#4. Incentive Superstructure
Charlie Munger once said, “Show me the incentives and I will show you the outcome.”
We love systems thinking. Looking at systems to understand how our world works. We use systems thinking to understand how our world works. Political systems. Business systems. Social systems. Systems thinking is helpful to understand the terrain on which we’re all walking.
But our traditional systems make it difficult to navigate these frothy seas. New questions arise in our rapidly evolving world that traditional systems thinking cannot keep up with. How do we interact and meet new people in a pandemic? Are politicians just Twitter celebrities? What is money? How do I make it and what do I do with it? Why do I make it? But a north star does exist. Incentives. All of these systems and questions are part of the same Incentive Superstructure. If you're not looking at incentives, you might as well not be looking at anything.
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“Our world is a reflection of incentives” - Mike Solana
What is an incentive? Incentives are anything that drive an individual to act in a certain manner. There are two types of incentives:
Intrinsic - created by the self or individual desire
Extrinsic - created by outside factors
And incentives run our world:
Media is incentivized by attention
Ideal politicians are incentivized by community service
Today’s politicians are incentivized by winning (call me cynical, but this is where we are)
Businesses are incentivized by growth or profit
Individuals are incentivized by family, belonging, respect, or status
In any given process, we default to examining the structure of the system. And that's helpful. It gives a subway map of what exists - where the trains go, what times they go. But it's no more than a snapshot. Anybody looking at a map of London’s tube can navigate London. Going from Hampstead to Trafalgar square for breakfast? Take the Northern Line, of course.
But the structure will not tell you why that map exists or why others travel on that line. Ask a Londoner how you get from Hampstead to Trafalgar in the morning and they will tell you to avoid the Northern Line like the plague. Unless you enjoy stuffing your face in strangers' armpits. Yes, the Northern line connects Hampstead to Trafalgar. But in the morning, the reason anybody is on that line is to commute. The map shows us the system structure - what, where, how - while incentives show us movement and tendencies - why. If you navigate the world based on a snapshot of our societal architecture, you will become lost.
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If you understand a person’s primary incentive, you’ll understand how to better interact with that person. This isn’t Machiavellian. If you know a person’s incentives, you understand that person. If you understand that person, you can more easily trust and work with them.
Every society has an incentive. Every country within that society has an incentive. Every organization has an incentive. And every single individual within the organization has an incentive. Each of these incentives are all interlinked and form what I call our Incentive Superstructure.
Take your typical start-up. You have founders, employees, investors, and customers. All with different incentives.
Founder - “I want to finally solve X problem (e.g., better access to healthcare).”
Senior employees - “I want to get a good chunk of equity and build my nest egg on exit”
Junior employees - “Start-ups give me the best opportunity to learn and get promoted quickly”
Investors - “I want to provide a good return to my LPs”
Customers - “I want to solve my problem”
While each group’s incentives may not be exactly the above, you can be certain that the incentives will differ. This is the case in every start-up. Yet, as if by alchemy, these incentives combine to create world changing technologies and new categories of industry.
And you can expand each node out further. The customer is but one person in a large organization. What are the other incentives in that organization that drove the one customer to engage? The investor is but one investment from its LP, what drove that LP to invest in venture at all? Our Incentive Superstructure is the intertwinement of the incentive structures that everywhere. Incentives mingle with each other to drive outcomes. Each structure winds on its own axis, but impacts every single structure around it.
Our intertwined incentives power our entire world and our every action within it.
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When our society doesn't perform the way we want, misaligned incentives are at the root of the problem. Take, for example, Boeing 737 Max crashes. David Perrel, dug into why that was happening. Everybody else was writing about pilot training and autopilot issues. But what did David find? A 2001 memo that pointed to the root of the problem - executive incentives.
Credit: David Perrel
But incentives gone awry aren’t always nefarious. Good-hearted incentives can go awry as well. As Sahil Bloom outlines in his excellent thread, in the 1800s, there were too many cobras in India. British colonists created an incentive for locals to kill the cobras and get rid of this problem - bounties for every cobra head. What happened? Locals started breeding cobras so they could bring the British more heads and get more bounties. A well-intentioned incentive to get rid of the country’s cobra problem instead made areas literal breeding grounds for cobras.
Good-hearted incentives go awry all over our society today:
Politicians must win to serve, now they focus on winning at the expense of serving.
Agriculture must produce crops to feed us, now the industry focuses on yield at the expense of soil.
Money buys us freedom to do what we want with our time, now we spend all our time seeking money.
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But incentives don’t run our world. The Incentive Superstructure isn’t dictated top-down by the Illuminati. It’s built bottom-up. We run the world. You. Me. Us. Each of us drives those incentives and creates the superstructure around us. This is not about how systems make us act a certain way, but how our internal incentives build our systems
Here’s my “Incentives run our world” list reworded with more accurate ownership:
Media is incentivized by attention We incentivize media with our attention
Today’s politicians are incentivized by winning We incentivize politicians with our votes, donations, and likes
Businesses are incentivized by growth or profit We incentivize businesses with our money
Individuals are typically incentivized by family, belonging, respect, or status We incentivize ourselves with narratives of belonging, respect, and status
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Understanding incentives is understanding human behavior. Start with yourself. To build your map of our incentive superstructure, first identify your place in it. Once you start to build a hazy picture of incentives, how do you fit in? What incentives are you working toward? Were those placed on you or developed intrinsically? Do they represent who you are, what you believe, and what matters? Or is it time to purposefully design your own incentives and how you aim to fit within and drive our superstructure. Expand this framework outward to understand your local community or the company you work for.
I work at Epitel to fundamentally change the way we treat brain disorders and stop the suffering that exists because of our lack of understanding this most complex organ. Not everybody I hire will share that primary incentive. The equity will excite some. Others will focus on career progression. More still will be driven by our company values or remote culture that allow them to spend time with family. The key for me and the executive team is not to force our incentives onto others. It is to understand what drives everybody who helps us build our dream. By aligning their incentives with ours and helping them move in the direction of their incentives, we move toward ours as if by gravity.
The amazing thing about a superstructure is it is entirely self-dependent. It is a working of gears in which we each must decide what matters and what we are working toward at the moment. We are each responsible for moving at least one gear in this superstructure. There is never (NEVER) an instance in which a gear does not connect to at least one other. Your actions matter. What's more, why you do them matters. Bring your incentives to light. Frame them within your values. Understand the incentives of those around you, and work toward what matters to you. The world and superstructure around us will change accordingly.
