# Incentives and Distortions

Incentives make you act; transparency makes sure you act on the right information.

I recently read that in Italy, train trips are subsidized at an average rate of 15€ per ticket (about $17, [source](https://x.com/ramella_f/status/2100969173803253865)).

I don't want to comment on whether these subsidies should exist: that's a political choice, with no obvious right or wrong answer. But they should at least be visible, on every ticket purchased. Otherwise, people see the price they pay, but not the full cost behind it, and over time this can create distorted beliefs about the relative costs of different options.

Doing so would not be enough to change behavior or transportation choices; that's not the point. But it would improve the discussion the next time we decide how to invest in infrastructure. The more visible the costs and tradeoffs are, the more our decisions can reflect the actual reality we live in, rather than the one we think we live in.

To be clear, I'm not saying this because I want investment or infrastructure decisions to move in any particular direction. And just as I'd like train tickets to show the actual price, I'd like fuel, tolls, and parking lots to show their actual price, too. My point is that better information is valuable regardless of which policy it ends up supporting. After all, if making the costs and tradeoffs more visible makes my preferred option look less attractive, then that option was worse than I thought it was. Learning that is not a loss but a gain.

### More in general

When it comes to public policy, but also corporate management, I think there is too much emphasis on incentives and too little on reducing distortions.

Don't get me wrong: incentives are necessary to attract and retain talent, and to make everyone feel like they are treated fairly. But the focus on adding incentives should be paired with a focus on keeping the reality underneath them visible.

Incentives are what make you take action, but transparency is what ensures you take the right one. Companies with strong incentives but weak transparency about the true costs of things will find themselves full of action, but that action will bring mediocre results, for it will be at least partially misdirected.

Moreover, the stronger the incentive, the easier it becomes to misunderstand that underlying reality. Let's go back to the example of trains. Subsidizing them makes train travel cheaper for the passenger, and that might be exactly what we want. But if the subsidy itself is invisible, over time the observed price can start being mistaken for evidence about the relative benefit of using trains over cars. That distorted perception can then make us take poorer infrastructure decisions down the road.

Of course, transparency is not enough: knowing the true costs of decisions won't guarantee that the right decisions are made, especially if incentives towards poor decisions are too strong. But at least it makes poor decisions easier to notice, discuss, and argue against.

This last point is key. In the short term, what matters is getting this decision right. In the long term, what matters just as much is ensuring that the next decision will be made better. But that requires a functioning feedback loop: we need to be able to see which past decisions worked, which did not, and why.

The fewer the distortions in that feedback, the more we can learn from reality rather than from a reality partly created by our own incentives.