The importance of incentives

Incentives are what really drive human behavior, not rational argument or moral persuasion. Much of what is wrong in our nation today is because we have the incentives wrong.

In politics, politicians have far more incentive to get re-elected than to do what is good for the nation. They have strong incentives to pass legislation favorable to the people and companies that sponsor and support their campaigns, whether it is good for the rest of us or not. They have strong incentives to be liberal now with government funds to their constituents and their party base, irrespective of the final cost at some later time. They have maximum incentive to put off hard and unpopular decisions, leaving them for some future holder of their office. They have the maximum incentive to think short-term rather than long-term

In health care, because of the way Medicare and the insurance industry work, doctors and hospitals have the maximum incentive to provide as many services and procedures as possible, whether they are really needed or not. And we as patients have the maximum incentive to ask doctors to do as much for us as possible, because we don’t see the costs or seem to pay the bill (We do pay the bill in the long term, but that is mostly invisible to us). Because trial lawyers have strong incentives to push malpractice claims, doctors have the maximum incentive to practice expensive preventative medicine, ordering all sorts of tests which they know are usually not necessary.

In the job market, the incentives are such that a disproportionate number of our best and brightest graduates are lured in the essentially non-productive financial gambling market, rather than into productive fields like science, engineering, teaching, or innovating.

In the financial markets, now that “too big to fail” banks know that the government will bail them out if they get into trouble, they have the maximum incentive to take risky but potentially lucrative positions, since they are in essence allowed to bet with the taxpayer’s money rather than their own.

In the military-industrial complex, corporations have the maximum incentive to propose new, expensive and profitable military equipment, and politicians have the maximum incentive to approve them if they provide jobs in their district.

One can look around and see many, many more examples in the society where the incentives are such that apparently irrational policies are being followed. And not much is going to change in any of these cases until the incentives are changed.