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Letter to Learners, July 2019

Incentives, Focus, and Developing Your Circle of Competence

I started nearly a year and a half ago, and since then, I have been on a weekly reading and learning binge. There are worse things in life to binge on than good reading material, but even so, most days I don’t take enough time to just sit and think. As Charlie Munger once opined, ‘most people calculate too much and think too little.’ Thus, the idea for a less frequent “letter to learners” was born out of the need for time to sit and think about what I’ve been learning. The best way I have found to keep a personal promise is to go public with it. The social pressure (whether real or perceived) can be a heavy, but positive behavioral bias if you’ve gone public with a goal, so here’s to structuring personal incentives in a positive direction!


Business involves people, people have drives and emotions, and these drives can be largely swayed by the set of incentives in place in society and at work. I have moved beyond the idea that a company is a set of numbers to be analyzed rationally on paper. These numbers represent the collective efforts of people who are anything but rational. While in school, you learn so many theoretical concepts relating to financial analysis, strategy, market dynamics, but one concept you hardly ever focus on is how incentives are structured. Let’s look at a few examples.

Wells Fargo’s incentive structure was based solely on new account sales and the pressure was slowly raised to pressure-cooker levels. I have found that incentives mixed with other social pressures almost always results in behaviors in the direction of least resistance and/or highest reward. The sales members had three options: either upsell their clients (who had no interest in opening 5 checking accounts), get laid off (“I can’t afford not to feed my family”), or open fake accounts (“Everyone else is doing it…”) You get what you incentivize.

Facebook prioritized and incentivized growth over every other metric. Google’s YouTube did the same. And now, facing unintended consequences of radical user generated content and user polarization as a result of their reinforcement algorithms at play, they are under the regulators’ microscope. You get what you incentivize.

Seth Klarman, the CEO o