What is a Perverse Incentive?

The fundamental lesson of economics is that people respond to incentives, while the driving insight of psychology is that people respond to positive or negative reinforcement. The two conclusions are very similar in their implications, but economics is focused primarily on money while psychology places its emphasis on love and attachment. Both incentives and reinforcements depend on the logic of cause and effect. Do this and get that.

The desire for money, love, respect, and leisure are some of the most powerful drivers of behavior that any of us will ever experience.  No one would disagree that the need to avoid the opposites of these rewards, being death, neglect, scorn and thankless toil, is an equally powerful motivator. The incentives structure of positive and negative reinforcements drive our behavior in just about any situation we’ll find ourselves in.

Given the corollaries between incentives and reinforcements, it’s tempting to assume that a perverse incentive would be the same thing as a negative reinforcer. It’s a bit more complicated than that. With negative reinforcement, you deter a behavior by punishing it. A perverse incentive, on the other hand, is an incentive to do something that has an unintended result that is contrary to the interest of the person naming their terms.

If I reward you for doing something a lot, you will be incentivized to inflate that number at all cost, outcome be damned. Your incentive to do the right this is perverted by the incentive to do the expedient thing. In business, an unfortunate example of this is a CEO’s whose salary is tied to the stock price company initiating company-wide lay-offs in order to revive a faltering stock price. In history, an illustrative example took place in Hanoi, under French colonial rule, where a program that paid villagers a bounty for each rat tail handed in was intended to exterminate rats led instead to the farming of rats by those citizens.

Economics is particularly bad at teaching empathy, and that’s the attitude you need to avoid setting up a perverse incentive for someone. Before deciding how you’ll reward or punishing someone else’s behavior, it’s helpful to think about how you’d react to the given reinforcers if you were the person you’re incentivizing. Chances are, your needs aren’t that much different from theirs.

 

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