I am currently reading Jared Diamond’s amazing book ‘Guns, Germs and Steel’ recommended by Charlie Munger a couple of decades ago (as you can see I am pretty up to date with my reading). The book is a treasure-trove for anyone curious about understanding the world. There are a number of mental models which can be applied to the business and investing world.
Here, I want to enumerate a couple of brilliant instances which illustrate the power of habits and incentive caused biases.
Typewriters and keyboards
Have you observed the ubiquitous keyboard / keypad that is a part of every digital device that we use today? At times I have wondered about the “QWERTY” nature of it. Why is the design of all keyboards in the “QWERTY” form? Let me explain further. While reading Sherlock Holmes, I came across the interesting fact that the most common letter in the English alphabet is ‘E’. While I do not know the second most popular, I am pretty sure that the letters, ‘A’ and ‘S’ are quite popular as well.
But curiously, these popular letters are on the left side (whereas most humans are right-handed) and nearer the weaker fingers of the left side as well. That is quite strange isn’t it. The alphabets closest to the most commonly used finger - the right forefinger - are ‘Y’,‘H’, ‘J’, ‘U’. I don’t think you would find them in the list of most commonly used alphabets.
It is upon reading the above book that I understood the reason behind the popularity of the “QWERTY” keyboard. This ‘anti-engineering feat’, as Jared Diamond refers to it, has an interesting history. When the keyboard layout was designed in the beginning to manufacture typewriters, the designers employed a whole series of tricks to ensure that the typists typed as slowly as possible.
Yes, that’s right. It sounds downright silly to us sitting here who believe that the sole goal of developing technology is to make things simpler (it is another matter that the unintended consequence is the opposite - the intent is to make life simpler). The typewriting manufacturers took great care to make typing difficult in the beginning.
The reason was that the manufacturing technology was not so advanced in 1873 when typewriters were first manufactured. They jammed if adjacent keys were struck together in quick succession. And this explains the design we see today.
So what happened after the technology developed?
Well, in 1930s trials were done on a more efficient keyboard layout that would double the typing speed and reduce the typing effort by 95%! But incredibly, they failed. QWERTY keyboards were solidly entrenched by then. The habits and incentives of millions of typists, teachers, salespeople and manufacturers have crushed all moves to typing efficiency.
Imagine that the reason for more than a century of inefficiency (think of the cumulative human hours wasted) is the habit forming nature of humans that led to incentive bias. Consider for a while the power of this bias - which was so strong that it overcame man’s seemingly unending search for higher efficiency.
Samurais and the (temporary) downfall of Japan
When I was young I remember loving the Tom Cruise movie the Last Samurai. It is a story about an American military advisor who embraces the Samurai culture he was hired to destroy after he is captured in battle. For a while after watching the movie I took my cricket bat and swished at imaginary villains at my home. Let’s just say the movie made quite an impression.
In the movie, the Americans help one Japanese faction defeat another by providing them the technology of gunpowder. The opposing side follows the code of the Samurai - they do not use guns. They instead fight using swords and horses. Given the way the movie is made, one can’t help rooting for the Samurai class for their honour and dignity.
But here is a fact from the book that made me scratch my head in wonder - Japan actually had possessed gun technology and then abandoned it. This again is strange - why would a civilization voluntarily give up technology?
Apparently, firearms reached Japan in 1543 AD via two Portuguese adventurers who reached the country via a Chinese ship. The Japanese were initially so impressed with the technology that they began indigenous production of guns. By 1600, they had more and better guns than any other country in the world.
And then they abandoned it. Why?
There were a confluence of factors working against the adoption of guns in the empire. The country’s numerous warrior class, the samurai used swords as their primary weapons of war. Swords were also class symbols, works of art and were also means of maintaining power over the lower classes. Japanese warfare initially primarily involved single combats between two samurai swordsmen who made ritual speeches and then engaged in graceful fighting. This behavior was under risk when one had local peasant soldiers blasting away with guns.
Also, after 1600, a sudden rise of patriotism led to boycott of what was considered to be foreign technology - of which guns were a part.
The Samurai controlled government began by restricting gun production to a few cities, then introduced a requirement of a government license for producing a gun, then issued licenses only for guns produced for the government, and finally reduced government orders for guns, until Japan was almost without functional guns again.
Only because Japan was a populous, isolated island could it get away with its rejection of the powerful new military technology. Its safety in isolation came to an end in 1853, when the visit of Commodore Perry’s U.S. fleet bristling with cannons convinced Japan of its need to resume gun manufacture.
Consider once again the importance of the above story. The bias for the ruling Samurai class for maintaining the existing structure was so strong that they rejected a technology which was clearly a better way of defending themselves. They put their entire country and future generations at risk due to their blindness. It was sheer luck (isolation from the other parts of the world due to island topography and dense population) that they were not wiped out by a gunpowder wielding stronger civilization.
It is fascinating but this particular bias rears its head in many human contexts.
There are many businesses which became extinct due to incentive caused biases. This post in the community lists a couple of fascinating ones. Below is an excerpt:
Edwin Land, Polaroid’s founder, and his successors were too fixated on Polaroid’s legacy business. The whole organization thought of itself as a chemical engineering corporation, with a focus on photographic chemistry.
Kodak even developed the first digital camera in 1975, but management poo pooed the idea. Kodak, too, forgot what business it actually was in. From the customer’s perspective Polaroid and Kodak were in the business of capturing memories. The hardware, chemistry and engineering were secondary, a means to an end not the end to the means.
Polaroid and Kodak were among the largest businesses in their time. But incentive caused bias, in its inimitable insidious way, had firmly entrenched itself in the organization. The senior members were comfortable and set in their ways of thinking about chemistry.
Here is another example:
While writing about Vineet Nayar (here), we came across a fascinating snippet on incentives worth sharing here.
As part of ‘Employees First, Customer Second’ mantra, HCL introduced an online smart service desk which allowed anyone in the organization to lodge a complaint or make a suggestion by opening a ticket.
The idea behind the ticketing system was that previously, whenever an employee wanted to do something, the managers of the enabling departments like finance, HR, admin, etc would quote some rule or regulation as to why that cannot be done. Vineet referred to these managers as ‘Gods’ for their ability to allow or deny requests.
So he and his team set up a ticketing system which incentivised the ‘Gods’ to resolve the tickets within a certain period of time.
And it worked!!! In the first week, the company had 10,000 tickets and 99% of them were resolved withing two to three hours. The next week, there were 20,000 tickets of which 98% were resolved quickly.
And so Vineet called the ‘Gods’ for a celebration in a town hall. Just as he was raising a grand toast to all 500 present, a 21 year old girl got up and said,
“Vineet, I have not met anybody else as foolish as you.” To which he replied, " I have teenagers at home and I have heard the statement before, but please elaborate." Her response was classic, “How can you celebrate the fact there are 20,000 problems in your company , and celebrate with the people who have created it in the first place?”
Vineet was stunned. How did he miss something so simple? It was late night but still he went straight to his office to introspect. The next day he announced a change in the plan -
The ‘Gods’ were to be incentivised on days there were NO tickets raised by employees. They called it the ‘no ticket day’.
After this, any new policy to be implemented had roadshows and was discussed in detail with employees. The ‘Gods’ were incentivized to avoid tickets.
This simple change in the incentives created a system that served the frontline employees better, which was of course the goal right from the beginning.
As Munger repeatedly says, incentive caused bias is one of the strongest biases in human nature. If incentive caused biases and habits can be so powerful so as to blind whole populations and countries, imagine how blind we would be to it in our daily lives.
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