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Incentives, Goals, and Behaviour

Edward Walker-

‘Cheaters never prosper’ is one of the biggest lies we tell our children. If cheaters never prospered, there would no incentive to cheat. Getting people to do things they don’t want to do, or getting them to refrain from something they do want to do, isn’t easy. Any parent can attest to that.

Our behaviour is predominantly affected by three things: current thoughts, emotions, and external events/actions. Fortunately (or perhaps, unfortunately) we aren’t able to control people’s thoughts and emotions, and so getting people to behave in a manner that benefits themselves or society can be quite challenging. Incentives are the most basic way to change people’s behaviour. Without a reward for achieving a goal, we wouldn’t be motivated to do anything. This would leave our lives without positive emotion, and is ultimately not advisable.

One of the most basic examples is going to work. If we didn’t get paid, most of us wouldn’t go to work. If an employer wants to create a product or offer a service, adequate incentive must be given to the workers in order to achieve this goal. The incentive, wages, clearly has a fiscal cost, but the behaviour elicited from this incentive is a net benefit for both employer and employee. Of course, wages alone aren’t necessarily enough in the long term; people work harder when they enjoy their job, and have further, more personal, incentives to complete their goals.

Not all incentives are positive, however. Counterproductive incentives can be created unintentionally from a well-meaning source. Most people will see insurance as a good thing, it allows people to worry less about our property and prevents large financial burdens if property is damaged, however; this peace of mind is what creates the negative incentive. Without fear of crippling costs from damaged or stolen property, people are more likely to treat that property carelessly. Someone parking their uninsured car would be more likely to park in a secure garage, whereas a person with car insurance is far more likely to park in the street where damage or theft is much more likely to occur. This extra financial burden is known as ‘moral hazard’, and is something insurance companies have to factor into their prices.

The risky practices of bankers, that lead to the 2008 recession, were incentivized by government assurance bailouts. This was an extreme case of moral hazard. Had the financial crash resulted in bankers getting fired and banks going under, this would have served as an incentive to not risk extreme sums of the public’s money, however; with government assurance and no accountability, there were no incentives to treat other’s money with caution.

A problem every government has to deal with is “how do you stop people from doing things they shouldn’t?” People are quite often selfish creatures who naturally put themselves before the common good; since they can’t see their effect on the collective common good, this is hardly surprising. We often see governments put in place policy to achieve a positive goal, such as reduce healthcare costs by reducing the number of smokers and drinkers, and this comes in the form of sin taxes, taxes put in place to create a financial incentive to restrain from smoking or drinking, unfortunately, they don’t work very well to dissuade people; £31 billion is lost to the UK government by cigarette and alcohol black markets, while the tax, issued on all legally-purchased tobacco or alcohol-based goods, only raises £26 billion. While not preventing smoking and drinking significantly, it is still a convenient source of tax revenue for the government, albeit mostly from the poorest in society.

Common land is also an example of a political goal that seems positive on the surface. If people are responsible for keeping their land fertile, they will be more likely to take care of it (or so the logic goes), though overgrazing has historically been commonplace on common land, however; a farmer who owns the land his animals graze in, is far more incentivised to maintain the fertility of his fields. Unlike private land, where maintenance is incentivised financially, common land tends to fall afoul of the diffusion of responsibility. When responsibility is put on a group as a whole, rather than the individual, any one individual will assume responsibility falls on someone else. The larger the group, the worse and more prevalent this phenomenon gets.

When it comes to government policy, the utmost care needs to be taken in order to create positive incentives, whilst also being wary of unwanted incentives. Welfare systems can breed dependency given poor foresight, and while no politician wants to be seen as ‘against the poor’, we must remember the effects of policy, good or bad, happen in time frames much longer than an election cycle. By the time any negative ramifications present themselves, that politician is long gone.  Education is the other classic political pawn, with many a politician promising increased spending, though seemingly little time is ever taken to consider whether poor education is the result of underfunding, or just poor teaching quality. It is easy to fall into this political trap, not knowing whether the budget will simply just be spent on more costly incompetence, however; without politicians being held accountable for failed policies, years or decades after the fact, this kind of political theatre is unlikely to change anytime soon.

Ideally, society should encourage positive goals such as honesty, considerateness, or personal responsibility.  The court of public opinion encourages honesty, and should be utilised as much as possible. Free markets often bypass regulations when it comes to dubious business practices, and customers often get wind and jump ship before it even enters the government’s radar.  Encouragement of personal responsibility is harder to incentivise, however; there are certain laws, such as those that hold individuals responsible for their actions rather than groups, that appear to be a good way to start. Corrupt officials breed dishonesty, and bribes quickly become the norm in doing business, and so government officials need to set a good example of themselves in order to stand out.

Good values must be taught in school curriculums; societal change happens whether we like it or not, and we can only move in one direction at once; as such, the best we can do is to slowly push society in the direction that benefits us all, rather than to continue down a line that only breeds selfishness, apathetic lethargy, and societal corruption.

Sources:

https://www.investopedia.com/ask/answers/050515/how-did-moral-hazard-contribute-financial-crisis-2008.asp

https://books.google.co.uk/books?id=wvO5DQAAQBAJ&pg=RA1-PA57&lpg=RA1-PA57&dq=common+land+diffusion+of+responsibility&source=bl&ots=T5ezUyo5AK&sig=eaog5jmC1U0x2SBJ6q_r8Wh0Tro&hl=en&sa=X&ved=0ahUKEwi716zm4c_XAhUDMhoKHYHlDE8Q6AEIRDAE#v=onepage&q=common%20land%20diffusion%20of%20responsibility&f=false

http://www.telegraph.co.uk/news/2016/11/14/sin-taxes-on-alcohol-and-tobacco-have-cost-the-treasury-more-tha/

https://iea.org.uk/media/uk-will-pay-almost-25-billion-in-sin-taxes-next-year/


 

Featured Image Source: New York Times

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