Munger places Reward and Punishment Superresponse first among his 25 tendencies because “almost everyone thinks he fully recognizes how important incentives are in changing cognition and behavior. But this is not often so.” The critical mechanism is not that bad people do bad things — it’s that incentive structures cause otherwise decent people to drift into harmful behavior, then rationalize it as justified. A surgeon in Lincoln, Nebraska sent “bushel baskets full of normal gall bladders” to pathology for years, not because he consciously chose fraud, but because he genuinely convinced himself that “the gallbladder was the source of all medical evil.” Similarly, Xerox salesmen pushed inferior machines on customers because commission structures made it profitable, and Westinghouse’s lending officers made reckless hotel construction loans because accounting rules rewarded them with immediate paper profits.
The antidotes Munger prescribes are structural, not moral: “especially fear professional advice when it is especially good for the advisor,” learn enough of your advisor’s trade to evaluate their counsel, and double-check what you’re told. This connects to Systems that prevent bad behavior beat moral appeals — design the cash register, not the sermon — the cash register did more for honesty than sermons ever could. The economic term for this effect is “agency cost,” which acknowledges that “just as grain is always lost to rats, employers always lose to employees who improperly think of themselves first.” Understanding this tendency is essential for decision-making in any context where advisors have misaligned incentives. What makes the pattern particularly dangerous is that Excessive self-regard makes fixable failures persist — people excuse poor performance instead of correcting it — once incentive-caused bias produces poor performance, Excessive Self-Regard Tendency prevents the person from recognizing the shortcoming, creating a self-reinforcing loop of rationalized decline.