The Hidden Hand Behind Many Poor Decisions
“Never, ever, think about something else when you should be thinking about the power of incentives.”
— Charlie Munger
Every executive knows that incentives drive behavior—but few appreciate just how deeply they shape our perceptions, decisions, and even our ethics. Incentive-Caused Bias is a foundational mental model in decision-making because it highlights the often invisible—but powerful—force behind irrational actions, misaligned outcomes, and systemic failure.
Understanding this bias isn’t just about designing better incentive systems for others—it’s about recognizing how incentives warp our own decision-making, often without our conscious awareness.
What Is Incentive-Caused Bias?
Incentive-Caused Bias occurs when personal motivations—especially financial, social, or psychological rewards—cloud rational judgment and skew behavior. When incentives are misaligned with desired outcomes, they can lead even intelligent and ethical people to make flawed decisions.
It’s not always malicious or even conscious. Often, people genuinely believe they are doing the right thing, unaware that their reasoning has been subconsciously shaped by what they stand to gain.
Examples in the Real World
1. Corporate Sales Targets
Executives set aggressive sales quotas. In response, salespeople start bending the rules: premature revenue recognition, pressure tactics, and even unethical behavior—all rationalized by the need to “hit the number.” The outcome? Short-term gain, long-term brand and legal damage.
2. Consultants and Conflicted Advice
A consultant paid by the hour has a subtle incentive to complicate problems, prolong engagements, and delay final delivery—consciously or not. A firm paid on performance, on the other hand, has every incentive to optimize outcomes.
3. Doctors and Pharmaceutical Companies
Research has shown that doctors who receive even small perks from pharmaceutical reps are more likely to prescribe that company’s drugs—even if better or cheaper options exist. Incentives distort the clarity of judgment.
4. Government Policy
When policymakers are rewarded for short-term popularity (e.g., votes) rather than long-term value (e.g., economic stability), decisions tend to skew toward populism instead of prudence.
How It Shows Up in Executive Decision-Making
As a leader, you’re surrounded by competing agendas and incentive systems—your own, your board’s, your team’s, your customers’. Incentive-caused bias creeps in when:
- You unconsciously favor projects that boost short-term KPIs or bonuses.
- You ignore downside risks because your upside is locked in.
- You resist transformative change because it threatens your position or legacy.
- You design systems that accidentally reward output over outcomes (e.g., activity vs. impact).
The bias doesn’t just lead to bad decisions—it breeds organizational dysfunction. Culture follows incentives.
Combatting the Bias
To mitigate incentive-caused bias, use these executive practices:
1. Audit the Incentive Architecture
Ask: What behavior are we really incentivizing? Review compensation structures, KPIs, promotions, and informal rewards. Do they align with long-term strategic goals and values?
2. Use Second-Order Thinking
Don’t just ask, What will happen if we do this? Ask, What incentives are we creating? How will people respond?
3. Design for Integrity
Build structures that reward long-term stewardship, shared success, and customer outcomes—not just activity metrics or personal performance.
4. Cultivate a Culture of Candor
Encourage feedback loops where teams can safely flag misaligned incentives or observe unintended consequences. Normalize asking, What am I missing?
5. Look in the Mirror
The most difficult—but necessary—step is to question your own motivations. Is my decision truly rational and fair—or subtly influenced by what benefits me?
A Final Word from Munger
Charlie Munger, the vice-chairman of Berkshire Hathaway, considered incentive-caused bias the most powerful and pervasive bias in human decision-making. He famously quipped, “Show me the incentive and I will show you the outcome.”
As an executive, recognizing this truth gives you a superpower. By designing incentives wisely and keeping your own biases in check, you can drive better outcomes—not just for your business, but for the people and systems you influence.
Reflection Questions for Executives
- What incentives (formal and informal) are driving the behavior I see in my organization?
- Are we measuring and rewarding what truly matters?
- Where might my own judgment be skewed by personal or political gain?
Missed out on the over all series?
Murray Slatter
Strategy, Growth, and Transformation Consultant: Book time to meet with me here!
