Let me explain.

The heart of economics deals with incentives. Incentives shape the behavior of an individual. These incentives need not necessarily be monetary. They can be non-material forms like love and respect among others. It is my personal belief that Incentive theory can be applied almost to any field with success.

Incentive theory has been more widely known as the principal-agent problem, especially when applied to the corporate world. In the corporate world, the principal is the employer and the agent is the employee. The theory states that the interests between the principal and the agent may not necessarily be aligned, and hence the agent might not wholeheartedly pursue the interests of the principal. Various mechanisms have been devised to align interests like commissions, profit sharing, stock options, efficiency wages and even a disincentive like firing. All the above mechanisms and many more try to address the principal-agent problem. Extending the theory to the world in general, I call it the Incentive theory.

My general and overarching principle states that people change their behavior according to the incentives/disincentives available. My exposure to this principle came through to me primarily in the corporate world. Once I understood this principle, it became very easy to extend this framework to other subject areas leading to conclusions with immense predictability. I did play back this principle/framework with multiple people and almost all agreed to the notion that the theory of incentives works in all subject areas, including love.

Situations are many. I will quote just a few examples -

1) Corporations – This is an easy one, easily extended from the principal-agent problem. Sales professionals are usually the paid the highest, since their incentives (commissions) are tied to the sales they bring in and hence leads to the growth of a company. Employees working in IT care not so much for the sales numbers, but to the number of errors/bugs they generate since their incentive is tied to superior code. The employee on a car assembly line works towards number of cars he can work on, since his incentive is tied to that particular element of his job.

 2) Work – All incentives need not be monetary. For example, people wanted to work for Google way back in 2000-2004, not necessarily because of monetary incentives but because it was a ‘cool’ place to work for, a place where all ‘smart’ people worked. Every computer science engineer worth his salt wanted to work for Google. Similar was the case with Microsoft in the early 90s. Eventually, people made money – but that’s not the point. The primary motivation to join Google/Microsoft was not money but ‘coolness’ and ‘smartness’.

 3) Dating and Love: It is plain amazing what people do during dating/love. The incentive here is to feel happy by pleasing the other person and more often than not, expect reciprocation of the affection/warmth/love that you had exhibited. As much as ‘Be Yourself’ is the mantra, people tend to adjust their behavioral patterns (and in some case, sleeping patterns) to get along with their partner. I have personally known a total non-reader reading up on her partner’s favorite authors, a frequent drinker becoming a teetotaler etc. Yes, these actions may not be permanent, but they are temporary enough for the other partner to reciprocate their love/warmth.

 4) Blogging – Why do people blog? Why do I blog? What is my primary incentive? There might be many incentives – fame, sounding intelligent, leading to a book, impressing a girl, making friends in the blogging world, networking and so on and so forth. Multiple bloggers have these and many other incentives, each onto his own.

 All this is commonsense – don’t you think? I certainly felt so, but only after I started thinking in this mode. I call it a ‘mode’ because living life by constantly thinking about incentives/disincentives will drive people crazy. We are inherently built to act according to our incentives and so it shall be, whether we like it or not. I stated this theory to lay out a framework of thought process that one has to consciously imbibe, so as to understand and appreciate the world and the wonderful, but incentive-driven human beings in it. Ask yourself for any situation – What is my incentive here? What is his/her/their incentive here? How do I modify the incentives to create a win-win/win-loss situation? You’d be surprised at the number of things you’ll learn once you start applying this principle/framework in day-to-day affairs. I definitely was.