in such a scenario?
Charlie Munger, one of the greatest investors in history, believed that “never, ever think about anything else when you should be thinking about the power of incentives”.
In other words, regulators do not have the right incentives. As Morgan Housel once said, being rational is not the same as being reasonable. Regulators are rational because they behave according to the incentives they have, but they are not rational if what you really want is innovation and technological progress. There is a quote from Upton Sinclair that says: “It is very difficult for a man to understand something when his salary depends on his not understanding it”.
This problem is not restricted to regulators. Many Fortune 500 CEOs do not pursue innovation because their compensation is tied to short-term quarterly results, and innovation is a long-term bet. It’s not that they don’t have the ability to innovate, it’s that they don’t have the will because they don’t have the motivation.
In the book The 48 Laws of Power, author Robert Greene talks about the importance of interest in influencing others. He tells the story of how Chinese culture was on the brink of destruction in the mid 12th century.
When Genghis Khan, the leader of the Mongol Empire, invaded China, he found a country lacking in the resources he considered valuable. Known for his zeal for destruction, Genghis Khan decided it would be best to raze all Chinese cities to the ground. This would mean the destruction of two thousand years of Chinese culture.
But a trusted advisor to Genghis Khan, who appreciated the beauty of Chinese culture, convinced him that he would reap riches from the place if, instead of destroying it, he simply taxed everyone who lived there. Khan saw the wisdom in this and listened to his advisor.
Conclusion
As Benjamin Franklin wisely noted: “If you want to persuade, appeal to interest, not reason”
Whether it’s saving prisoners at sea, fostering innovation in space exploration, or preserving ancient civilizations, understanding and leveraging the power of incentives can change the course of history.
So, next time you’re faced with a seemingly intractable problem, ask yourself: What are the incentives at play? And how can they be changed to achieve the desired outcome?