Wednesday, February 25, 2009

B.F. Skinner haunts the banks

A year after first Raghuram Rajan and then Martin Wolf, both writing in the FT, fingered bankers' bonuses as a prime cause of the financial meltdown, Nassim Nicholas Taleb redoubles the attack. The point is not hard to grasp. The banking industry runs on a heads-I-win-tails-you lose incentive structure: take huge hidden risks, reap the rewards of resulting outsized gains, and give up nothing (except perhaps your job, multimillions later) when those gains give way to huge losses.

But Taleb does end with an arresting dictum that's worth a thousand words:
never trust with your money anyone making a potential bonus.
Take that as as a rule of life. Are you listening, education reformers? It translates: never trust with your child anyone making a bonus. There are buried risks in juicing children's apparent performance, too. Skewed incentives also pervert education from the other end. As an opponent of behavior mod programs once said, give children pizzas for reading books, and you'll end up with a lot of fat children who can't read. Incentives focus people's attention on the reward rather than on the act required to get the reward.

I'm also reminded of a wise woman's watchword: never trust what you hear from any man with an erection. Broadly, then: beware of anyone dazzled by overwhelming incentives, by the prospect of immense gratification.

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