In many parts of life, incentives aren't aligned. We're used to that, as it is the case in most industries and parts of life. Recently, I started realizing how powerful incentive alignment is though.
If you're not sure what I'm talking about, let me give you an example: The pharma industry has no interest in making you healthy. The healthier you are, the less medication you need. The less medication you need, the less revenue for the pharma industry. The incentives aren't aligned here: You're buying medication to become healthy, but becoming healthy is not in the pharma industries' interest. If there was a definitive cure for cancer, you can be sure – the pharma industry has no interest in it.
To stay in the same bracket, the same usually counts for health insurance. Health insurances have absolutely no incentive to make it easy for you to file claims or to process them quickly. If it's a nuisance to file a claim, little tiny claims usually get dropped and don't get reimbursed. Saving even $50 per year across every insured person in the US? That sounds nice.
Let's take another example which might be closer to home: You're using a social network that advertises to be a way to "quickly connect with friends". So you are using it for a few minutes every day to catch up on what your friends are doing. Sike. The network's interest was never to connect you with friends. Their goal is to keep you on the platform as long as possible and increase engagement. How would a FB/IG/Twitter look like, if it was in their best interest to simply keep you in the loop and keep you updated and then let you leave?
Incentive Alignment is Attractive
I'm sensing a trend that in politics, business and society, that incentive alignment is becoming more and more attractive.
In some areas, this has always been a thing: Employers granting stock options, so it's in your interest that the company succeeds. Parents granting $5 for every A their kid gets in school. Schools looking to have the highest possible graduation rates, with students hoping to graduate. Imagine if early startup employees would work 12-hour-days only for a mousy salary, if kids would get $5 for every F they get, or schools would have to try to meet a certain quota for exam fails, it's dangerous to have someone work against you.
All of this article was initially inspired by some interviews I watched with Andrew Yang. A master in aligning incentives, especially looking at his ideas of interaction between state and citizen. As a democratic presidential candidate without lobby-backing, he is one of the only candidates who is free to decide what to do and to create aligned incentives across the board. This is not possible if, as a candidate, you're under the pressure of weapon, coal, pharma or big tech lobbyists.
Having this freedom means being able to take decisions that may displease people benefitting from unaligned incentives (in our example above, e.g. the pharma industry or health insurers), but essentially means that "doing good" is going to become the interest of everyone, because it's usually bundled with more revenue or lower costs.
I'm not going into details on this specifically, but I was impressed that, by simply aligning incentives, you can create outcomes that are interesting to everybody acting in everyone's best interest, to the point where a democratic candidate can navigate and impress people on far-right interview shows, without big problems.
A framework for Incentive Alignment
The most prominent example of successful incentive alignment in the business is probably Lambda School. Their service is a textbook sample of the power of incentive alignment.
- Lambda School's goal is to make revenue.
- The goal of students is to get hired.
- Lambda School does not get any compensation, as long as students aren't hired.
- The new goal of Lambda School is to supply students with knowledge and skills to get them hired.
It's a simple framework, that turns a high-quality coding school into a life-changing bootcamp for career placement.
Let's look at Generic Coding Bootcamp XY instead: They charge $12,000 upfront for a 9 month coding program.
- Generic Coding Bootcamp XY's goal is also to make revenue.
- The goal of students still is to get hired.
- Generic Coding Bootcamp XY is getting compensation either way.
- There is no incentive for Generic Coding School XY and their career team to get you hired (except stats maybe). Instead, their goals might become to maximize profit – keeping costs low and enrollment high.
A framework like this can be put together for pretty much every competition where incentives might be misaligned. Incentive Alignment is a powerful tool that more people should utilize.