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“Show me the incentive, and I will show you the outcome.” – Charlie Munger

Have you heard this leadership quote from Charlie Munger?

Charlie Munger was born on new year’s day in 1924, and is a former real estate attorney, architectural designer, is the vice chairman of Berkshire Hathaway, the huge company controlled by Warren Buffett. He has long been fascinated with the psychology behind human misjudgment.

Business Partner to the Richest Man in the World

Charlie Munger has been business partner to Warren Buffett, at one time the richest man in the world, and it is clear in his wisdom from quotes like these that there is a very good reason why.

Before the Global Financial Crisis in 2008, mortgage brokers were heavily incentivised through their commissions to sell as many mortgages as possible, whether their customer could pay it back or not. Traders and financial houses were also heavily incentivised through their own commissions to create and sell bundles of these low-quality mortgages to other traders around the world.  And of course, people who couldn’t afford houses but really wanted one were able to do so. The result was a perfect storm that nearly broke the back of capitalism.

But when we talk about incentives, it doesn’t have to be just about money. A person might be doing something to improve their status – gain a new title or a promotion, or even just impress someone they like. It also might be how someone is measured – if you measure a team in your company as a leader and you focus on the volume of something, you can bet that their behavior will change quite quickly to push more of that thing through their process, whether it is of good quality or not.

Think carefully about someone’s incentive, and you will know them well without ever having to meet. You will also be well prepared for any decisions that may take others by surprise.

– David McLachlan

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