Skip to main content

Incentives

It is 6 AM in France. A man opens his bakery. The air of the bakery is perfumed by the smell of some of the world's best bread. The bread is something of a religious experience, a dance and juxtaposition of hard vs. soft, bitter vs. sweet, simple vs. complex. It is intoxicating. He wakes up incredibly early and sells this experience for less than 1 euro a pop. It is hard to find this experience outside of France, which is something I find a little depressing as someone who doesn't live in France. In my eyes, there exist few opportunities in to have such wonderful experiences at that price. Outside the bakery is a cafe with wine, coffee, a view of the sea, enveloped by a city which echos of another century. How one can be sad here I am not sure. Just by waking up and being alive, you earn yourself a feast for the eyes.

It is 6 AM in midtown, Manhattan. You are awakened by the screams of the mentally ill man outside the front window. Your walls are soaked with toilet water from the apartment upstairs, your landlord won't fix it or respond to your calls because he is trying to wring every dollar out of the property. Your foot hurts, but you would rather hope it goes away rather than going to the doctor to avoid paying your copay/deductible. Even if you go to the doctor, chances are they won't care as they treat you more as a piggy bank than patient. It crosses your mind that they will most likely overprescribe to avoid liability lawsuits. If you go to CVS for a prescription, they will text you non-stop for the drugs you may or may not need. All of this frustration makes you hungry to succeed. Some day, if one works hard enough, life will be comfortable or maybe even good!

I have had both experiences. But as you can imagine, if all humans are driven by pain and pleasure, by incentives, one is more likely to produce in the US than France. One corollary of this is the fact that a unit of currency does not buy the same incremental benefit to one's life in France and the US. In the US, money makes your life much more tangibly better. I am not so sure this is true in France. What the heck would one buy with extra money in France when the things that can be desired are free or inexpensive? Those facts are reflected by the numbers. ~29% of all wealth that exists in the world, lives in the USA. The discovery/invention of DNA, Google, the iPhone, the transistor, and many of the other innovations that make the world go round were invented in the US. One can argue that the US changes the world because Americans are incentivized to avoid the pain of living a bad life. But that same problem can be solved by moving to France where, by default, your life can be beautiful without much effort. Incentives drive the quality of life of a country's citizens. Incentives drive the destiny of a society.

For the past year, I have been struggling with one of life's most important questions. The question of whether to have kids. If you want to live in NYC, have enough space for a kid (~$2,000/month per bedroom), send them to a private school where the quality of education is going to be reasonable (~$60,000), your net worth probably needs to be considerably more than many other places in the world. I have been told by a friend who recently had a kid, that the cost out of pocket if one wants to have a kid without insurance is roughly $90,000. This problem is compounded by the fact that I believe it is possible to compound capital at high rate a year and so spending money on a kid while we are young is foregoing much more capital in future value. I didn't want to have a kid for the longest time and if it weren't for my wife, it probably would have been a foregone conclusion that I wouldn't. It didn't occur to me, until fairly recently, how much a society's incentive structure impacts the answer to some of life's more important questions. In hindsight, it is strange to compare money to the miracle of life. And yet, almost all advanced economies have plunging birth rates, likely for many of the same concerns I had.

We will probably have kids. I think that comes with some important questions and chiefly among them is the set of values we'd like to articulate. Some of that, of course, can be done explicitly. We can say "be honest". But in a world where cheating can sometimes get you ahead, how can one provide an environment where the benefit of honesty exceeds that of cheating? To me, the answer is one that incentivizes long term thinking. Cheating is a short term win, long term loss. I hope I'm somehow able to incentivize my kids to think long term and therefore themselves, become incentivized to do the right thing. It can be argued that the art of parenting is one where one is thoughtful of incentives regardless of rationality or not.

My wife and I have been traveling the world for a few months. One of the questions I've been hoping to get clarity on is how to think through investing in foreign markets. There are, of course, simple quantitative measures which allow one to quantify the differences in international markets (equity risk premiums, default spreads, etc.). But all quantitative measures tend to be blended figures which obscure regulatory, political, and governance issues. The question of how a regulatory authority is one which requires one to think through how to regulate an emerging industry is likely how that authority is incentivized. How good employees are, are also of paramount importance since this affects everything from supply chain to product. Those employees can be motivated by vision, compensation and so on. That is, thinking through how employees are incentivized is also a critical part of investing. Finally, businesses serve customers who are, themselves incentivized by their own values, needs, and wants. And so, incentives play a huge role in investing on pretty much all levels from societal structure, to the employees, to the customers. We call the former, politics, HR, and marketing, but they are all, in the end frameworks and disciplines to think about incentives. At the end of the day, although the quantitative aspects of investing are important, I would argue the qualitative aspects of investing can and should entirely be thought through the lens of incentives.

At the end of the day, the economy, wealth, society, desires, likes, dislikes, passions, the things that make life worth living or the frustrations in life are mostly driven by people. All people are driven by incentives. It is worth thinking through what one is incentivized by and what one incentivizes.

Comments

Popular posts from this blog

How to get 70 job interviews in 17 days

When I was but a wee lad, I dreamed of being a janitor for NASA. There's just something awesome about playing a part, no matter how small, of something that dares to push the world forward. While I no longer hold my old lofty dreams of working for NASA, I have had to recently look for jobs. For whatever contrived reason, the conventional thinking behind how people should search for jobs falls under two categories: networking and job sites. While those approaches work, a very useful metaphor for how you might view yourself is that you're a business. You sell your product (your time) for a salary (your revenue). You might argue, most wages in the western world are $20,000 USD to $500,000 USD. If you're a business, then it's probably also helpful to think about selling your product (time) like a business. Typically, different price points in business dictate different sales and marketing techniques. Below say, $10 a month, direct sales (sales where you sell to people

What marketing might look like in the future

There once lived a wise, middle aged, bald prophet named Marc Andreessen. His job, was to profit from prophecy. Today, he is one of the most well known, and respected, venture capitalists in the world. He is famous for some of his sayings such as "if you want to see where a bubble is forming, follow the MBAs" in reference to the MBAs going to Wall St during the mortgage backed securities crisis of 2008 and the dot com bust in 2002. Arguably, his most famous saying is/was "software is eating the world". Today, it's a foregone conclusion that, software has broken the way a lot of industries fundamentally operate. I think it's particularly interesting, however, to think about what that means for marketing. I'm of the opinion that, very few companies really understand what they're doing and that modern marketing should not only look like engineering... it should be engineering. One way to think about marketing is that there are two key components to ma

Superficial impressions of business in China

I’m walking down a residential street in Tianjin. Food vendors hustle their wares for dirt cheap prices. A whole Peking duck for $3.80 USD? Sign me up for that! As I bring my spoils back to my girlfriend’s apartment, I can’t help but feel like I’m caught back in time while the rest of the country is moving in fast forward.  I’m on my computer looking at valuations of companies in the healthcare/pharmaceutical space. $500M here, $300M there. Whatever your conceptions of speed or size are in the Valley, I assure you, they have nothing on China. The game being played in China is big and aggressive. And Clay Christensen’s “Innovator’s Dilemma”? Nowhere to be found. Alibaba does everything from B2B sales to B2C pharmaceuticals. Big companies just aren’t slow here. What about the startups? Even more fast and furious.  As a foreigner, China is a daunting place. Almost every perception of what you think you know about doing business basically doesn’t really apply here. In the Valley,