PDF Summary:The Voltage Effect, by John A. List

Have you ever had an idea with the potential to change your organization, your city, or even the world? In The Voltage Effect, economist and professor John A. List offers his advice for how to take things from the small scale to the big stage, whether you’re an entrepreneur, an activist, or anyone else with a brilliant idea. To help you get started scaling your idea, List offers a set of red flags that signal you may have trouble scaling up, as well as offering a set of strategies designed to increase your idea’s chances of success.

In our guide, we’ll cover each of List’s red flags and strategies while also providing alternate perspectives on scaling, business management, and data science. Throughout the guide, we’ll also include examples that help illustrate why some ideas scale upward meteorically while others struggle to get off the ground.

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The Unintended Consequences of Workplace Social Dynamics

Unintended consequences of scale can also stem from certain workplace dynamics. As you scale your organization, you’ll inevitably have to hire more employees. With an increasingly large workforce, the relative costs of social problems such as demoralization, poor communication, and employee turnover can become increasingly severe due to the effects of scale.

Suppose, for instance, that due to its demanding environment, your startup maintains a 40% annual turnover rate. Given that you only employ 10 people, this high rate of turnover likely won’t feel unmanageable, as it only equates to hiring one new employee every few months. However, suppose that your business scales up, growing in size to the point where it employs a workforce of 1,000 people. If your business maintains its high turnover rate at scale, to remain fully staffed, it will have to go through the costly and time-consuming process of hiring dozens of employees each month. While it wasn’t such a big deal when your workforce was small, at scale, managing turnover becomes exponentially more expensive.

(Shortform note: While List argues that unwanted workplace dynamics become increasingly costly at scale, some authors believe that larger organizations are often better equipped to deal with workplace toxicity than smaller organizations. These authors argue that at scale, most organizations have the resources to staff and train HR departments that can help repair broken workplaces. By contrast, in small organizations, where each member of the team is intricately involved in the day-to-day, negative workplace dynamics may be allowed to fester while other issues take precedence.)

It’s also common to run into unintended consequences of scale when adopting a new network or system at your organization. Generally, even if a new system is more efficient and effective in the long run, your organization will experience lower productivity as individuals adjust to it. At a smaller organization, these setbacks may seem relatively minor. However, at scale, even slight changes in productivity can be costly.

For example, if your organization decides to change platforms for internal communication, switching from email to a more modern platform like Slack, your workforce will likely experience a temporary dip in productivity. If your small business only deals with thousands of dollars a week, a 5% to 10% decrease in productivity isn’t such a big deal. However, if your business is operating at a larger scale, dealing with hundreds of thousands or millions of dollars each week, even a 5% change in productivity represents a large sum.

(Shortform note: While there is a short-term cost associated with switching platforms, you should also consider the opportunity cost of not switching to a new system. As experts note, whenever you choose to use one piece of technology over another, you pay an opportunity cost equal to the value of the strongest option you didn’t choose. In other words, you miss out on all the benefits the other system would have provided you. To put this in concrete terms, consider Southwest Airlines’s December 2022 meltdown. Southwest’s antiquated software caused thousands of flights to be canceled, ultimately resulting in a net loss of roughly $800 million. In this case, $800 million is the cost Southwest paid for not choosing a stronger system.)

The Unintended Consequences of Wage Transparency

A common source of unintended consequences is organizational policy around wage transparency. According to List, wage transparency can have a variety of positive and negative effects depending on how it’s implemented at your organization. To avoid the negatives and benefit from the positives, List recommends taking a considered approach to wage transparency.

List conducted a study on the effects of wage transparency to better understand which practices produced the best results. In the study, employees worked harder when they knew how much their managers were being paid, as they aspired to get promoted and earn those wages for themselves. However, when employees knew how much other workers at the same level were being paid, they became resentful and demotivated if any of their peers were earning more than them. Based on the results of this survey, the best approach would be to let employees know what the average employee makes one step up the ladder—that way, your workforce will have something to aspire to, without knowing what their peers make in enough specificity to become resentful.

The Many Effects of Wage Transparency

As List notes, wage transparency can have both motivating and demoralizing effects within an organization, depending on its implementation. However, wage transparency can have an even wider range of effects on your workforce than List describes.

In terms of additional negative effects, wage transparency may cause some of your employees to quit outright. In one organization’s survey, 5% of participants said that they’d quit their jobs if they learned someone in the same role was earning more. Staff leaving their positions could have major ramifications for your organization, especially if they’re in important roles.

As a more-or-less neutral effect, experts observe that wage transparency policies often result in the flattening of earnings curves within a single role. Put simply, when wage transparency policies are enacted, employees in the same role will also begin to receive similar pay. This happens as a result of supervisors attempting to prevent employees from being disgruntled at someone else’s elevated rate. In response to flattening pay curves, employees often request individual incentives, viewing bonuses as a way of both earning more and distinguishing themselves from their peers.

This increased demand for bonuses based on personal performance creates a unique opportunity to create fair and transparent workplace incentives. When employees request individual incentives, experts recommend that you implement an individual performance-based bonus system that is identical for all employees in a particular role. By implementing a system that’s the same for everyone, yet still rewards individual efforts, you’ll have created a motivation system that is as egalitarian as possible.

Red Flag #4: Runaway Costs

List’s final red flag is runaway cost. Runaway costs occur when per-unit expenses unexpectedly increase as your organization scales. Generally, as you scale up a product, your unit cost should decrease, since you'll be able to take advantage of increased efficiency and lower component cost, while overhead costs remain the same. However, if your idea’s unit cost increases as you scale up, it may not become profitable, leading your idea to fail at scale.

(Shortform note: Runaway costs are especially common in organizations that purchase cloud computing services for internal use. While the convenience of cloud computing is attractive to many startups, experts note that the cost of cloud services can skyrocket as your organization scales. This effect occurs because vendors usually charge for each element of their cloud services as a recurring expense, much like a subscription. This means that as your organization scales up, its growing use of storage and other services also becomes a recurring expense. By contrast, when you use traditional, in-house computing infrastructure, upgrading storage or processing power is a relatively simple, one-time fix that comes at a flat fee.)

To avoid being blindsided by runaway costs, when calculating your costs and setting prices before launching a product, overestimate your costs to account for the unexpected. By overestimating your costs, your business can remain profitable even if you end up having to spend more money than you’d like.

For example, suppose you’re a new restaurant owner, and one week, your fridges fail, causing all your ingredients to spoil. If you had overestimated your costs beforehand, and set aside extra funds for unexpected expenses, you’d be able to afford to replace your stock. However, if you haven’t planned for unexpected expenses and have emptied your bank account just getting the restaurant open, you’ll likely have to close up shop at least temporarily, while you figure out your next steps.

(Shortform note: While List recommends leaving room in your budget for unexpected expenses, he doesn’t specify how much money to set aside. According to some experts, for small businesses, you’ll want to reserve an additional 20% of your organization’s total budget to be truly prepared for unexpected costs.)

List also recommends doing whatever you can to lower your overhead cost before your product launches. By lowering your overhead, you’ll be able to introduce your product to the market at the lowest possible price point, which will allow you to target a wide audience. Additionally, the lower your overhead costs, the sooner you can make them up and begin to profit.

(Shortform note: Permanently switching to remote work can be an especially effective tool for reducing overhead costs. While many businesses shifted to remote work by necessity during the Covid-19 pandemic, major companies such as Yelp, Airbnb, Spotify, and Lyft have embraced remote work as a cost-cutting measure. As a growing portion of the workforce seeks remote work, going fully remote may be a win-win in terms of attracting talent and lowering overhead costs.)

How to Scale Successfully

Once you’ve gone through the author’s red flags and determined that your idea is likely to succeed at scale, it’s time to put your ideas into action. As you scale your idea, List recommends a few strategies to help give your idea its best chance to scale successfully: Set the right incentives, avoid the sunk cost fallacy, and build a positive organizational culture.

Incentivize to Win

List’s first strategy for successful scaling is setting the right incentives to motivate your team. List argues that incentives are a more effective focus than leadership style or personality when it comes to managing your workforce at scale. It’s better to focus on incentives than leadership style because as we’ve learned, talented individuals don’t scale, making it impossible to replicate the unique qualities of gifted leaders across your organization. However, incentives are much more easily scaled as blanket policies across your organization.

(Shortform note: While List fervently advocates workplace incentives, other authors have argued that incentives have little to no effect on employee performance. These authors argue that at best, incentives cause employees to briefly attempt to change their behavior before reverting to their prior patterns. According to this school of thought, incentives actually distract employees from the work itself. Incentives lead employees to view the work as an obstacle they must overcome to earn a bonus, which leads them to lose interest in the work altogether.)

List recommends taking advantage of loss aversion when setting incentives. According to List, people are generally more motivated by their fear of loss than by their desire to gain. To take advantage of this element of human nature, pay out performance bonuses for a given period of time before the period begins, letting employees know that they’ll have to repay the bonus if they don’t hit their targets. When employees get the incentive up front, they’ll be more motivated to work hard to keep it, thanks to loss aversion.

For example, suppose you’re a parent, trying to motivate your 16-year-old to work harder in school. To get them to study, you could offer them an incentive based on their interests—this could be a new videogame, new clothes, or anything else they’re interested in. To take advantage of loss aversion, you’d want to give your kid their reward at the beginning of the semester, and let them know that they’ll only be allowed to keep it if they dedicate a certain amount of time to studying or achieve a certain grade. Based on List’s principle, your child will work harder to protect the reward they’ve already been given than they would to earn a potential future reward.

(Shortform note: According to List, incentives that use loss aversion are more powerful than traditional bonuses. However, in some studies, loss aversion incentives produced an unexpected decrease in workplace productivity. Researchers believe that when employees are presented with loss aversion incentives, they become more incentivized to avoid loss than to pursue success. For example, a salesperson who was presented with loss aversion incentives might adopt a conservative strategy, focusing on not blowing sales calls, instead of focusing on closing them.)

According to List, social incentives can also be powerful motivational tools. As we learned when discussing List’s red flags for scaling, workplace social dynamics can impact performance. Social incentives make use of the interpersonal factors that motivate your employees. Specifically, List notes that people tend to work harder when they know that their performance is being monitored, in a phenomenon known as the Hawthorne effect. By letting your employees know that you’re tracking their performance, giving them clear targets, and offering them encouragement, you can take advantage of the Hawthorne effect to get the best out of your workforce.

For example, suppose you’re the manager of the sales department at an insurance company, and you want to use the Hawthorne effect to encourage your staff to make an extra effort. A simple way to do this would be to set and communicate goals for each employee, and then let your staff know that you’ll be checking in regularly on their progress toward those goals. Thanks to this gentle nudge (using the Hawthorne effect), you’d likely see a bump in productivity.

Does the Hawthorne Effect Exist?

List’s proposed social incentives rest on the assumption that the Hawthorne effect is a near-universal phenomenon. However, there is still significant disagreement within the scientific community about whether the Hawthorne effect even exists.

Some researchers have argued that in the study in which the effect was first described, there was insufficient evidence to infer a causal relationship between observation and behavioral change. According to a meta-analysis of the literature on the Hawthorne effect, while many studies demonstrate some evidence for the effect’s existence, most studies of the Hawthorne effect contained methodological inconsistencies that may have compromised their results. These findings suggest that further research is necessary to concretely establish the existence of the Hawthorne effect.

Avoid the Sunk Cost Fallacy

In addition to offering the right incentives, as you scale your ideas up, List advises that you take steps to avoid succumbing to the sunk cost fallacy. The sunk cost fallacy is the human tendency to invest additional time and resources into failing projects in an attempt to salvage resources that have already been invested in the project. In these situations, you should pull out of the failing project, as doing so minimizes your losses and maximizes the time and resources you’ll be able to invest in more fruitful projects.

(Shortform note: As Dobelli notes in The Art of Thinking Clearly, overcoming the sunk cost fallacy can be difficult because it inherently involves the uncomfortable task of admitting your mistakes. Instead, those who fall victim to the sunk cost fallacy continue to invest in their failing enterprises, hoping that they’ll eventually become successful, in which case their decisions would be retroactively vindicated.)

(Shortform note: While List offers separate sections on identifying diminishing returns and giving up optimally, we’ve merged them to condense the strategies for avoiding the sunk cost fallacy.)

Don’t Be Afraid to Give Up

List offers a strategy for avoiding the sunk cost fallacy: Give up. To prioritize your best ideas, you need to recognize when an idea isn’t scaling and give up on that idea as quickly as possible. When you’re able to quickly give up on failing ideas, you minimize your losses and free up resources so that you can successfully pivot to another project.

(Shortform note: List’s recommendation to abandon struggling projects is primarily aimed at executives and other organizational leaders who are tasked with protecting and efficiently directing their organization’s resources. However, if you’re a project manager, it may be in your best interest to try to revitalize your projects, instead of giving up on them. Experts note that your reputation as a project manager is often directly tied to the success or failure of projects you manage. You can boost your reputation and increase your chances of advancement by learning to turn around floundering projects.)

When you think it might be time to give up on an idea, List recommends that you consider alternative ways you could spend your time and resources. For example, if you think it may be time to pull the plug on a specific product feature, ask yourself what else you could do with the resources currently allocated to the project. If there are other ideas or features that seem more lucrative, exciting, or scalable, it’s probably time to give up and move on.

(Shortform note: If you’re not sure whether you should give up on a project, consider getting an outside perspective. In Rework, Jason Fried and David Heinemeier Hansson recommend that you ask a coworker for advice any time you’re stuck on a project for longer than two weeks. In many cases, your coworker will be able to provide fresh ideas and solutions that help you make progress. And, if it turns out that your project is irreparable, your colleague’s distance from the project will often allow them to identify the problem when you’re unable to do so yourself.)

Identify Diminishing Returns

List notes that ideas that aren’t scaling properly often suffer from diminishing returns. Diminishing returns are a phenomenon in which profit margins per unit decrease as production scales up. As we learned when discussing runaway costs, for an idea to scale successfully, cost per unit needs to decrease as the business scales.

(Shortform note: As you retool your ideas to address diminishing returns, avoid compromising on quality. In Profit First, Mike Michalowicz notes that in trying to cut costs, many entrepreneurs try to save short-term costs by lowering the quality of their goods and services. While reducing product quality can temporarily help your bottom line, in the long run, it may cause you to lose customers to competitors who provide better products.)

To identify diminishing returns, you need to interpret your data correctly. List notes that many organizations fail to identify diminishing returns because they focus on the wrong metrics—for instance, on the average profit per unit. Instead of focusing on your average profit margin, List recommends that you calculate the profit margin on the most recent unit sold. If it’s lower than your average margin, you may be experiencing diminishing returns. If this is the case, it may be time to give up.

(Shortform note: A common economic strategy for optimizing production is identifying the point of diminishing return. The point of diminishing return is the point beyond which producing additional units results in decreased cost efficiency—you can accurately estimate this using equations that take into account your production and your output. Generally, it’s most efficient to produce your product at the point of diminishing returns. Below that point, you aren’t taking full advantage of your resources, and beyond it, you’ll begin to experience diminishing returns.)

Build Teamwork and Diversity Into Your Culture

Lastly, List argues that you should focus on building a sustainable culture while you scale your ideas. Specifically, List writes that cultures that embrace collaboration and diversity do well at scale.

As your organization grows, collaboration becomes increasingly important. When an organization is in its infancy, the drive, talent, and ideas of one or two individuals may be enough to propel it forward. However, as we know, talented individuals don’t scale. Instead, as your organization grows, its success will depend on clear and efficient communication within a larger group of employees.

To incentivize teamwork, List suggests assigning each employee to multiple teams, which will help ensure that ideas are shared across your organization and help employees invest in the success of the organization as a whole.

Learning to Collaborate at Scale

Experts note that collaboration often comes naturally to small businesses in their early years, but as they scale, these businesses often struggle to continue collaborating. At young companies, there are usually fewer employees who work together more closely than at larger organizations. These employees tend to form strong bonds that enable them to collaborate informally and effectively. However, as an organization grows, it becomes impossible for each member of a team to build a deep relationship with everyone else. Because of this, as your organization scales, you’ll have to implement policies that lay the groundwork for effective collaboration.

To set your organization up to cooperate efficiently at scale, Matthew Skelton and Manuel Pais recommend, in Team Topologies, that you assign staff to smaller teams and provide guidelines for how teams should interact and communicate with each other. And, as Patrick Lencioni argues in The Five Dysfunctions of a Team, you can financially incentivize teamwork by offering bonuses based on the teamwork output.

Along with collaboration, diversity helps organizations to succeed at scale. Diversity enables your organization to solve problems creatively, as individuals from a variety of backgrounds will naturally bring a variety of perspectives, ideas, and problem-solving tools to their work.

(Shortform note: Diversity can also help boost employee retention. Studies have shown that in addition to the benefits List describes, cultivating diversity can also help your organization keep its best employees. Over time, as those employees continue to innovate and excel within your firm, the strength of your workforce may become a competitive advantage for your organization.)

List argues that you must demonstrate a real commitment to diversity to recruit a diverse workforce. Specifically, List notes that diversity statements fail to attract many candidates when they’re not paired with policy and action. However, when organizations commit to hiring candidates from minority groups and simultaneously commit to treating employees well and fairly regardless of their backgrounds, word gets around, which leads more strong minority candidates to apply.

(Shortform note: As part of your efforts to create a positive environment for a diverse workforce, experts recommend educating your current workforce on workplace diversity. To keep the diverse range of employees you hire, education can help ensure that your current staff welcomes all new hires and treats them with fairness and respect. Without educating your staff, you run the risk of mistreating and alienating your new hires, which may ultimately cause them to leave your organization.)

Be Accountable

List notes that even as you try to build a positive culture that embraces collaboration and diversity, you will sometimes make mistakes. When these things happen, List stresses that the best thing for your organization is for you to take responsibility for your actions and offer an apology.

(Shortform note: As a corollary to the rule that you should apologize for any mistakes that you’re responsible for, you should avoid apologizing for things that aren’t truly your fault. Research has shown that apologizing when you’re not in the wrong can lower your self-esteem and lead others to view you as incompetent. For example, suppose you run a logistics company, and one of your shipments is delayed due to a hurricane making local roads impassable. While you should communicate to your client that the shipment will be late, you shouldn’t apologize, as this will cause the client to infer that the delay is your fault when in reality it isn’t.)

When offering an apology, note that money speaks louder than words. For example, if some of your employees feel they’ve been underpaid or mistreated on the basis of their race or gender, they’ll probably respond more positively to an apology that includes a wage increase than to an apology without financial compensation.

(Shortform note: Some experts argue that apologies that don’t include some form of reparative action aren’t real apologies. According to these experts, to make a genuine apology, commit to rectifying the situation and ensuring that it doesn’t happen again. In business-related conflicts, reparative action often includes a financial angle, as List describes. However, reparative action can take many forms and should be carefully chosen to correct your organization’s errors. For example, if one of your factories accidentally leaks pollution into the local environment, you could dedicate organizational resources to funding cleanup efforts that will help mitigate the negative impact of the spill.)

However, don’t be too quick to apologize, especially in situations that are likely to recur. Apologizing too frequently lowers the value of each additional apology, especially if you’re unable to fix the issue you’re apologizing for. For example, if you run a delivery service, and five-minute delays due to traffic variance are unavoidable, you probably shouldn’t offer an apology each time. It’ll only make the user more upset if another order gets delayed.

(Shortform note: Apologizing too frequently can be a difficult habit to break, but there are ways to make the process easier. For one, experts recommend that you practice thanking people in situations where you habitually apologize. For instance, if you ask a schoolmate for help with an assignment, instead of apologizing for bothering them, you can simply thank them for their time.)