The extreme success of free-market capitalism as an economic system owes much to

its prevention of many of bad effects from incentive-caused bias. Most

capitalist owners in a vast web of free- market economic activity are selected

for ability by surviving in a brutal competition with other owners and have a

strong incentive to prevent all waste in operations within their ownership.

After all, they live on the difference between their competitive prices and

their overall costs and their businesses will perish if costs exceed sales.

Replace such owners by salaried employees of the state and you will normally get

a substantial reduction in overall efficiency as each employee who replaces an

owner is subject to incentive-caused bias as he determines what service he will

give in exchange for his salary and how much he will yield to peer pressure from

many fellow employees who do not desire his creation of any strong performance

model.

 

Another generalized consequence of incentive- caused bias is that man tends to

“game” all human systems, often displaying great ingenuity in wrongly serving

himself at the expense of others. Anti- gaming features, therefore, constitute a

huge and necessary part of almost all system design. Also needed in system

design is an admonition: Dread, and avoid as much you can, rewarding people for

what can be easily faked. Yet our legislators and judges, usually including many

lawyers educated in eminent universities, often ignore this injunction. And

society consequently pays a huge price in the deterioration of behavior and

efficiency, as well as the incurrence of unfair costs and wealth transfers. If

education were improved, with psychological reality becoming better taught and