Behavioural Economics permits us to dig deeper into unconscious cognitive biases and the unpredictability in human decision making. It makes for an important field of study for introducing cultural change
Workplace policy and systems work on the premise of predictability and rationality of human behaviour. For most of us who work in people professions, there is a realisation that human behaviour is anything but predictable.
Organisations demand a set of standard processes and systems which are largely the outcome of rational thought. However, employees in organisations bring their own selves to work, and the culture in an organisation is a dynamic interplay of individual cognitive responses within a larger rational ecosystem. Organisational transformation requires behavioural change intervention.
Behavioural Economics allows us to dig deeper into unconscious cognitive biases and the unpredictability in human decision making and is an important field of study for introducing cultural change. (Reddy, 2018). Priming intentions and nudging people to change behaviours in alignment with organisational strategy is an important part of the HR agenda of the future.
Setting the context for Behavioural Economics
The traditional economic theory set store by the rationality assumption of people behaviour that individuals can make better economic choices for themselves than they can make for others, or others can make for them. People are assumed to be interested in maximising their own welfare, and as a natural corollary, it is assumed that they can make rational decisions after considering all aspects of the matter at hand.
However, it is seen that people do not always think through a problem in a rational manner and do not make utilitarian decisions at all times. They do make impulsive regrettable choices and are sometimes driven by factors other than what is optimally best. Behavioural economics aims to bridge the chasm between this rational approach and the cognitive decisions made by people (Lee & Clark, 2017).
Behavioural economy is now being adapted and increasingly integrates multiple areas from big data to structural models to neuroscience. It is also being applied in all kinds of domains to bring an added layer of insight into making descriptive economics about people decisions more meaningful (Thaler, 2018). The advent of bounded rationality (Simon, 1955) and the developments in behavioural economics have a profound impact on workplace policy and processes, especially people processes. Behavioural economics posits the following: -
♦ People are more concerned about possible losses than gains, a principle called Loss Aversion
♦ People dislike uncertainty and have a propensity to stick to the status quo
♦ Perceived Fairness is more important than the absolute to people
♦ People sharply discount the future compared to the present which is the principle of discounting
These principles imply that people generally do not put in a lot of effort to find optimal solutions, preferring simpler decision-making strategies that require minimal effort. This has implications for people processes as people would tend to:
♦ Stick with what they know
♦ Tend to follow social norms
♦ Settle for ‘good enough’ over the best
♦ Procrastination is normal for people, from savings to delaying process completion
♦ People stick with the default option that is prescribed as it requires effort to make a switch
♦ If decisions are complex and involve multiple elements, such as most performance management processes, they will avoid it altogether if they could
HR professionals could use the following propositions suggested by Behavioural economics to amplify the success of their interventions and guide people towards the desired outcomes.
Choice architecture and nudges
Thaler has famously stated, “Most provocatively, is it possible to help people make better choices, even if they are already fully informed (say about the relative merits of ice cream and salad)?” (Thaler, 2018)
Choice architecture is like designing a menu of different options to present choices to the consumer, which in the case of HR, would be the internal employee. The manner of presentation could influence the choices made by the employee. E.g. if employees are told that they can encash leave, employees tend to forego their leave and prefer to accumulate them. However, a policy modification that leave cannot be encashed and automatically lapses leads to an increase in leave availed by employees. A simple change ends up aligning the organisation perspective on work–life balance.
A Nudge is a concept in behavioural sciences, now adopted in behavioural economics as well. It is the manner of influencing human behaviour in the desired direction through positive reinforcement and indirect suggestions. Nudging contrasts with other ways of achieving compliance, such as statutory enforcement or literacy/ awareness. Gamification and incentivisation are all forms of nudges.
Reminders and Prompts
Filling mandatory forms, sticking to stipulated deadlines and completion of prescribed courses are all instances where reminders and prompts are constantly used by HR professionals. Positioning and timing of reminders and prompts are useful in directing behaviours, especially in the area of ethical and value-based actions.
Default settings work better than reminders in terms of behaviour modification techniques, simplifying options and not providing too many choices is actually a better manner of enforcing compliance. People tend to get confused with too many options and delay their course of action or decision making. The trick is in creating a sense of freedom and choice while not leaving it too open-ended and ambiguous.
Priming refers to unconscious amplification or enhancement through associated words, symbols or meanings. It is extremely powerful and could be extensively used for performance management. Employee motivation and drive are by nature, cognitive, and could be suitably modified using priming techniques.
Through a study of call-centre employees, Shantz and Latham (2011) explored the impact of primed goals on employee performance.
Behavioural economics could have much to offer for Workplace interventions as a simple and costeective manner of assisting employees to bridge the gap between personal intention and action. For the HR professional, its applications could span many contexts such as:
♦ Corporate compliance
♦ Minimising the effect of employee procrastination
♦ Retirement savings through PF deductions
♦ Lifestyle modification through appropriate nudges
♦ Energy efficiency
♦ Health compliances
♦ Learning challenges, and more recently in talent management
It can profoundly affect performance management and productivity. Thaler and Sunstein (2008) make a strong case for nudging at the workplace by pointing out various instances where individuals fail to comply with their clearly defined goals.
HR professionals need to proactively assess required behaviour modification in employees and use options such as choice architecture, nudging and priming or even discounting as the case may be to effect the changes. Behavioural economics has created profound changes in policy and implementation strategies at government and global public policy level. It is presently at the throes of creating an impactful realignment in workplace strategies and could have immense potential for application in the areas of enhancing workforce engagement and productivity.
As fields of study become more interdisciplinary, Thought Leadership in the Human Resources field would also embrace insights from multiple fields to interpret and analyse cognitive data on human behaviour. Behavioural economics could be used to enhance the effectiveness of translating the intention of an intervention into action. From improving compliance to instilling savings behaviour to an increased focus on healthy lifestyle choices (Srivastava, 2012).
Environmental nudges could usher in awareness and suitable adaptation to an environmentally conscious contribution (Thaler & Sunstein, 2008). HR professionals need to work towards actively assimilating a scientific approach to their intervention design and explore other sciences in more depth. It is all in the choices!
Lee, D. R., & Clark, J. R. (2017). Can behavioural economists improve economic rationality? Public Choice, 174(1-2), 23-40. doi:10.1007/s11127-017-0487-z
Reddy, S. (2018). Cultural transformation: An Upheaval or Metamorphosis? Leadership Excellence presented by HR.com, June 2018, 39-41.
Shantz, A., & Latham, G. (2011). The effect of primed goals on employee performance: implications for human resource management. Human Resource Management, 50(2),289-299.
Simon, Herbert A. (1955-02-01). “A Behavioural Model of Rational Choice”. The Quarterly Journal of Economics. 69 (1): 99–118. doi:10.2307/1884852. ISSN 0033- 5533. JSTOR 1884852.
Srivastava, P .(2012).Getting engaged: Giving employees a nudge toward better health. Compensation & Benefits Review, 44(2),105-109.
Thaler, R. H. (2018). From Cashews to Nudges: The Evolution of Behavioural Economics. American Economic Review, 108(6), 1265-1287. doi:10.1257/ aer.108.6.1265
Thaler, R. H., & Sunstein, C.R. (2008). Nudge: Improving decisions about health, wealth, and happiness. New Haven: Yale University Press.
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