1: What happens when you make it easy for people to cheat?
Charlie Munger had a friend who owned a manufacturing business in Texas.
“He was in a low-margin, tough business,” Charlie writes in Poor Charlie’s Almanack. Charlie, who died in 2023, was Warren Buffett‘s business partner and the former Vice Chairman of Berkshire Hathaway, the first non-technology firm in the U.S. to reach a market capitalization of $1 trillion.
The workers’ compensation claims at his friend’s company grew and grew and grew to where the company was paying double-digit percentages of payroll.
“And it was not that dangerous to produce his product. It’s not like he was a demolition contractor or something,” Charlie notes.
The business owner pleaded with the union, “You’ve got to stop this. There’s not enough money in making this product to cover all of this fraud.”
But, by then, the behavior had become part of the culture: “It’s extra income. It’s extra money. Everybody does it. It can’t be that wrong,” Charlie writes. “Eminent lawyers, eminent doctors, eminent chiropractors–if there are any such things–are cheating.”
No one could say, “You can’t do it anymore.”
What would happen if the union representative were to tell the workers to stop?
“When people get bad news, they hate the messenger,” Charlie observes. “That is not the way to advance as a union representative.”
2: So what did Charlie’s friend do? He closed the plant and moved it to a different state.
“Guess what his workers’ compensation expense is today?” Charlie asks. “It’s 2 percent of payroll.”
Charlie’s big point: “It’s very, very important to create human systems that are hard to cheat,” he writes. “Otherwise, you’re ruining our civilization, because these big incentives will create incentive-caused bias and people will rationalize that bad behavior is okay. . .
“If enough people are profiting in a general social climate of doing wrong, then they’ll turn on us and become dangerous enemies if we try and blow the whistle. It’s very dangerous to ignore these principles and let slop creep in. Powerful psychological forces are at work for evil.”
3: Getting better at getting better is what RiseWithDrew is all about. Monday through Thursday, we explore ideas from authors, thought leaders, and exemplary organizations. On Fridays, to begin 2025, I will be sharing some of Charlie’s wit and wisdom.
He has a message, too, for the legislators who create the laws.
“Take the workers’ compensation system in California,” he begins.
“Stress is real. And its misery can be real. So we want to compensate people for their stress in the workplace. It seems like a noble thing to do.
“But the trouble with such a compensation practice is that it’s practically impossible to delete huge cheating.
“And once we reward cheating, we get crooked lawyers, crooked doctors, crooked unions, etc. participating in referral schemes. You get a total miasma of disastrous behavior.
“And the behavior makes all the people doing it worse as they do it.
“So we were trying to help our civilization, but what we did was create enormous damage, net.
“So it’s much better to let some things go uncompensated—to let life be hard—than to create systems that are easy to cheat.”
Charlie quotes Samuel Johnson, who once wrote, “Truth is hard to assimilate in any mind when opposed by interest.”
As human beings, we tend to “game all human systems,” Charlie observes, “often displaying great ingenuity in wrongly serving himself at the expense of others.”
The answer? “Anti-gaming features,” he explains, “therefore, constitute a huge and necessary part of almost all system design.”
More next week!
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Reflection: Think of a current difficult situation. What bad behavior is happening? What incentives are at play?
Action: Discuss with a colleague or family member.
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