Navigating Cognitive Drift: Aligning Actions and Values

In my quest to grasp the undercurrents of human behavior, I stumbled upon a realization that has altered my perspective: our actions are largely shaped by incentives, often overshadowing the black-and-white notions of right and wrong. This epiphany didn't strike me in a moment of grand revelation; rather, it was a gradual awakening as I navigated the complexities of everyday life.

My initial encounter with the intricate play of incentives began at home, in my role as a father. I found myself grappling with the challenges of parenting, particularly in encouraging positive behavior in my son, Hamza. My approach was straightforward: reward good behavior with toys. Each time Hamza exhibited kindness, discipline, or athletic prowess, he would receive a toy of his choice. Initially, this strategy seemed successful. Hamza's behavior improved, and I thought I had cracked the ultimate parenting hack.

However, as weeks turned into months, I began to notice an unsettling pattern. Hamza's actions seemed increasingly driven by the prospect of gaining toys rather than an intrinsic understanding of why those behaviors were important. His questions shifted from "Is this the right thing to do?" to "Do I get a toy for doing this?" It dawned on me that my approach, while well-intentioned, might actually be undermining the very values I sought to instill. I was facing the complex interplay of incentives and morality.

My insights from parenting began to resonate with my experiences in finance. In particular, the performance-based reward systems across the corporate world create a cesspool of self-serving behavior. Bonuses tied to meeting quarterly targets, promotions based on surpassing sales goals, and recognition often a result of outperforming peers.

This system of incentives creates a competitive and results-driven culture. While it propels the companies to post great short-term results, with longer-term value destruction. Management cutting corners to meet targets, long-term projects sidelined in favor of short-term gains, and ethical considerations sometimes overlooked in the race to the top. The parallel between my strategy as a father and principal-agent misalignment in corporate world is increasingly clear. In both scenarios, the incentives in place shape behavior in ways that are misaligned with the underlying values and long-term objectives.

However, there is always room for course correction. Charlie Munger, in his psychology of human misjudgment highlights a pertinent example in FedEx's case.

FedEx faced a challenge in their package sorting process. The night shift workers, vital to this operation, were compensated hourly. This pay structure inadvertently encouraged a slower pace of work – the longer the task took, the more they earned.

FedEx's response to this issue was a paradigm shift. They restructured their payment system, moving from an hourly rate to a pay-per-shift model. This realignment of incentives had a profound effect. Workers were now motivated to complete their tasks efficiently as they would receive the same pay regardless of the time taken. The result was a dramatic improvement in operational efficiency. This case study was a clear illustration of how aligning incentives with organizational goals could lead to significant improvements. It was a lesson in the power of well-structured incentives.

Understanding Incentives

To understand human behavior, we have to understand their incentives. Money stands out as one of the most powerful motivators for our habits and behaviors. Just like a monkey can be trained to value a token as if it were a banana, humans work for money, which holds even greater allure. Money isn't just for buying necessities like food; it's also a ticket to a variety of desires and often brings status, whether through its accumulation or expenditure.

Interestingly, the pursuit of money often doesn't stop even when there's no real need for more. This habit of continuously striving for more wealth is a unique aspect of human behavior, not commonly seen in other animals. In our civilization, money is a crucial driver, deeply entwined with other forms of reward. For example, some people spend money to gain status, while others use their status to make more money. There are also those who simultaneously seek to increase both their financial and social standing. However, it's important to note that money isn't the only incentive that influences behavior. People are also motivated by other factors like sex, friendship, companionship, and the pursuit of higher status. These nonmonetary rewards play a significant role in shaping our actions and thoughts, just like monetary incentives.

Misaligned Incentives

Incentives possess a superpower, i.e. they compel us to act, both consciously and subconsciously. However, when left unchecked, it does not take long for incentives to misalign with our values and goals. All too often, we forget about our goals and start pursuing the incentives. We can term this phenomenon as "cognitive drift". We often start with noble goals, but when our incentives aren't aligned with these objectives, this cognitive drift can subtly nudge us toward behaviors that we wouldn't ordinarily condone.

Consider the following, a product manager at a large IT solutions company. He began a side hustle to cater to a niche that his employer couldn't – small clients for whom the company's business model didn't make economic sense. His intention was commendable: to assist these smaller entities that needed help. Initially, this side business was just that – a side project, secondary to his main job. However, as it grew more successful, and the profits from this venture began to eclipse his regular salary, his priorities shifted.

This shift wasn't overnight but gradual, a classic example of cognitive drift in action. The change in incentives – the increasing financial lure of his side hustle – led him to start diverting clients from his employer to his own business. This action was a far cry from his original intention of merely filling a market gap.

It's a common belief that no one inherently sets out to act immorally. I, too, would like to believe that most people are fundamentally decent. Yet, the reality I've observed is more complex. Whether we acknowledge it or not, we are all susceptible to being swayed, both consciously and subconsciously, by our incentives. These incentives can lead us down paths of behavior that, under different circumstances, we might never consider. And once we tread these paths, it's all too easy to rationalize our actions.

Aligning Incentives

This understanding of cognitive drift and its power has led me to a crucial realization: we must constantly evaluate our incentives and how they align with our core values and long-term goals. When we find ourselves at a crossroads where our incentives are leading us astray, particularly in cases where monetary gain conflicts with ethical conduct, it's imperative to take a step back. We need to assess whether our actions are in sync with the broader goals and values we hold dear.

Aligning our incentives requires a conscious effort. It involves regularly examining not only the immediate benefits of our actions but also considering their long-term implications and their congruence with our ethical standards. It's about making deliberate choices that not only serve our immediate needs but also uphold our fundamental principles and contribute positively to our overall life trajectory.

Practical Takeaways for Managing Incentives

1. Granny's Rule: This concept exemplifies the power of rewards in shaping behavior. Much like the rule of eating our vegetables before getting dessert, we can apply this principle to our own lives. It's about completing necessary but perhaps less appealing tasks before indulging in more enjoyable activities. This approach helps in instilling discipline and prioritizing responsibilities.
2. The Role of Punishments: Punishments act as crucial guardrails, preventing us from straying off our desired path. Historically, military organizations have effectively used punishments to enforce discipline. For instance, during Caesar's time, there was a tribe known for its harsh but effective practice: the last warrior to reach his assigned place would be executed. This extreme measure ensured that all warriors were highly disciplined and punctual, contributing to the tribe's formidable reputation in battle. While this is an extreme example, it underscores the impact of punitive measures in influencing behavior.

In understanding and recalibrating my incentives, these insights have been instrumental in keeping my habits and behaviors aligned with my goals and values. They serve as practical tools for anyone seeking to navigate the complex interplay of incentives and actions in their lives.

Recommended Reading

• Same as Ever by Morgan Housel
• Poor Charlie's Almanack: The Wit and Wisdom of Charles T Munger by Charles T Munger