Tag: incentive design

Selection > Incentives

I blame old age, so there.

See, the thing is, I cannot for the life of me remember where and in what context I heard this line today: selection matters more than incentives.

It sounds like the kind of thing Tyler Cowen would say (and indeed, he’s written an entire book about it), but I cannot say for sure. So my apologies for not being able to attribute it properly, but whatay idea, no?

We’re big on the line “incentives matter” in these parts. In fact, if you click on that link in the previous sentence, you could spend a couple of hours, easy, going through my earlier posts on the topic. And don’t get me wrong – not for a moment am I suggesting that incentives do not matter. Of course they do!

But in the context of getting folks to do what you’d like them to, selection often matters more than incentives.

And as with so many other things in the world, it comes down to just two words: demand, and supply.

Example : You, as a college professor, would like students to do a really god job on their theses in their final year.

Example : You, as a manager of a team in an organization, would like your team members to execute a particular project really well, and on time.

Example : You, as a citizen of your nation, would like your elected leaders to do a good job.

In each case, you could (and should) ask about how to go about designing the best set of incentives in order to achieve your objectives. That’s supply.

But that being said, it sure would help if the folks you were designing these incentives for were good at execution in the first place! What is the demand like for these awesome incentives you’ve got lined up?

You could have the best incentives in the world, but if you don’t have the best students/team members/politicians to begin with, the incentives don’t matter much, now do they?

And so the story begins with a good selection mechanism: how do we get “the best” students into a college? How do we hire the best employees for an organization? How do we go about electing the best possible leaders?

Once we figure out the answers to these questions, we can (and once again, we absolutely should) figure out how to best incentivize them. But incentivizing good, talented and motivated folks is much easier than it is to incentivize average folks.

The primary constraint is getting the right people in place. Once you do that, getting the incentives right is the relatively easy part.

Or, as the title of this post puts it:

Selection > Incentives

How Might You Use Incentives in Your Own Life?

It’s all very well to dispense gyaan about incentives, but what is the TMKK?

For those of you new in these parts, TMKK stands for To Main Kya Karoon? Learning about economics for its own sake only make sense in terms of scoring marks in an examination. But a subject truly comes alive when you are able to understand its relevance and importance to your own life – preferably directly, but at the very least tangentially. Don’t get me wrong, I am not at all suggesting that intellectual pursuits for their own sake are not worth it. But I am very much suggesting that the ability to answer a TMKK for oneself makes it much more interesting.

So how should once use incentives in one’s own life?

  1. You can make museum visits less boring.
  2. You can lose weight. I cannot find the reference I’m looking for right now, but Tim Ferriss once spoke about how you can send a truly embarassing pic of yourself to a friend, with instructions to post it on social media by the end of the month – unless a certain amount of weight loss has been achieved. If pics on social media is not your thing, give an amount of money that will truly pinch you to your friend, with instructions to donate it to a cause/political outfit that you truly loathe – again, unless a certain amount of weight loss has been achieved.
  3. What is the Pomodoro technique if not an incentive mechanism? There is more to it, sure, but incentives are certainly involved, no?
  4. If you have a gym buddy, yes, that too is an incentive mechanism. There is another phrase for it – peer pressure. That simply means that it’s not so much about you missing gym, but about the pressure you feel for letting your friend down. But the underlying mechanism? Incentives! In this case, it is a non-monetary, negative incentive.
  5. In my opinion, nobody does gamification using non-monetary incentives better than Duolingo.
  6. Ask ChatGPT3 for more examples! I could have done this myself, of course, but you really should get in the habit of using ChatGPT3 as a tool to do all kinds of research – it’s what you’re going to be doing in your careers in many different ways, so the correct time to get started is yesterday.
  7. Think about examples from your own life where you’ve tried to design incentives for yourself. Ask yourself which ones worked and which ones didn’t, and then ask yourself if we humans treat positive and negative incentives the same way.
  8. Best of all, try designing incentives for somebody in your family. See how they respond to your incentive mechanism, and see if you can iterate it (the mechanism) for the better. If you’re looking for an example – what if you promise to make breakfast in bed for a family member who promises not to look at their phone after dinner throughout the week. Will this work? Try it out! (Note: not a single “I just need to do this one little thing” allowed!). Try the same experiment the next week, but this time, use a “punishment” instead. Say, a fine of a thousand rupees, payable to you, if they break the rule.
  9. If you do “run” the experiment in pt. 8 above, ask yourself if Goodhart’s Law applied.
  10. Get better with every passing week at designing incentives, refining them and implementing them, both for yourself and for others. You’ll be surprised in two regards. First, you’ll be surprised at how easy it is to design better and better incentives. And second, you’ll be surprised to learn that GoodHart’s Law is always applicable. Tricky little beasts, incentives.