Ever wonder why systems meant to empower us sometimes feel like they’re working against us? I’ve been mulling over this lately, especially when it comes to how we learn and how businesses operate. It’s not just random chance—there’s a thread tying these frustrations together, and it’s called incentive structures. When the rewards push us toward the wrong goals, we end up with outcomes nobody wanted. Let’s dive into two areas where this happens: education and corporate finance. Buckle up—it’s a wild ride.
The Hidden Forces Shaping Our Systems
Incentives are like the invisible hand guiding our choices. They’re the carrots and sticks that nudge us toward certain behaviors. But what happens when those carrots lead us off a cliff? In education and corporate finance, we’re seeing perverse incentives—rewards that produce outcomes contrary to what we’d hope for. Let’s unpack how these systems, meant to drive progress, are sometimes holding us back.
Education: Rewarding Completion Over Mastery
Picture this: a college student hunched over their laptop, racing to finish a paper before the deadline. Sound familiar? Now, imagine they’re not writing it themselves—they’re feeding prompts into an AI tool. Why? Because the system doesn’t care if they learned anything; it just wants the assignment done. This is where education’s incentive structure starts to crack.
Recent studies show a troubling trend: when classes end, usage of tools like generative AI drops dramatically. One report noted a two-thirds decline in AI platform activity during summer breaks. That’s no coincidence. Students are incentivized to pass classes, not to master the material. The result? A generation of graduates with credentials but limited skills.
American higher education is characterized by limited or no learning for a large proportion of students.
– Academic researchers
This isn’t just a hunch. Research like Academically Adrift confirms that many students leave college without significant gains in critical thinking or problem-solving. The system rewards accumulating credits, not building knowledge. And with AI doing the heavy lifting, the gap between credentials and competence grows wider.
Why Does This Happen?
It’s simple: the incentives are misaligned. Students are graded on outputs—papers, exams, projects—not on how deeply they understand the material. Universities, meanwhile, are incentivized to churn out graduates, not to ensure those graduates are prepared for the real world. Tuition dollars keep flowing as long as diplomas are handed out.
I’ve seen this firsthand. A friend of mine, a college junior, admitted to using AI to write half his essays last semester. He passed with flying colors but struggled to explain the concepts in person. The system didn’t care—he got the grade. That’s the problem.
A Better Way: Accrediting the Student
What if we flipped the script? Instead of rewarding institutions for handing out degrees, we could focus on accrediting the student. Imagine a system where passing rigorous, device-free exams is the only path to a credential. No AI, no notes—just you and your knowledge.
- Test mastery, not memory: Exams should demand deep understanding, not rote recall.
- Randomized questions: Prevent cheating by issuing unique tests in real time.
- Skill-based credentials: Allow students to earn certifications in specific skills, from coding to carpentry.
This approach would reward actual learning. A 17-year-old who aces a university-level exam could earn a degree without stepping foot in a classroom. It’s not about the institution—it’s about the individual’s ability. Sounds radical, but maybe that’s what we need.
Corporate Finance: The Buyback Bonanza
Now, let’s shift gears to the corporate world. Ever heard of stock buybacks? They’re when companies use their profits to buy back their own shares, boosting stock prices. Sounds harmless, right? Not so fast. In 2025, projections suggest buybacks will hit a staggering $1.1 trillion, led by tech giants and big banks. That’s money not going into new factories, research, or jobs.
Buybacks were legalized in 1982, kicking off an era of financialization—where companies prioritize stock prices over real-world growth. Instead of investing in innovation, they’re inflating their share value to enrich executives and shareholders. It’s a classic case of incentives gone wrong.
Financialization has hollowed out the real economy to benefit the few.
– Economic analysts
Why do companies do this? Because executives are often paid in stock options. Higher stock prices mean bigger bonuses. Meanwhile, the economy stagnates as capital gets funneled into financial games rather than productive assets. It’s like a chef spending all day rearranging plates instead of cooking.
The Tariff Excuse Doesn’t Hold Up
Some argue that uncertainty, like tariff debates, is holding back investment. But that’s a weak excuse. Buybacks were skyrocketing long before tariffs became a hot topic. The real driver is the incentive structure: it’s easier and more profitable to manipulate stock prices than to build something tangible.
Think about it. If you’re a CEO, and your bonus is tied to stock performance, why risk billions on a new factory that might take years to pay off? Buybacks are quick, safe, and make everyone at the top look good. But for the broader economy? It’s a losing game.
Rewriting the Rules
So, how do we fix this? It’s about changing the incentives. Here’s a thought experiment: what if we taxed buybacks heavily and rewarded domestic investment? Imagine these changes:
- Tax buybacks at 50%: For every dollar spent on buybacks, companies pay a dollar in taxes. This would discourage financial games and generate revenue for public good.
- Zero-tax domestic profits: Profits from production with mostly domestic components and labor could be tax-free, encouraging real investment.
- Tie bonuses to growth: Link executive pay to job creation or innovation, not stock prices.
These shifts would push companies to prioritize long-term growth over short-term gains. It’s not perfect, but it’s a start. The challenge? Those benefiting from the current system have little reason to change it.
The Bigger Picture: Aligning Incentives with Outcomes
Whether it’s a student using AI to skate through college or a corporation buying back shares to boost executive pay, the problem is the same: misaligned incentives. We’re rewarding the wrong things—completion over competence, financial tricks over real progress. It’s no wonder outcomes feel so… off.
In my view, the most frustrating part is how entrenched these systems are. Those at the top—university administrators, corporate executives—have no incentive to rock the boat. Why would they? They’re winning under the current rules. But for the rest of us, it’s a different story.
| System | Current Incentive | Outcome | Proposed Fix |
| Education | Complete assignments, earn credits | Limited learning, reliance on AI | Device-free exams, accredit students |
| Corporate Finance | Boost stock prices via buybacks | Hollowed-out economy | Tax buybacks, reward domestic investment |
This table sums it up: our systems are built to reward short-term wins, not long-term value. But change is possible. It starts with recognizing the problem and demanding better.
What Can We Do?
It’s easy to feel powerless, but there are steps we can take. For education, advocate for skill-based credentials and real-world testing. Support policies that prioritize learning over diplomas. In finance, push for tax reforms that reward investment in people and infrastructure, not stock manipulation.
Perhaps the most interesting aspect is how interconnected these issues are. A better-educated workforce could demand more from corporations. A healthier economy could fund schools that focus on real skills. It’s a cycle—one we can steer toward better outcomes if we rethink what we reward.
Show me the incentives, and I’ll show you the outcome.
– Business icon
That quote’s been stuck in my head lately. It’s a reminder that we’re not doomed to repeat these cycles. By redesigning incentives, we can build systems that work for everyone—not just the few at the top. What do you think? How would you change the rules?
