Earlier this month, it was announced that this year’s Nobel Prize winner in economics would be Richard Thaler, the University of Chicago professor famous for his work as the father of the field of behavioral economics.
What is behavioral economics? Well, it’s based on a simple concept: humans aren’t robots. While traditional economics has always viewed humans as entirely rational creatures (what Thaler refers to as “econs”) behavioral economics looks at humans as the emotional, often irrational creatures that we actually are.
Behavioral economics recognizes that economics is not simply an independent field of study, but an interdisciplinary one, and that to truly understand how human beings spend and earn money, one must involve the more “soft” sciences of psychology and sociology in the equation. The lessons learned from this have revolutionized seemingly every corner of human life, from user interface design of apps to government policy to how supermarkets stock their shelves.
However, one of the areas where behavioral economics, and behavioral science in general, has been slow to catch on is in one of the areas where it matters most: how companies manage their people. While the findings in this field have revolutionized how many of the world’s smartest companies hire, motivate, and direct their employees, for most employers, HR practices continue to treat humans like the “econs” that Thaler proved only exist in the minds of economists.
For companies that are getting savvy about how to use behavioral economics in people management, they are showing clear results, and indicating that it might be easier than many might think. Here are three ways that companies are putting the work of Thaler and the field of behavioral science into practice:
Leaving “Grandma” at Home, and Using Data Instead
Most of us have intuitive assumptions about people that we use to make decisions in the workplace. These assumptions often come from tradition, personal experience, stereotypes, or superstition. Think, for example, of the scene from the movie Moneyball, when baseball coaches are discussing the potential of young players, and one coach dismisses the potential of a player, saying: “he’s got an ugly girlfriend, that means he doesn’t have confidence.” HR expert and Senior Advisor at Goldman Sachs Laura Liswood refers to these assumptions as “grandma,” since they often come to us informally through our families and cultures of origin.
While “grandma’s” thoughts are not without value, they are not the most effective tools when making decisions about who to hire, fire, and promote. I have met numerous HR professionals in China who seem to use employees’ star signs to indicate whether they are suitable for a position: a worthless, if not detrimental approach.
Work by Thaler and other behavioral scientists have found that human decision-making is greatly swayed by emotions, and that individuals can be easily persuaded by the charm or appearance of the person delivering an argument, rather than the logic of argument itself. This is a major reason why job interviews are so often so ineffective in finding the right candidates: the good-looking, confident, charming extroverts have an advantage that the other candidates do not, even if those traits do not relate to job performance.
This is why nearly all top HR consulting firms recommend using a predictive tool in interviewing. As a Deloitte consultant explained: “When it comes to hiring and promotion decisions, even simple predictive models run circles around unaided professional judgment.”
Don’t Command People to Make Certain Decisions; “Nudge” Them Instead
In Thaler and his colleague Cass Sunstein’s massively influential book Nudge: Improving Decisions about Health, Wealth, and Happiness, they use the findings of behavioral science to show that when trying to encourage a group of people to make better decisions, a slight “nudge” is often more impactful and suitable than a commanding “shove.”
One example of effective “nudging” is seen in a study Thaler conducted with Shlomo Benartzi, “Save More Tomorrow: Using Behavioral Economics to Increase Employee Saving.” In the US, many people save for retirement through employer-supported investment programs called 401(k)s. For much of the last century, most American workers with 401(k)s would have to opt-in to the program, meaning that they would need to fill out enrollment paperwork, and then voluntarily contribute a portion of their paycheck to the account.
Although perfectly logical humans would know the value of saving for retirement and contribute voluntarily with each paycheck, Thaler and Benartzi found that real humans are more complicated. While we tend to want to save money in the abstract big picture, we usually do not have such good self-control in our daily life, and opt for having more spending money for the new phone or TV today, rather than for our future lives decades from now.
To address this problem, Thaler and Benartzi developed the Save More Tomorrow (SMarT) pension program, in which rather than requiring employees to opt-in to the program, they were automatically enrolled and given the option to opt-out. This means that rather than having to make the difficult decision between tomorrow’s comfort and today’s iPhone, workers have to go just a little bit out of their way to convert their savings into spending money. This “nudge,” while still giving freedom to each employee, just changes the “default setting” to one that favors their long-term interests, rather than their short-term impulses.
Thaler and Benarzi’s findings have revolutionized how companies manage their employee pension programs. In 2000, only 8.1 percent of American plans used auto-enrollment. Now, nearly 60 percent do.
Principles of nudging can be seen throughout the campuses of Silicon Valley’s most successful companies. In an effort to encourage healthy behavior from employees and lower the company’s substantial healthcare costs, Google has nudged employees into eating healthier, without forcing them to do so. For example, at the snack tables at their offices, they used to offer fruits and vegetables side-by-side with less-healthy cookies and candy bars. While most employees would logically want to eat the healthier snack, the emotional temptations of the moment would cause them to grab the junk food instead.
Rather than simply removing the unhealthy snacks, which would undoubtedly upset some employees, Google simply separated the snacks, putting the fruits and vegetables in easily visible locations, while the junk food was somewhat “hidden” in a non-transparent container. For those who insisted on their candy, it was still an option, but for the majority of employees who were just mindlessly grabbing a snack, they were far more likely to grab a carrot instead of a cookie.
One of the earliest and most enthusiastic adopters of “nudging” in the workplace was none other than Steve Jobs himself. According to Jobs’ biographer, Walter Isaacson, when Jobs designed a new headquarters for Pixar, he obsessed over where the bathrooms would be placed, engineering them in a way that would encourage “serendipitous personal encounters,” spurring cross-functional collaboration and idea-sharing.
While sophisticated “nudging” is less common in China when it comes to people-management, it is certainly used in UI design for some of the country’s most popular apps. Have you ever tried to use WeChat pay on Alibaba-backed food delivery platform Ele.me? You can, but it’s not quite as easy as using Alipay.
Motivating and Incentivizing in a Way That Actually Works
In 1962, before Thaler even began his research, Princeton psychologist Sam Glucksberg conducted a series of experiments that began to raise questions about how people are motivated and compensated, and how that impacts work performance. These experiments were more recently mentioned in a popular 2009 TED talk by author Daniel Pink.
Glucksberg’s experiments tested how well participants did at solving the “candle problem.” The test presents the participant with the following task: fix and light a candle on a wall (a cork board) in a way so that the candle wax won't drip onto the table below. To do so, one may only use the following along with the candle: a book of matches, and a box of thumbtacks, like this:
In taking the test, participants tried many unorthodox methods to achieve the goal. For example, some tried to tack the candle to the wall without using the thumbtack box, and others attempted to melt some of the candle’s wax and use it as an adhesive to stick the candle to the wall. Neither method worked. To solve the problem correctly, participants had to empty the box of thumbtacks, use the thumbtacks to nail the box to the wall, put the candle into the box, and light the candle with the match, like this:
Glucksberg and his team of researchers wanted to find out how, when participants were offered rewards for completing the tasks, the financial incentive impacted their performance. Subjects who were offered no prize, termed low-drive, were told: "We are doing pilot work on various problems in order to decide which will be the best ones to use in an experiment we plan to do later. We would like to obtain norms on the time needed to solve." The remaining subjects, termed high-drive, were told: "Depending on how quickly you solve the problem you can win $5.00 or $20.00. The top 25% of the participants in your group will win $5.00 each; the best will receive $20.00. Time to solve will be the criterion used."
The researchers found that, surprisingly, the “low-drive” participants consistently completed the task in less time than the “high-drive” participants. This experiment has since been replicated with various sizes of rewards, with different groups of people in different countries, with different income levels. In all these studies, one theme was consistent: the more money that was at stake, the worse the participants performed.
However, there was a version of the candle problem where participants performed better when higher rewards were on the line. Monetary incentive increased performance when the test was designed this way:
In this test, the box is presented as something separate from the tacks. In the original test, the box and the tacks are presented as being one item. In the second version, the answer is far simpler: a linear problem, with a straightforward, obvious solution. Since the solution is clear to most participants, the distinguishing factor is not how quickly they can find the solution in their minds, but rather how quickly they can execute in attaching the box to the wall and lighting the candle. In the original problem, the solution is unclear, complex, and requires some out-of-the-box thinking. Literally.
These studies indicate something profound about how the human mind works, and something profoundly wrong with how most companies incentivize employees. When direct incentives, carrots and sticks, are used to motivate, stress levels increase, and the human mind focuses intently on one task. This goes back to the early evolution of humans; after all, when you’re hunting a deer or running from a lion in order to survive, there is not much use in being a philosopher. This works great for simple, linear tasks with a fixed, clear solution (kill the deer, get away from the lion, stick the box to the wall), but when the solution is not clear and requires complex and creative cognitive processes, the focus brought on by those stress levels blinds us from seeing the less-obvious solutions. At work, when a bonus is at stake or we’re concerned about being fired, our neurobiological processes prevent us from being able to find creative solutions.
This has tremendous effect on how the jobs of the future can be effectively managed. As AI continues to develop, straightforward “second candle problem” work will be easily done by machines, while the complex, creative “first candle problem” work will continue to require human minds.
However, when you look at the way most companies manage their employees, they are using incentivization tools that are far better suited for the simple work of the past, rather than the complicated, nuanced work of the future.
So how can companies leverage behavioral science to better manage their people? Here are a few actionable steps:
Acknowledge that human beings all have biases, and that when it comes to decisions for hiring or promotion, “grandma” may be having more influence on us than we are aware. To limit the influence of bias, use an interview scorecard to evaluate the specific qualifications of each candidate, and then save the interview data and compare it with job performance across the whole company. Use the trends you find to continuously improve the reliability of your interview process. You can use a card like the one below, from Dattner Consulting and Harvard Business Review:
People generally like having freedom to make their own decisions, and when companies take away that freedom, it can be demotivating and lower employee morale. The next time you think about adding another rule to the handbook, think to yourself, “how could I better engineer the company’s work environment and culture to encourage a shift in behavior, rather than forcing it?”
That being said, it should also be noted that people generally don’t like being manipulated into decisions that are against their own best interests. In the cases of automatic pension enrollment, Google’s encouragement of healthier eating, and Steve Jobs’ office design, each of these “nudges” were put in place to help the employees save more money, live healthier lives, and work more collaboratively. When nudging, do so in a way that creates a win-win for all involved.
For work that requires creative and complex thinking, punishment and rewards can have the opposite of their intended effect. Instead, author and expert on motivation Daniel Pink suggests that companies clarify payment terms at the beginning, and then provide those employees with three things: autonomy (freedom to complete the tasks in a way that suits them best), mastery (the opportunity to develop skills and expertise), and purpose (the sense that they are part of something that is bigger than themselves).
For autonomy, provide employees with “free time” for them to work on creative pet projects. At Google, they try to provide each employee with a total of 20 percent of their time for such projects. Shenzhen robotics education company Makeblock has monthly “Makerathons,” where employees take a break from their daily work to participate in a 24-hour competition to offer the best ideas for application and innovation of the company’s products.
For mastery, provide each employee with a development plan in addition to KPIs, and monitor their progress in development as well as performance. Managers should provide feedback to subordinates on both performance and development, but keep the two conversations separate; people tend to be defensive with regards to the quality of performance, and that defensiveness can hinder learning.
For purpose, clearly define your company’s mission, vision, and values, discuss them, and act consistently according to them. When a company is about more than just making money, it attracts more committed people who bring a greater sense of meaning to their work, fosters a sense of loyalty, and builds a better company culture as a whole.
Elliott Zaagman is a consultant in Beijing who works with Chinese firms on the path to global expansion.