STREET DOGS

PEOPLE are people, they respond to incentives. They can nearly always be manipulated, for good or ill, if you find the right levers. — Steven D Levitt.

Charles Munger wrote in Poor Charlie’s Almanack: “Perhaps the most important rule in management is to get the incentives right.” To explain what he meant he told the story of two clients his father had as an attorney. One was Grant McFayden. He owned a Ford dealership and was a brilliant man of enormous charm and integrity who made good decisions. The other was Mr X (Munger leaves out his name). Mr X was a blowhard, overreaching, pompous, difficult man.

Charlie, when he was 14, asked his dad why he did so much work for Mr X, the blowhard, instead of doing more work for wonderful man like McFayden.

His father’s answer: “Grant McFayden treats his employees right, his customers right and his problems right. If he gets involved with a psychotic, he works out an exit as fast as he can. Consequently, Grant McFayden doesn’t have enough remunerative law business to keep you in Coca-Cola. But Mr X is a walking minefield of wonderful legal business.”

Translation: lawyers have a much stronger financial incentive to represent clients who get into trouble and even break the law and are likely to see less financial gain (therefore have less incentive) from working for highly ethical clients.

“That’s what partly drove me out the profession,” wrote Munger. “You don’t want to be in a perverse incentive system that’s rewarding you if you behave more and more foolishly, or worse and worse…. Perverse associations are also to be avoided. You particularly want to avoid working directly under somebody you don’t admire and don’t want to be like.”

Michel Pireu — e-mail: pireum@streetdogs.co.za