Everywhere There Is a Large Commission. There Is a High Probability of a Rip-Off
Large commissions can create conflicts between a seller’s rewards and a customer’s interests. Munger argues that weak controls make misconduct easier to rationalise, and that repeated cheating can become a group norm.
THE IDEA
Everywhere There Is a Large Commission. There Is a High Probability of a Rip-Off
Charlie: “Perhaps the most important rule in management is to get incentive right. Worldly wisdom is mostly very, very simple. And what I am urging is not that hard to do if you have the will to plow through and do it. And the rewards are awesome—absolutely awesome. But maybe you aren’t interested in awesome rewards or avoiding a lot of misery or being more able to serve everything you love in life. And, if that’s your attitude, then don’t pay attention to what I’ve been trying to tell you—because you’re already on the right track.
It cannot be emphasized too much that issues of morality are deeply entwined with worldly wisdom. Considerations involving psychology. For example, take the issue of stealing.
A very significant fraction of the people in the world will steal if (a) it is very easy to do so, and (b) there’s practically no chance of being caught. And once they start stealing, the consistency principle—which is a big part of human psychology—will soon combine with operant conditioning to make stealing habitual. So, if you run a business where it’s easy to steal, because of your methods, you’re working a great moral injury on people who work for you. Again, that’s obvious. It’s very, very important to create human systems that are hard to cheat. Otherwise, you’re ruining your civilization because these big incentives will create incentive-caused bias, and people will rationalize that bad behavior is OK.
Then, if somebody else does it, then you’ve got at least two psychological principles: incentive-caused bias plus social proof. Not only that, but you get Serpico effects. If enough people are profiting in a general social climate of doing wrong, then they’ll turn on you and become dangerous enemies if you 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.
How does it relate to the law business? Well, people graduate from places like Stanford Law School and go into the legislatures of our nation and, with the best motives pass laws that are easily used by people to cheat. Well, there could hardly be a worse thing you could do. Let’s say you have a desire to do public service. As a natural part of your planning, you think in reverse and ask, ‘What can I do to ruin our civilization?’ That’s easy.
If what you want to do is to ruin your civilization, just go to the legislature and pass laws that create systems wherein people can easily cheat. It will work perfectly xlvii.”
Mr. Brown: “Well this is very interesting, but I am still more concerned with psychological case history, not an action. What really moves any individual into that? I have a very stupid and simple case. When I was a thief, I just put 30 percent over my ordinary normal fee. My client was a nut; we got a commission for my services, and I made a ton of money for him. Don’t you think it is like stealing to manipulate somebody’s gains? We had a dinner party on Sunday evening; recently the same risky stocks were so popular. The client was very interested to get an advantage of it. I have done it for him but charged him 30 percent over my usual fee. I took the money—nothing ashamed me at all—put it in my account, and I have no idea why. I cannot explain what happened. I felt enormous pleasure just because I got this money. I went to Las Vegas the next day and played roulette the whole night through. I drank that evening in a restaurant. I had an urge to get rid of it quickly. And it didn’t trouble me, either then or later. I do not care about it right now. That’s it.
“You have grown very blasé; are you ok? Maybe it is my story that…heh-heh.”
Charlie: “Actually, I don’t feel too well. I’ve got a headache, from the long day today probably.”
Mr. Brown: “You need fresh country air, sir; you have to return to Omaha.”
Charlie stood up, lost in his thoughts.
Mr. Brown: “In three days I’m going to have a small event with the family and some guests. How long are you going to stay in New York City? It will be a great pleasure to all of us if you managed to visit us on this occasion Sunday night.”
When to use it
When designing sales commissions, check whether employees can increase their pay by misrepresenting a product or selling something the customer does not need.
In law or policy-making, carefully consider whether new regulations create loopholes that can be exploited for personal gain.
When managing a team, remove easy opportunities to cheat, examine what rewards encourage, and give staff a way to raise concerns.
Before accepting a recommendation, ask how the adviser is paid and whether the fee creates a conflict with your interests.
FROM THEORY TO EVERYDAY LIFE
In practice
Mr. Brown's Overcharging Scam
In the dialogue, Mr. Brown says he charged a client 30% above his usual fee, felt no shame, and quickly gambled the money away. The scene illustrates rationalisation and pleasure in a gain he himself describes as theft.
Legislating for Corruption
Munger uses an inversion exercise: imagine designing laws that make cheating easy, then ask how to avoid doing that. His point is that good intentions do not compensate for rules that reward abuse.
A MOMENT TO REFLECT
Put it to work.
Think of a situation in your work or life where a large commission or reward was offered. How might that incentive have influenced your behavior or the behavior of others?
What systems in your organization or community make cheating easy? How could they be redesigned to reduce the likelihood of unethical behavior?
Reflect on a time you witnessed or heard about someone rationalizing dishonest behavior because 'everyone else is doing it.' How did social proof and incentive-caused bias play a role?
CONTINUE THE CONVERSATION
Source texts
- The Art of Being Rational Charlie Munger