Thursday, July 9, 2009

Systems which encourage cheating I

In “Poor Charlie’s Almanac” the great Charlie Munger gives a good example of the need to avoid creating systems which encourage cheating…. workers compensation.

Summarising – stress is real and the misery it causes can be real. So compensating people for workplace stress seems to be a good idea and a noble thing to do. The trouble is in devising a compensation system it’s close to impossible to prevent huge levels of cheating.

Once you reward such cheating he notes, you get crooked lawyers, crooked doctors, crooked unions, crooked employers – all participating in the scheme. The result is a string of disastrous behaviour and the net effect is to create enormous damage.

So it is often much better to let some things go uncompensated – making life hard – than it is to create systems that are easy to cheat.

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