The Personal MBA

Master the Art of Business

A world-class business education in a single volume. Learn the universal principles behind every successful business, then use these ideas to make more money, get more done, and have more fun in your life and work.

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What Is 'Incentive-Caused Bias'?

Incentive-Caused Bias says that people with a vested interest in something will tend to guide you in the direction of their interest.

Incentives influence the way people act. Change the incentive, and you'll change the behavior.

Incentives are tricky because they interact with our Perceptual Control systems.

Incentives can be useful if used properly, but caution is in order. Make sure that your interests match those of the people that receive the incentive.

Josh Kaufman Explains 'Incentive-Caused Bias'

If you're working with a real estate agent or mortgage broker, they're primarily interested in convincing you to buy a house. Accordingly, most agents won't tell you it's in your best interest to rent, even if it's true.

Incentive-Caused Bias explains why people with a vested interest in something will tend to guide you in the direction of their interest.

We touched on the idea of Incentive-Caused Bias when talking about Buffers. If you're working with an agent who's paid on commission, it's not necessarily in their best interest to tell you that purchasing something is not a good idea.

As the saying goes: don't ask the barber if you need a haircut.

Incentives automatically influence the way people act, based on how they're rewarded. As a result, the structure of the incentives people are exposed to has a significant impact on behavior.

Assuming that the things people are controlling for stay the same, changing the incentives is also likely to change behavior. In Street Smarts, Norm Brodsky and Bo Burlingham describe how they compensate their salespeople.

Most companies compensate salespeople on a commission basis: closing more sales nets the salesperson more money. Under this incentive structure, their salespeople would be hyper-focused on closing sales-even if those sales weren't profitable or in the long-term interest of the company. By compensating their salespeople on a salary basis and giving generous bonuses based on long-term performance, their salespeople began to focus on making profitable sales vs. sales at any cost.

Sometimes incentives create unintended Second-Order Effects.

Stock options were created under the theory that executives who had an interest in the company's stock price would act in ways to make their options go up in value over time.

That's true, but only to a point: the actual interest of those executives is in making the stock price go up right before they intend to sell. Once the options are sold, they no longer care, leading to policies that sacrifice long-term stability for short-term gains.

Incentives are tricky because they inevitably interact with our Perceptual Control systems. For example, giving an employee a bonus or raise for doing something good can create a curious result-they stop doing what got them the reward.

That makes no sense until you realize there was always a reward-they did what they did because they wanted to, so the reward was internal. Paying them makes the action part of their job, which reduces their inner drive to complete it for its own sake.

In the case of Conflict, Perceptual Controls win over incentives every time.

Incentives can be useful if used appropriately, but tread cautiously. If the incentives of the people you work with aren't aligned with your interests, you're bound to have problems.

Questions About 'Incentive-Caused Bias'


"It is difficult to get a man to understand something when his salary depends upon his not understanding it."

Upton Sinclair, Pulitzer Prize–winning author of The Jungle


From Chapter 8:

Working With Others


https://personalmba.com/incentive-caused-bias/



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The Personal MBA

Master the Art of Business

A world-class business education in a single volume. Learn the universal principles behind every successful business, then use these ideas to make more money, get more done, and have more fun in your life and work.

Buy the book:


About Josh Kaufman

Josh Kaufman is an acclaimed business, learning, and skill acquisition expert. He is the author of two international bestsellers: The Personal MBA and The First 20 Hours. Josh's research and writing have helped millions of people worldwide learn the fundamentals of modern business.

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