Vital Signs: The power of not being too clear | 1/18/2019 | Staff
moemajor (Posted by) Level 3
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Incentives, in one form or other, are central to our lives.

The Soviet experiment ended in December 1991 because it turned out that when people got paid the same whether they worked hard or slacked off, most people slacked off.

People - Careers - Promotion - Prospects - Parents

People often work incredibly hard early in their careers to improve their promotion prospects. Parents will to go to extraordinary, sometimes life threatening, lengths to protect their children because of biological incentives. Doctors, nurses, emergency workers, and teachers often go above and beyond the call because of intrinsic motivation.

Without incentives of some kind nothing much happens. As former US treasury secretary Larry Summers once noted, "nobody in the history of the world ever washed a rental car."

Bonuses - Performance - Indicators - Stock - Options

From bonuses for meeting "key performance indicators," to stock options for executives, to no-claim bonuses on insurance policies, to the threat of the sack for to poor performance, we swim in a sea of incentives.

While carefully designed ones can improve our performance, perhaps dramatically, poorly thought out ones can do the opposite. And, unfortunately, they are all too common.

Problem - People - Ways

The problem is, people really do respond to incentives—often in the most literal and destructive ways.

The list of incentive schemes that have gone awry is almost endless. The consequences range from corporate malfeasance, to teachers cheating on behalf of their students, to plagues of rats and snakes.

Accounting - Scandals - Bankruptcies - Enron - WorldCom

We have witnessed staggering accounting scandals and bankruptcies like those of Enron and WorldCom where the high-powered incentives for senior executives to report good results became high-powered incentives to create what appeared to be good results.

Anyone who has read or watched "The Big Short" knows the story of how high-powered incentives for mortgage brokers and traders of mortgage-backed securities triggered the global financial crisis.

Closer - Home - Hayne - Royal - Commission

Closer to home, the Hayne royal commission has shown how incentives in Australia's financial services sector have led to...
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