Economics can improve your life. And no, I don’t just mean being able to understand the world better in an abstract sense, or simply knowing something interesting you didn’t know before. It can improve your life. It can make your decisions better, and produce better outcomes for your personal and career growth.
Incentives matter
Pointing out the value of incentives can easily be labeled as banal. There are few people out there that think incentives never matter. But it’s one of those subjects one thinks they understand, but they really don’t.
It’s illustrated in the debate about whether it’s better to leave experts in charge or “the people” — obviously this is a false dichotomy. To paraphrase Nassim Taleb, we’re all dumb without skin in the game. From my article, “Politics Makes People Stupider“:
“I’m inclined to follow my doctor’s advice because he happens to be an expert and is personally accountable for the results of his advice. If he suffered no consequences if the medicine he prescribed me gave me buboes, his “expertise” is useless to me. So too with the “man on the street.” If he has no personal stake in my outcome, I’m not going to bother going for him for advice. I’m not going to rely on anybody’s counsel if he doesn’t know me from Adam.”
This is not to say that somebody relatively disconnected from me has no chance of giving me good advice, only that the odds are slim, and trusting any Tom, Dick or Harry with your life is a bad general life rule.
You’re always going to find examples of people who defied their incentives. There are numerous cases of someone going above and beyond their responsibility to do something extraordinary.
The life of Mother Theresa is an oft-cited example, as a riposte to those who think all human action is selfish, of the will of pure altruism. The Catholic nun and missionary dedicated her days to the service of the needy and the sick. Theresa didn’t have to leave her family, never to see them again, for the benefit of Indian children she didn’t know, but she did it. This goes beyond what we think of immediate incentive.
Yet these stories make news because they are extraordinary and unexpected. Mother Theresa wouldn’t have been canonized and been given honorary US citizenship if this behaviour was considered the norm.
Relying on other people to be good to you on its own merit is setting yourself up for a life of disappointment. I don’t say this with glee — the world might be a better place if we all acted for the good of each other by pure will. Nonetheless, the fact that real life is contrary to this utopia is a useful insight in your dealings with yourself and other people.
Why are public institutions so inefficient? Not necessarily because they’re not profit-driven, but because the environment is not conducive to good decision making. So says psychologist Benjamin Hardy:
“Every environment is optimized for something. Some environments, for example, are optimized for learning, connection, and growth.”
Without skin in the game, public actors don’t suffer when the little people get shafted by their decisions. No politician lost their second home by bailing out the banks in 2008, resulting in a decade of debt and inflation for a whole nation. If this power was left to private investors, they would have gone bust (which is probably why private investors weren’t falling over themselves ready to take that on).
Public institutions, unlike businesses in a free market, aren’t optimized for serving customers. When there are no customers to which you are accountable, what you are producing is no longer a service. It’s a routine, just for show. The way you get ahead is not by innovating and producing better goods and services that people want to buy, but by political pull. It means being the biggest ass-kisser.
Public institutions are optimized for ass-kissing.
So first lesson to improve your life: always be open to people doing good for you out of pure heart, but don’t bet your house on it.
Now flip the scenario from dealing with other people to dealing with yourself. Chances are you are not the exception when it comes to the notion that people respond to incentives. If you wouldn’t trust most people in your life to treat you right based on pure willpower, why are you expecting you to treat yourself in that way?
Self-management necessitates a weird sort of dualism where you treat yourself like a spoiled child. You’re a consuming machine with the barest of foresight who reacts to every stimuli, except for those rare moments of clarity, usually in the shower or whilst driving. Use those moments to put your economist hat on.
You can’t always control how you’re going to react, but you can control your environment. Hardy’s contention is that our personal environments in the 21st century are optimized for dopamine:
“Because people can’t handle the allurements that come with all the advancements of society, they have developed unhealthy and addictive triggers around technology, information, food, work, etc.”
You actually know this, but it’s easy to pretend that we have our lives under control. “I’m not like those silly peons,” I thought to myself, whilst watching the 4th Formula One crashes YouTube video in a row.
Just reiterate to yourself that you’re an economic actor as much as the rest of them. Use the Screen Time feature on your iPhone, move all of your technology out of your bedroom and downstairs by the juicer — give yourself an incentive to pursue all long-term behaviours, and make sure you suffer by the behaviours you want to phase out. Optimize your environment for the life that you want to live.
James Smith
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