It is the tendency to make a decision based on observable, quantitative metrics while ignoring all others. The McNamara Fallacy is the flawed assumption that what can't be measured isn't important. The McNamara Fallacy is named after Robert McNamara-the US Secretary of Defense from 1961-1968-whose over-reliance on quantitative metrics led the US astray during the Vietnam War. The Soviet factory managers had viewed nail quantity and nail weight as easy ways to measure production, so they gave their workers incentives based on these measures. That should fix the tiny nails problem! What happened? The workers produced a few massive nails. Nevertheless, they persisted, adjusting the incentives to be based on the weight of nails produced. What happened? The workers produced thousands of tiny nails. In order to meet their ambitious goals, the Soviets needed to produce more nails to fuel their industrial complex.įirst, Soviet factories established incentives based on the number of nails produced. The result? Locals gamed the system, breeding cobras to earn the bounties.Īn incentive designed to reduce the cobra population actually increased it! Soviet Nails The British viewed cobra heads as a simple way to measure cobra elimination, so it gave the population an incentive to deliver cobra heads. When the breeding got out of hand, some of the breeders were forced to release the cobras onto the streets, thereby increasing the population of cobras.Ĭlearly not what the British had in mind… Locals excitedly began breeding cobras, chopping off their heads, and turning them in to earn the bounties. The British colonists-worried about the impact of these deadly creatures-started offering bounties for cobra heads. This simple model of incentives-which will feel familiar if you have ever worked in the government, a large organization, or anywhere really-often leads to undesirable outcomes and unintended consequences. The target can be specific (you receive your incentive if the KPI hits X level) or general (you receive your incentive if your manager is satisfied with your work).īut there is a real problem here. Target: The level of the measure at which a reward or punishment will be initiated. The measure can be quantitative (KPIs, metrics, etc.) or qualitative. Measure: The metric that the individual or group will be judged upon. In a (very) simple model, extrinsic incentives involve two key components: Extrinsic incentives are external-created by outside factors, typically a reward (positive incentive) or punishment (negative incentive).įor today, we'll be focusing on extrinsic incentives… Intrinsic incentives are internal-created by self-interest or desire.
They come in two forms: intrinsic and extrinsic. Incentives are anything that motivates, inspires, or drives an individual to act in a specific manner. Let’s start with a basic definition of incentives: In today’s piece, I will share a framework for establishing incentives (that actually create desired outcomes). More often than not, we wind up in the poorly-designed camp scrambling for answers and quick fixes. Unfortunately, humans are astonishingly bad at establishing incentives-we consistently create systems that invite manipulation and unintended consequences. Well-designed incentives have the power to create great outcomes poorly-designed incentives have the power to…well…create terrible outcomes. Incentives are everything-an uber-powerful force governing our interactions, organizations, and society. “Show me the incentive and I will show you the outcome.” - Charlie Munger