Risk, Incentive, and the Power of Knowing: Lessons from Charlie Munger on Business Decision-Making

I’ve always been a fan of reading. Growing up, it was one of the few activities that could keep me quiet in school—my teachers loved that.

But over the years, my reading interests shifted more toward business and self-improvement books, eventually leading me to Charlie Munger, Warren Buffett's partner and a man known for his wisdom on decision-making and success.

Munger has been an important figure in shaping my thinking about business, especially in two areas: Risk and Incentive.

These principles aren’t just philosophical ideas—they are actionable frameworks that have influenced how I approach life, work, and decision-making in my own business.

Risk: “Risk comes from not knowing what you’re doing.”

This is one of Munger’s most famous quotes, and though it’s short, it packs a punch. To me, this means you shouldn’t dive into anything blindly. If you take on a project, invest in a company, or even hire someone, you must understand it inside and out. Knowing the details reduces your risk.

In business, risk isn’t just about financial exposure—it’s about making decisions when you don’t have enough information or expertise. The more uncertain you are, the more you’re gambling. The more you know, the more calculated your risks become.

Think about how this applies in various areas. Let’s say you’re considering a new vendor for your business—like a PEO (Professional Employer Organization). You wouldn’t just pick the first one that comes up on Google.

You’d want to understand how each PEO operates, its services, its reputation, and most importantly, how well it aligns with your company’s needs. Without this knowledge, you’d be walking into unknown territory, vulnerable to unforeseen challenges.

Applying Munger’s wisdom

In my experience working in the PEO industry, I’ve seen business owners dive into PEO partnerships without genuinely understanding the scope of services, legal obligations, or long-term commitments they’re signing up for. That’s a risk.

Munger’s philosophy can save you from costly mistakes. Before deciding, especially in areas crucial to your business operations, you must know what you’re getting into.

Incentive: “Show me the incentive, and I will show you the outcome.”

If you ever want to understand why something is happening—whether it’s a business decision, employee behavior, or political move—look at the incentives involved. This is another core Munger idea, and it’s always fascinated me.

Incentives run the world.

If you want your sales team to perform better, what’s their incentive? If a company makes decisions that don’t seem logical, consider what they stand to gain. This is true for every facet of life, but it’s especially telling in business.

Take PEOs as an example again.

On the surface, they all might seem similar: they provide payroll, HR, benefits management, and workers’ compensation. But dig a little deeper; you’ll see the incentives driving their business models.

Some PEOs might be incentivized to push specific insurance plans because of partnerships that benefit them more than you. Others might structure their fees to reward long-term contracts or to discourage frequent client switching.

Applying this to decision-making: In business, understanding the incentives of different PEOs can be the key to making the best choice. Which PEO is incentivized to keep your costs low? Which one profits from your growth versus one that might profit from volume?

When evaluating vendors, employees, or strategic partners, ask yourself: What’s in it for them?

Risk and Incentive in Decision-Making

Understanding these two concepts is crucial in today’s world, where every decision you make can have significant positive and negative consequences. Business leaders often make the mistake of jumping into agreements or investments without fully understanding the risks involved.

On the flip side, they usually overlook the power of incentives and how they shape outcomes.

Risk comes from not knowing what you’re doing. If you’re going to make a business decision, whether choosing a PEO, hiring new talent, or entering a new market, you need to understand what you’re getting into. This means doing your homework, seeking information, and consulting with experts where necessary.

Incentives drive outcomes.

When you want to predict an outcome, whether it’s in employee behavior or the strategic moves of a partner company, look at the incentives. Incentives tell you a lot about why decisions are made and the likely outcomes.

Incentives also play a huge role in employee retention and satisfaction. Understanding what motivates your employees can help you structure more effective compensation packages or incentive-based goals.

You might be surprised to learn that it’s not always about money—it could be flexibility, recognition, or the opportunity for growth.

How This Relates to Choosing the Right PEO

So, how does all of this tie into selecting a PEO for your business?

Let me break it down:

• Understanding the Risk: Every PEO offers different services, pricing structures, and long-term commitments. If you don’t fully understand how a PEO operates—whether that’s compliance risk, how they handle claims, or what fees are tied to growth—you could end up with more headaches than solutions.

The key is to research and ensure you know the risks involved. Choosing a PEO is not a one-size-fits-all decision.

• Incentive Drives Outcome: When comparing PEOs, always ask yourself what their incentive is. Are they incentivized to help your business grow or just looking to lock you into a long-term contract? Are their fees transparent, or are they incentivized to push specific insurance or benefits packages that may not suit your needs?

Understanding the incentives behind a PEO’s business model gives you a clearer picture of what to expect in the long run.

• The Decision-Making Process: Risk and incentive aren’t just abstract concepts but practical tools for making better business decisions. When you understand the risks involved and align incentives properly, you’re setting your business up for success.

Whether you’re choosing a PEO or making another major decision, understanding the underlying factors will put you in the best possible position.

Final Thoughts: The Value of Knowing

Charlie Munger’s principles of risk and incentive have fundamentally shaped my thinking about business. Whether you’re running a small business or navigating complex corporate partnerships, these ideas will help you make more informed, thoughtful decisions.

If you’re currently looking at PEOs or any major business decision, remember this: Risk comes from not knowing what you’re doing, and incentives drive outcomes. Ensure you know what’s going on from top to bottom, and always ask who stands to gain.

In a world full of noise and information overload, knowing where the risks lie and what incentives are at play can make all the difference. And trust me, once you start looking for the incentives behind decisions, you’ll never look at business the same way again.

Need help with your benefits, HR, or PEO, let's chat.

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Rodney Steele is the CEO of Dinsmore Steele, a leading PEO brokerage that helps businesses simplify their HR, payroll, and employee benefits. With years of experience in the PEO space, Rodney is passionate about helping companies navigate complex decisions, from PEO renewals to benefit plan negotiations.

Known for his humor, wit, and straightforward advice, Rodney provides valuable insights that make the business of HR outsourcing easy to understand and even easier to execute. When he's not closing deals or advising clients, you can find him playing pickleball or enjoying time with his family on Long Island.