When Illogical People Are Actually Right

Part 1: Incentives matter

Jan 22, 2026

I thought they were crazy. The business team wanted to sell one of our contractors to the client, which violated the agreements. I argued against it. My take was that we’d lose team motivation, and other engineers would ask for similar transfers.

In hindsight, they were right. I was wrong. I’d overestimated the motivation risk and underestimated the revenue that the company needed. The business brought the money, and people understood that it was a one-time exception.

My leader pointed out something clear in retrospect: they were incentivised by the revenue they brought, and this transfer could help them. He said something which has stuck with me for years:

When you don’t understand people’s actions, look at their incentives.

Understanding incentives doesn’t mean agreeing with them, but operating is easier when you can predict people’s behaviour.

“Show me the incentive and I’ll show you the outcome.”
— Charlie Munger

Understanding by Asking

Next time someone does something difficult to understand, ask yourself:

What would have to be true about their incentives for this to make sense?

You may be surprised how often this gives you the answer.

If you can’t figure it out, ask them directly:

What are your measures of success?
What gets you rewarded or punished in your role?

What I saw repeatedly during the ZIRP (Zero-Interest-Rates Policy) era: When some companies kept hiring despite no clear work for people, the answer was: “Their next funding round is tied to team size”. So their “illogical” hiring made sense at the incentives level.

Caveats

Of course, incentives aren’t the only thing that matters.

Sometimes people lack information or are under the spell of cognitive biases. But incentives for me are the most underrated predictor of behaviour.

When someone is acting “illogically” from your perspective, they may be just juggling their different incentives, short-term vs long-term, personal values vs organisation politics.

A few months later, after my arguing session, the company changed the bonus system to align these incentives. But people will game any incentive you create. More on that next Thursday in Part 2: The Cobra Effect.