Wednesday, April 14, 2010


Recently, I have been thinking about how incentivisation effects systems. Most recently in the news is the Goldman Sachs inquiry going on in Washington. Fabrice Tourre, a prominent GS trader stands up for himself saying that he has done no wrong doing. I happen to think that Fabrice is correct. These guys set themselves up so that they would make more money if the market fails than if the market succeeds. This is legal. Why is everyone so pissed off? Well then they started doing things to ensure that the market would fail. Shiesty? Yes. Illegal, no. It's really just a matter of incentivisation. The system is setup in such a way as to provide benefits for the people who produce the greatest gains in a given period of time. If that period of time is short (typical for any manager/director/CEO) then no one should be surprised when record profits come during on year, and record losses come during the following year, or in this case for everyone else. Why should they care of they put the entire economy at risk? That wasn't part of the contract. The contract said, you make us money, we pay you money. It didn't say, as long as we make money over the 5 years after we pay you this bonus, you can get the bonus. That doesn't make any sense. What does make sense is to make a huge chunk of the bonus pay off over 5 years based on the long term performance of the company. This is good incentivisation.

The exact same thing can be said for doctors. They have been getting paid based upon the amount of work they do. Sounds good right? The issue arises from what we should value from our doctors. Isn't the big end goal for better health? Better health rather than more health, because really how can you have more of health? Not to mention that many procedures (what they are incentivised to perform) often cause more problems than they solve. Imagine someone who needs to have a biopsy. You have to go in cut them open and remove the stuff. If there was nothing wrong to begin with say the cells are abnormal, but just sitting there, now the person has to heal from the surgery, deal with the mental stress of waiting for the death sentence, take of work, lose money, spend money. It really creates some adverse effect. YET, the Dr still makes money from performing the procedure even though his/her patient may be in worse health because of the procedure. This is all because of the incentivisation of the Dr.