by Anthony Bonneville

It’s been an eventful Olympics. Joyous victory, heartbreaking defeat and, in a couple of notable instances, newsworthy disqualifications.

First, the Chinese badminton team was disqualified for not trying hard enough to win a game. On the face of it, a sound decision, not least because their opponents were trying to lose as well, resulting quite literally in a race to the bottom, in which the spectators were the real losers.

In that instance, all the teams involved (eight players in total, actually) were disqualified for having breached the rules which state that one must, having shown up for a game, at least try to win.

So far, so depressing for all concerned.

Then Taoufik Makhloufi of Algeria was also thrown out of the games, despite having qualified for the 1500 metres final.  His crime? His team failed to withdraw him from the 800 metres, so he was forced to compete. Presumably keen to avoid exhaustion and/or injury and thereby risking his chances in the 1500, he dawdled around the track before giving up and wandering across the infield, possibly in an ingenious attempt at a short cut to the finish, but more likely because he simply didn’t want to be running that race.

He was disqualified from the games, including the medal hope he was trying to protect, for not giving a bona fide effort.

There are arguments to be had about the rights and wrongs of sporting conduct, but that is not what is most interesting here.

What is interesting is the clear lesson to be learned in the difference between rules and incentives. Specifically, that incentives are far more powerful than rules.

Think about it. What do you think will happen in the next Olympics, when a competitor has either no interest in a win or, worse, something to gain by losing? Will they, taking the lessons of London, give it 100% and push themselves to the limits, because that is what the rules require?

Or will they simply give the event 70% of their effort, thereby conforming to the rule whilst achieving the outcome they desired all along?

You don’t have to guess, just watch qualifying heats and watch the world’s finest athletes do just enough to qualify, and no more.  World records are not set in qualifying rounds.

In and of itself, this is no bad thing – the spectators will at least enjoy a game worth watching rather than a fiasco. But in terms of outcome, what has really been achieved? Very little.

In contrast, structuring the events such that winning, even in the early rounds, provides advantages later or, in Makhloufi’s case, simply allowing him to withdraw rather than forcing him through a charade of a race that was never going to be, would result in a real competition.

And so it is in the “real” world. In business, in politics, in the media and every other area of life: there are rules and there are incentives.

When news and scandals break, there is always a question of rules. We need better rules to stop the bankers filling their pockets. We need tighter rules to stop MPs claiming expenses for moat cleaning, monocle polish and the very air they breathe. We need better regulation of an out-of-control media that thinks nothing of tapping your phone, raking through your bin and then making its excuses and leaving.

But by taking a relentless focus on the rules, we are perhaps missing the underlying incentives that drive behaviour more effectively.

The biggest scandals of recent years have all occurred in situations where there appeared to be two sides, but they were acting as one club.

The expenses scandal was a means by which MPs on both sides of the house, with a nod and a wink, gave themselves an “off the books” raise.

Bankers, credit rating agencies and brokers were all enmeshed in a system in which, as long as everything kept going up, everyone won. Except everyone else, of course.

News International and the politicians cuddled up together because there was something in it for both of them.

In every case, incentives were common to a supposedly contrasting group, resulting in a total disregard for the rules.

Chinese badminton players, Algerian runners, MPs and bankers: they all acted rationally in pursuit of their goal, in line with the incentives they faced rather than the spirit of isolated rules. The lesson is clear and as applicable to sport as it is to politics or the money markets: tinkering with individual rules or laws alone rarely solves the problem. Aligning the incentives across the range of rules that govern an endeavour is what is required. It means incorporating carrot as well as stick.

Don’t just penalise, incentivise.

Anthony Bonneville works in investment banking

Tags: Anthony Bonneville, bankers, incentives, London 2012

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