Mismeasurements

Prices are set by the amount supplied and the amount demanded. When supply is mostly fixed, like top home-run-hitters, prices rise. This is the market mechanism.

One way to shimmy around this feature is to find things nearly as valuable, but less demand. This is Moneyball. It’s also investors who “fish in smaller ponds”. It’s also art. Collectors pine for Picasso but many fewer for real estate. Discretionary income + housing budget is a lot of money. Find a different attribute to compete on can be good advice.

Sometimes. We can overcorrect. Kristen Berman noted that one experiment which shifted the incentives from monthly to daily saw sales reps “focus on selling large numbers of cheaper items rather than more expensive items that have higher margins. A focus on short term returns can undermine pursuits of higher impact goals.” It was a case where 100 monthly sales did not equate to 4 daily sales.

This is Goodhart’s Law, when a measure becomes a target it ceases to be a good measure. A textbook example is higher education ranking hackings. Some schools counted “a postcard expressing interest” as an applicant. More applicants meant more rejections and a selectivity shine that was only a veneer.

But wait. Goodhart’s Law is a human quirk and quirks can be hacked. Airbnb grew because like eBay or Amazon, stars replaced brands. But while a four star hotel is mostly the same four star homes were not. So the company added subcategories.“We picked the subcategories based on what guests want,” said Jiaona Zhang, “but we also picked subcategories based on what we wanted our hosts to do.” 

Airbnb used Goodhart’s Law to direct their host’s attention. Once a category was counted hosts worked toward it.

Measures are a tool. They can be like Moneyball and show cheap things. They can be like Goodhart observed and show unintended consequences, but also tweaked for tidy Airbnb hosts. Measures only seem static but really reveal a lot.

Alchemy in the office then at the pump

“The tricky part of incentive design is that there are noisy signals about what could work and what may not work. For example, when given a hypothetical choice between cash and non-cash incentives, people overwhelming choose the cash incentives but studies consistently show that giving additional compensation in the form of non-cash rewards can be more motivating than cash.”

Kristen Berman, The Science of Change podcast

The basis of Alchemy is to create a lot of of value for a small cost. Alchemy happens for donations, for interest payments, and even for paying for a Peloton. Non-cash incentives are another form of Alchemy: the value of the item is greater than the cost to produce it.

On March 9, 2022 gas in Florida cost $4.19 per gallon. A friend noticed this and stumbled into a bit of Alchemy. His company is creating a mileage reimbursement program for the employees.

A “mileage reimbursement program” moves past a basic cash benefit and into the realm of alchemy because it uses our availability tendency: what’s top of mind is most important. Gas prices are often top of mind thanks to their frequency (and SIZE), but with Russia’s invasion of Ukraine the availability is even greater. And that’s not all! Thanks to our mental accounting we perceive pain at the pump.

A “mileage reimbursement program” is a great idea. It delivers more value than it costs. Here’s a few more:

  • Mother’s Day. There’s no holiday that deserves status elevation more. What if an organization had flowers for moms (or husbands to take home to moms) or bulk ordered a delivery. Hey everyone, at lunch today there’s a signup form if you want to order flowers for your mom. This is kinda tricky because if gifts are too easy they lose some impact.
  • Annual bonus. There’s alchemy calling it a “Christmas” rather than “end of year” bonus.
  • Four day workweeks. Businesses have some quantity of work that’s divided into some number of days. Divide those two for a rate. Reducing the number of days means the rate must rise, but many employees find this a fair trade as evidenced by the work-from-home success.

The original advertising alchemist, Rory Sutherland, noted that organizations often optimize the wrong metrics. Don’t make the trains run faster, which is very costly, Sutherland said, if you can make them more enjoyable for much less. A place to sit, a plug to use, and a coffee to drink go a long way for a small cost. That’s alchemy. Find something to provide that has an outsized impact.

Energy for change

This post is part of our thinking about ease and its counterpart design.

Football in Florida in February

John List begins his book, The Voltage Effect, with the example of Nancy Reagan’s D.A.R.E. program. That program, failed, List notes because it was based on a false positive. “It was a pretty large scale study in Honolulu,” List said, “the problem was it was only one study, it was never replicated, and it was never the truth.” Part of the reason D.A.R.E. is a case of something is always happening is the social incentive. It felt good to have a solution. It felt good to align with Nancy Reagan or local law enforcement or your child’s school.

A modern parallel is Michelle Obama’s Let’s Move! program. My year of AmeriCorp was in this heyday and it felt good to align with a political party or athletes or your child’s school.

Contrast Obama’s and Reagan’s initiatives with what I witnessed the first week of February: Florida football. This park was swarming with kids. Every NFL team was represented (and what a rollercoaster the kids on the Bengals team went through) and the parents were into it.

There’s no lack of football in Florida. If the current First Lady wanted a win, she should create a program that further promoted football in Florida. And the reason why is the ease. There’s not friction for Florida football. The weather is good to great (though dangerously hot) all year long. The culture welcomes football. There’s lots of people already doing it, so doing more of it wouldn’t be too much. Contrast Florida football with ‘Just Say No!’ or ‘Let’s Move!’. All the things in favor of Florida football are missing for the former First Ladies.

How to vaccinate the world: Hire the smartest, most attractive, and persuasive medical students (doctors and nurses) to go door-to-door across the country. Or along the football theme, get the best recruiters. Have them sit on the couch, look the person in the eye, and sell them on vaccination. That would work. But like ‘Just Say No!’ and ‘Let’s Move!’ it takes too much energy. But football in Florida? No energy needed.

There’s a gap between things I would like this person to do and things this person does. Energy closes the gap. Wordle wonderfully demonstrates energy. It’s easy to learn, easy to share, easy to play, easy to habituate. But Wordle will fade because it struck kindling. Unlike football in Florida there’s not a lot of factors working in its favor like with Facebook or automotive culture or take-out-pizza.

Energy, ease, friction, design – they’re all ways to address the same idea, how to change.

How to board an airplane?

Everyone knows how to board an airplane, back to front. It’s logical. Back to front means that if someone is taking their time in seat 21C the person in 20A can still seat themselves.

Physicist Jason Steffen built a computer model to see how much faster back to front was relative to front to back. He was shocked. The difference was minimal. Hmm, Steffen scowled at his code, is there a better way?

What if instead of 30 to 1 or 1 to 30, a plane boarded everyone in row 30, then rows 1, 2, 3…. That might work right? The folks in row 30 would have time to stow and seat without holding anyone up.

That kinda works. Steffen’s code continued and compared the 30, 1, 2…29 option to the 1, 2,…30 option. The code noted the faster sequence, and switched around two more numbers. Again it kept the faster option and computed another switcheroo. The fastest boarding process turned out to be boarding every other row.

“It turns the boarding process from a serial process, where one person gets to their place, puts their luggage away, and sits down into a parallel process where you send in fifteen people, say in all the even rows, and they all put their luggage away and sit down at the same time. And then you send in the next group of people.” – Jason Steffen, August 2021

Steffen’s code was a Markov Chain Monte Carlo, a way to solve problems through computer code and exploration. But like wet bias or wait times, ideal solutions may not be the best.

One problem with Steffen’s method is when people travel in groups, especially families. Another obstacle is the culture of air travel, there’s some established norms. Further confounding the case is an airline’s incentives. Faster turns do matter, but relative to upgrades how much does saving time save the company?

What to think while waiting

David Henderson recalls his first class with Armen Alchian in 1972, who started class noting that if someone understands the incentives they can understand a lot of ‘mysterious’ behavior.

“On the first day of class he said when we went to the bookstore we’d be in a long line and we’d be angry about that. But we shouldn’t be. We should be happy because it means economics works. The people working are on a standard wage and they don’t have a strong incentive. There’s no ownership, no one gets a big benefit if they do better.” – David Henderson, September 2021

We should be happy to wait? Kinda.

One theme around here is the value of curiosity. Mostly that means to wonder how and why and when things happen – or even when they don’t happen. And incentives are ripe for thought.

We’ve looked at prediction incentives, Marine incentives, and the incentives of salting roads. There’s music incentives, be careful what you count. And football recruit incentives, more careful counting.

Incentives come up so much because one way to be curious is to ask: why does that happen? and part-of-the-reason that happens are the incentives.

This kind of curiosity takes work. Like exercise takes calories, crypto (or cars) take gas, or relationships take conversations – curiosity takes work. To be curious is to think, wonder, and ask questions. To be curious is to move past the simple story and see what else is there. Sometimes there’s not more, sometimes there’s incentives, and sometimes there’s something unexpected.

One of the highlights of my interneting has been writing a post about curiousity for Ribbon Farm.

NBA 3s

There’s one honest sport.

When asked if the NBA will soon move back the three point line Mike Zarren said probably not. The reason is probably the business model.

“At the end of the day we are an entertainment and I would want to hear from fans that they are not liking the game as much. That’s not what we are hearing now (2021). You have to listen to the customer and people love the NBA right now…

“You also have a problem with the three-point line corners. The further out you move the crest of the line, the bigger the disparity between the corner-three and the other threes, and we’re not going to make the court wider because that would mean less seats and fewer tickets.”

It’s fun to talk about BIG CHANGES rather than “things are going well, let’s keep working hard and marking small bits of progress every day.” So it’s fun to talk about moving the NBA three-point line further from the basket or having a four-point shot or whatever. But those things won’t happen, chiefly because of incentives. The NBA, like movies, is a business, and like movies, those business incentives dictate the easy and difficult changes.

Obama and Eisenhower

Some subversive decision making influences, like a cross breeze in golf, are the unnoticed dynamics. Social pressures, human tendencies (status quo bias for example), status, ego, and so on. But like with a vegetarian diet, it is possible to design around them.

One design choice is incentives. Incentives work as designed sometimes, but other times create yes men and women. YM&W are a completely predictable case of certain incentives within an organization.

To get around this, certain leaders argue well and vigorously debate an issue. The aim is a debate rather than a resolution.

Another path is to not state a perspective and enroll a (similar status) opponent, but to be more of a blank page. It may not be coincidence that at least two presidents followed this direction.

Speaking about his new book, Noise, Cass Sunstein said:

“President Obama was a master of not giving a clear signal of what he wanted to do because he wanted to get as much information as he could and that reduced the noise.” – Cass Sunstein

The book Ike’s Bluff, covered how Dwight Eisenhower used this tool too:

“Despite his open demeanor, at press conferences Eisenhower would from time to time pretend to know less than he did, leaving the illusion that he was distracted and ill informed about matters that deeply engaged him. Indeed, Eisenhower was willing to appear less than sharp, even a little slow-witted, if it served some larger purpose. Unlike most politicians, he was not driven by an insecure need to be loved and recognized. He possessed an inner confidence born of experience.”

There’s as many paths to success as there are organizations trying to succeed. To ‘argue well’ or ‘listen like Ike’ is one of many ways.

No bad habits, no gold stars

We know nothing about venture capital!

“Correct, we have no bad habits. We were total outsiders. And, we weren’t kids that went to ivy league schools and worked at Goldman Sachs, so we weren’t accustomed to getting gold stars for painting in the lines. We were accustomed to doing things creatively outside the lines.” – David Fialkow, September 2021

People enter situations with a culture which can influence how they act. In society, and wearing a mask. In conversation, as debate structure. In politics, or anytime there is leadership.

People enter situations with incentives which can influence how they act. In music, ship platinum, receive gold. In football, three star recruits. In startups, what OKR? In horse racing, to race or to sell?

One of the tricky parts of life that covid revealed is the heterogeneity in life. Like, A LOT of variation. This same effect exists in the more mundane world of organizations. There’s no set of incentives or culture that always works. But there is a culture and there are incentives and each matter.


Have a nice day.

Show the way or in the way

One common mistake in our understanding of “how the world works” is to think that lack of action is due to a lack of information. If people just knew how important X was they would definitely do it.

One form is seen in the social media question: What would you add to the high school curriculum? Answers tend to hover around statistics instead of calculus, personal finance, or decision making.

Those are well intentioned suggestions, and on net, students would be better off if we could download a stats module in place of the first derivative. But information is not action.

Orlando Marriott hand washing sign

Geez. We’ve looked at hand washing (twice!) and there’s probably a well designed study that notes signs like that, in bathrooms such as this, change a proxy for health in some-such-way.

But, there’s a better example. It’s a real life example. It’s been tested on thousands. It’s also in Orlando. Arrange hand sanitizers to be avoided. To hijack Ryan Holiday: the obstacle is the way. But after two days people watching in the theme parks it’s very clear, this works.

And the reason for signs showing the way and not sanitizer stations in the way is incentives.

Back to Twitter. Some schools offer personal finance. From Kris’s nephew.

“I have this assignment for school where I have to invest $1,000 into a company’s stock. And I know you’re a stocks person so I was wondering if you know a good company i should invest in. Because the winner gets a prize of who makes the most money.”

Just give every twelfth grader $200. But there’s no action in that. There’s no standards or benchmarks or assessments about net learning in the second quarter of the school year. So in a way, Kris’s nephew is getting exactly what the system incentivized.

This is the system. In education it’s hard to measure “financial literacy”. In public health it’s hard to measure “healthy place”. In these systems optics are rewarded. Theme parks are in the optics business too, but for them results like: Person Gets Sick at World Famous Theme Park matter more. It’s important to know the rules if we want to play the game.


In finance there’s paper returns and there’s “moolah in the coola”, that’s another analogy. Paper returns are optics. Money in the pocket is an outcome.

Ship Platinum, Receive Gold

Within a system like an office, neighborhood, or team there are two main levers which drive behavior: culture and incentives. Culture, says Ben Horowitz, is what people do when they aren’t told what to do. Incentives are the rewards from actions. Incentives are easy to create but don’t always get the intended action.

One incentive might be fines for thin plastic bags. One potential action is customers switch to re-useable bags. Hey look! That’s was the plan.
Hannibal Loves It
Another potential action is using thicker bags. In this case the incentives led to the opposite anticipated actions: more plastic trash.

A family friend pays his kids for good grades. It works, but it’s likely a combination of culture and incentives. This is an incentive system that could easily go awry.

Another incentive that goes awry is rewarding for gross figures rather than net. This was the case in the record industry said Will Page:

“They would ship a platinum record because shipments were what qualified a platinum record. It wasn’t actually sales, if half-a-million albums came back to the factory gate it was up to the CFO to deal with the cost of returns. Once you create rules to play by people will bend those rules. If bonuses are related to platinum status and platinum status is related to shipments, then what do people do? They ship a million records.” – Will Page

1978’s Sgt. Pepper’s Lonely Hearts Club Band soundtrack was reported Platinum but was a sales bust. The following year the rules were changed and Platinum meant shipments minus returns within 120 days. That number has crept back down to thirty. It’s incentives all the way down!

A Platinum album is one million units. Gold half that. Album certification – ship Platinum, receive Gold back – feels like a thing of the past. But incentives are not.