Perverse incentives

How poorly designed systems unintentionally provoke the opposite behaviour

What Behavioural Economics makes painfully clear, time and again, is that we humans can in fact be endlessly manipulated. The way a choice is presented largely determines the choice we make. There is a very simple reason why the Austrians have a nearly 100% organ donor rate while in Germany it’s only 14%: the Austrians need to tick a box on a form to actively opt out of organ donation and the Germans need to tick one to actively opt in.

Accept this truth: our behaviour is – almost – completely determined by how it is provoked. So now it’s much easier to understand our behaviour within organisations. When Joris Luyendijk interviewed bankers in London over the course of three years, he basically discovered the same thing. If you devise a system where profits go to bankers and losses to the community, what you have actually devised is a gambling system. So participants will behave like the best players in the Champion’s League of the Big Finance Game. The participants see it as a top-class sport.

Enron, one of the biggest bankruptcies in history had developed an HR system called Rank and Yank: everyone was continuously ranked on the basis of performance and the 20% lowest ranked each quarter were thrown out. The consequence: everyone began to manipulate the system so they wouldn’t end up in the last 20%. And ultimately that led to the biggest accounting fraud ever.

What you see with these sorts of systems is that they eventually fall foul of unintended, perverse incentives. When hospitals get rid of their psychiatric beds in order to lower their score for average number of days beds are occupied overall, and universities close their humanities departments because these have a negative influence on the economic output of the hospital – since these are somehow linked in the administration, then you see perverse incentives at work.

We have seen this so many times. And yet, the gigantic problem here is that we never seem to figure this out before the point of no return.

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