Most of us have a knee-jerk reaction that when something bad happens to assume that someone or something is “out to get us.”

My personal favorite example is that every time I lose my wallet, my first thought is “someone stole my wallet.”

I have, in fact, never had my wallet stolen but have been sufficiently careless to misplace it many times (usually somewhere I can find it, fortunately).

Hanlon’s Razor is a clever way of pointing this out:

Do not attribute to malice, that which can be adequately explained by incompetence.

However, I think it leaves a little something on the table. I would like to humbly submit an addition to Hanlon’s Razor (which someone on Twitter has dubbed Taylor’s Machete which I thought was funny and I am sufficiently egotistical to want something named after me that I’m running with it).

Don’t attribute to incompetence, that which can adequately be explained by poorly structured incentives.

While it’s true that a lot of things we attribute to malice are actually incompetence, I would go further and say that a lot of what appears to be incompetence is actually the result of poorly structured incentives.

I generally think that most people are doing their jobs to the best of their abilities and that most disfunction is just poorly structured rules and incentives.

I think one of the elements about incentives that is often missed is that people with poorly structured incentives don’t realize that’s the case.

There’s a great story from Charlie Munger about a gallbladder surgeon in Lincoln, Nebraska that did way too much surgery.

Here, my early experience was a doctor who sent bushel baskets full of normal gallbladders down to the pathology lab in the leading hospital in Lincoln, Nebraska. And with that quality control for which community hospitals are famous, about five years after he should’ve been removed from the staff, he was.

And one of the old doctors who participated in the removal was also a family friend, and I asked him, I said, “Tell me, did he think, here’s a way for me to exercise my talents,” this guy was very skilled technically, “And make a high living by doing a few maimings and murders every year, along with some frauds?”

And he said, “Hell no, Charlie. He thought that the gallbladder was the source of all medical evil, and if you really love your patients, you couldn’t get that organ out rapidly enough.”

Not to pick too much on the medical community but I think this is very prevalent there. Because physicians and dentists tend to be best compensated for providing surgery, there is evidence (at least in dentistry, though I suspect more broadly) that far too much surgery is done on people and that the risk/reward is often better to wait and do nothing.

When we think about people with poor incentives, we tend to think “these people must know they are bad/evil/incompetent and are acting maliciously.”

When a financial advisor recommends some complex structured product that exposes their client to a lot of negative risk but gives them a big kickback, we tend to think “oh, that person knew they were doing something wrong and is just a bad person.”

I think that’s almost never the case. Most people doing these things really believe they are doing the right thing. Sure, some people are actual, clinical sociopaths. But, in most cases, it’s something more akin to the Nebraskan gallbladder surgeon: they really think they are doing the right thing.

One implication for this is it is always worth being mindful of the incentives of who you are talking with and working with. I’m pretty excited about the direct primary care movement where doctors in the U.S. move from an insurance-based model to a monthly retainer one: you pay the doctor a monthly fee in exchange for providing a service. They can still be incompetent or a sociopath, but you at least know that they don’t stand to benefit from recommending an unnecessary procedure.

Having spoken with a few doctors that have moved to this model, one of the most common changes is that they tend to become a lot more focused on their patients’ sleep, nutrition and diet than they were previously.

It turns out if you get someone to eat healthy, do some exercise and sleep decently that tends to be upstream of a lot of other issues that resolve themselves.

Another implication is to always be mindful of your own incentives. I like to think that I would “do the right thing” regardless of my incentives, but I try to always put myself in a position where my incentives are as closely aligned as possible as whoever I am working with.

It’s kind of like taking all the unhealthy food out of your house before you start a diet. You can convince yourself all you want that you’ll have more willpower and not crush an entire bag of cinnamon raisin bagel chips (which I did last night and they were delicious), but it’s a heck of a lot easier to just take them out of the house.

Last Updated on May 31, 2021 by Taylor Pearson