"Show me the incentive and I’ll show you the outcome." — In which cases did Charlie Munger emphasize this the most?

The Story Behind Munger's Famous Quote

Hey, that's an interesting question! I love digging into Charlie Munger’s wisdom too. His quote, "Show me the incentive, and I’ll show you the outcome," essentially means that the behavior of people or organizations often hinges on their underlying incentives—in other words, what drives them shapes the results. Munger never just theorizes; he always uses real-world examples to make his point crystal clear. Let me break down a few of his go-to stories for you, keeping it conversational.

1. The Federal Express Night Shift Workers Case

Munger adores this story. Early on, FedEx had a major problem: Night shift workers tasked with unloading packages from planes and reloading others were dragging their feet, crippling efficiency. The company tried everything, but nothing worked. Finally, someone realized the issue lay in the incentives—workers were paid by the hour, so they were happy to drag out the work to earn more.

Munger’s solution? Change the incentive: Pay them per plane processed, regardless of time spent. The result? Workers suddenly had a fire lit under them, finishing tasks lightning-fast to head home early. Munger used this to stress that wrong incentives distort behavior, while the right ones create magic. It’s a behavioral economics classic, and he’s cited it repeatedly in speeches to remind people not to overlook these "hidden drivers."

2. Xerox’s Sales Incentive Blunder

Another favorite of Munger’s involves Xerox’s copier sales. Xerox invented the first commercial copier, but salespeople earned commissions based on units sold—not customer usage or satisfaction. As a result, they aggressively pushed high-end machines onto small businesses that didn’t need them. The machines malfunctioned, customers were unhappy, and Xerox’s reputation tanked.

Here, Munger highlights how incentives focused solely on short-term sales, ignoring long-term value, lead to harmful "overselling." Xerox later fixed this by shifting to incentives tied to leasing and usage fees. In his investment philosophy, Munger often warns that such mistakes are rampant in corporate management, urging investors to scrutinize whether executive incentives align with shareholder interests.

3. Wall Street’s Bonus System and the Financial Crisis

When discussing investing and behavioral economics, Munger also calls out Wall Street bankers. Before the 2008 financial crisis, many traders received bonuses based on short-term profits—like selling risky mortgage-backed securities. They pocketed huge payouts regardless of looming crashes. The outcome? A frenzy of risk-taking inflated a bubble until the whole industry blew up.

Munger bluntly calls this incentive design "toxic": It rewards short-term gambles while ignoring long-term risks. At Berkshire Hathaway meetings, he repeatedly urges investors to examine how company executives are incentivized—are they driven by short-term bonuses or long-term equity? The former often spells disaster; the latter is far more reliable.

Why does Munger hammer this point? Because he believes human nature is steered by incentives. If you’re an investor or manager, remembering this helps you dodge countless pitfalls. For example, when picking stocks, don’t just skim surface-level performance—dig into the incentive mechanisms behind it. Munger’s book Poor Charlie’s Almanack explores these cases in greater depth; I highly recommend it—things really start to click as you read. Feel free to ask more questions!