1: 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 share some of the wit and wisdom of the late, great Charlie Munger, Warren Buffett‘s business partner and former Vice Chairman of Berkshire Hathaway, who passed away in 2023 at the age of 99.
Charlie developed a set of mental models that he used to analyze investment opportunities and to understand life.
He took particular pleasure in identifying our psychological tendencies as human beings.
Why? “Because,” Charlie writes in Poor Charlie’s Almanack: The Essential Wit and Wisdom of Charles T. Munger: “I have fallen in love with my way of laying out psychology because it has been so useful for me.”
Living life, he writes, “I was soon surrounded by much extreme irrationality, displayed in patterns and subpatterns. . .
“So surrounded, I could see that I was not going to cope as well as I wished with life unless I could acquire a better theory-structure on which to hang my observations and experiences.”
So, what did Charlie do? “I slowly developed my own system of psychology,” he explains.
Today and on Fridays to follow, we will explore some of Charlie’s realizations about the mind of human beings.
2: Today’s lesson is about the power of incentives. “Perhaps the most important rule in management is,” Charlie explains: “Get the incentives right.”
“I place this tendency first in my discussion,” Charlie writes, “because almost everyone thinks he fully recognizes how important incentives and disincentives are in changing cognition and behavior. But this is not often so.
“For instance, I think I’ve been in the top 5 percent of my age cohort almost all my adult life in understanding the power of incentives, yet I’ve always underestimated that power. Never a year passes but I get some surprise that pushes a little further my appreciation of incentive superpower.”
One of Charlie’s favorite examples of the power of incentives comes from Federal Express.
“The integrity of the Federal Express system requires that all packages be shifted rapidly among airplanes in one central airport each night,” he notes.
“The system has no integrity for the customers if the night work shift can’t accomplish its assignment fast.”
FedEx management struggled to make this happen. They tried one approach. They tried another. “They tried everything in the world without luck,” Charlie observes.
Then, someone came up with an idea that illustrates the power of the right incentive.
The question was posed: What if we “paid the employees per shift and let all night shift employees go home when all the planes were loaded”?
What happened next?
Victory. Suddenly, the packages were efficiently placed on the correct planes for delivery the following day.
3: Another example of the power of incentives involves the legendary entrepreneur Joe Wilson, who transformed Xerox into a global powerhouse.
Joe couldn’t understand why a new, improved version of the Xerox copier was selling so poorly compared to an older and inferior machine, Charlie explains.
The answer: A commission plan that paid salespeople “a large and perverse incentive to push the inferior machine on customers who deserved a better result,” Charlie explains.
One of Charlie’s favorite historical figures was Benjamin Franklin, who said: “If you would persuade, appear to interest and not to reason.”
“This maxim is a wise guide to a great and simple precaution in life,” Charlie notes. “Never, ever, think about something else when you should be thinking about the power of incentives.”
Indeed.
More next week. And more from Charlie next Friday!
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Reflection: What do I make of the Federal Express and Xerox examples? Think about a current sticky situation at work. What role might incentives play? Is there an opportunity to change the incentives to achieve the desired result?
Action: Discuss with a colleague or with my team.
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