Incentives, Unintended Consequences, and Second Order Thinking

Incentives encourage behavior and one of those behaviors is gaming incentive structures.

One of the first things people do when they are offered an incentive is come up with ways they can game the incentive.

It is human nature. We are hard-wired for doing the least amount of effort for the maximum amount of gain.

Many managers and executives think incentives are like guardrails that guide specific behavior but they are more like a series of trap doors. They are unintentional devices to encourage unproductive and sometimes counterproductive behavior.

While many incentive structures are well-intentioned they sometimes miss the mark. It reminds me of the cobra snake problems in India. The towns were overrun with cobra snakes and the local government was going to pay a bounty for every dead cobra.

In theory, this was a solid plan that would use incentives and market forces to create an army of cobra eradicators.

But like any good incentive, there were people willing to figure out how to manipulate the incentive to their benefit. Shortly after the program launched people began breeding cobras in captivity. The cobras now had value on them and became a commodity worth having.

When the government realized the error they ended the program and now disincentivized to be holding dangerous snakes everyone did what they would naturally do in this situation they released them making the problem ten times worse.

So what happened here?

On paper, this was a solid plan. We have a problem we have people ready and willing to solve this problem and for that service, there was an exchange of value. It somehow missed the mark.

This is where the mental model second-order thinking comes into play.

Second-order thinking is the process of thinking through the consequences or outcomes of first-order decisions.

Asking yourself what are the possible outcomes or unintended consequences of this decision.

Of course, this is not a catch-all it's impossible to think through every conceivable outcome. It is also not productive to think through any and all scenarios. It is a useful exercise to think through likely outcomes and play devil's advocate.

Asking yourself questions like how could this go wrong? What happens if we do X or Y?

Walking through second-order thinking allows you to think through all aspects of the decision from a 360-degree angle.