Winning Over the Addiction Of Wrong Rewards

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Within one year of launch, a credit card payment company called Cred has garnered more than 30% of the monthly credit card payment share in India. The key selling point to win the market share has been the ease of use and variable cash rewards given on each payment. After every payment, you are given a variable cash award. Apart from the cash rewards, the surplus points credited on payment can be used for discounted purchases and experiences.

What cred did is very simple to understand. It learnt from the pavlovian theory to condition a response by providing a stimulus. In his classic experiment, Ivan Pavlov would ring a bell every time he gave food to his dog. After multiple iterations, he started noticing that the dog would salivate at the ring of the bell.

In the case of cred, the stimulus is the variable cash reward in response of using the app to make the credit card payments. When the user of the app has made a payment and secured the variable cash rewards, they do not stop there. They are attracted to the redemption store where branded products and experiences could be purchased at discounted prices. The user just doesn’t know that they are eventually losing out.

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We learnt from the above example that humans do what works for them. We go where the rewards are. This has been explained very well by Charlie Munger in his talk on psychology of human misjudgement where one of the misjudgement is the rewards and punishment super-response tendency.

(Poor Charlie’s Almanack is a highly recommended read)

He explained that people work for rewards and escape the punishment. Incentives shape our motivation to undertake any task.

The iron rule of nature is, you get what you reward for. If you want ants to come, you put sugar on the floor – Charlie Munger.

Take stealing for example. We don’t steal because we know that it’s a punishable offense. However, studies have shown that 23% of people would steal if they wouldn’t get caught. We would have done it if it wasn’t punishable because it would be easy to steal and provide us with immediate rewards.

We must be careful to avoid getting addicted to the wrong kind of rewards. While the rewards may be variable and huge albeit with low probabilities, if the rewards come even with a tiny amount of probable blowout, we must identify and avoid seeking such rewards.

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Leveraged trading in the stock market is the best example. You may be getting small rewards every day and you start believing that you can make a living out of trading. And one rainy day, a black swan event wipes you out. You lose a huge amount of money on your leveraged trades and go bankrupt. You do not want to live a life on the edge.

While some rewards are immediate in nature, the punishment is pushed way out in the future. Smoking one cigarette every day does not kill you. But, over a period of 30 years, you have smoked 10,950 cigarettes. Enough to kill you. There is no way out.

Compounding is everywhere. Positive rewards compound positively. Negative rewards compound negatively. The effects of either are not realised in the short-term. You just want to be on the right side of compounding.

What should one do to seek positive rewards and avoid all kinds of punishment and negative rewards?

Encourage the right behaviour. Make systems and rules to encourage such behaviour.

Set examples for others to follow.

Montaigne said ” It is a custom of our justice to punish some as a warning to others. For to punish them for having done wrong would, as Plato says, be stupid: what is done cannot be undone. The intention is to stop them from repeating the same mistake or to make others avoid their error. We do not improve the man we hang; we improve others by him.

Hold the decision-maker responsible.

Charlie Munger gives an example “The Romans had a really responsible system which they used to build an arch. The guy who created the arch stood under it as the scaffolding was removed. It’s like packing your own parachute.”

Reflect on your actions.

“Everything in your life is a reflection of a choice you have made. If you want a different result, make a different choice.” Anonymous

Avoid places you know will kill you.

All I want to know is where I’m going to die, so I’ll never go there. – Charlie Munger


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