…

I subscribe to Farnum Street. It’s always worth my time.

This week I learned about the Psychology of Human Misjudgment. I lifted this piece below to share with you:

~
Charlie Munger was perhaps one of the smartest people in business, someone who spent decades intensely studying this topic in his spare time, and he said he STILL underestimated how powerful incentives are.

The simple maxim Munger created for this is: “Never, ever, think about something else when you should be thinking about the power of incentives.”

Munger’s favorite example of getting the incentives right is Federal Express.

FedEx built their entire business model on one thing: speed. Packages had to move through one central airport hub every single night, get sorted rapidly, and then get on planes heading to their final destinations. The whole system depended on these night shift workers unloading and then loading these planes all in one overnight shift. By daybreak, all planes had to be in the air.

But they always had issues getting it done before sunrise. Night after night at the end of the shift, there would still be planes on the ground not loaded. They tried everything to speed things up. Threats, training programs, more supervisors. Nothing worked.

Finally somebody realized they were paying workers by the hour.

Think about Munger’s statement from a minute ago: “Never, ever, think about something else when you should be thinking about the power of incentives.”

What was FedEx incentivizing on the night shift when they paid workers by the hour? To work slowly. Because if they stretched the job out, they’d get paid more money. A longer shift meant a bigger paycheck.

Finally someone had an obvious realization: pay them by the shift so when they’re done they can just go home. The problem ended, literally overnight.
~

Are you thinking about incentives, or are you thinking about expenses, profit and your bonus?

What are you incentivizing your employees to do?

Maybe you should think about it some more…