Author: Jordan Birnbaum
So What Exactly Is “Behavioral Economics?” And Why Exactly Should You Care?”
“Irrational is the new black.” –You, after reading my last post. (Very witty of you, by the way.)
Of course you were referring to that old line from the fashion industry that refers to every hot trend as “the new black.” And it’s true. Irrationality has officially entered the zeitgeist.
Certainly that’s not intended to legitimize irrational decision-making. It’s merely a reflection of the growing acceptance of human behavior as significantly driven by unconscious influences and perceptions. We rely on heuristics and biases to survive, but sometimes they cause us to perceive reality as it isn’t.
Now, if that sounds new to you, you might want to check out Part 1. Don’t worry – we’ll wait here for you.
Behavioral economics (“BE”), in some ways the study of irrationality, is exploding as a field thanks to the collective insight and executional brilliance of thousands of behavioral scientists. Equally crucial are the storytellers, transforming science into useful inspiration for a far broader audience. Every once in a while we encounter both achievements in the same person. How annoying is that?
Ask random strangers which academic field is the greatest contributor to BE, and they’d probably say, “Economics.” (Assuming of course that they don’t first run in fear.) But they’d be wrong! The correct answer is, “Psychology,” specifically cognitive, social and organizational.
The list of renowned names contributing to the field is far too long to include (and would probably bore you to death). Yet there are four books in particular that I believe are foundational to the behavioral economics principles discussed here. I share them because if you find the subjects of these posts interesting, it is quite rational* to believe you will love them as much as I do. (*wink)
- Nudge, by Richard Thaler and Cass Sunstein
- Influence, Robert Cialdini
- Predictably Irrational, Dan Ariely
- Thinking Fast and Slow, Daniel Kahneman
To honor these authors, I must address the ethical considerations of our subject matter. Clearly, the capacity to influence human behavior at an unconscious level can be used for good or bad intent. Nonetheless, the principles of behavioral economics are already at work in most aspects of our lives, whether consciously designed or not. Therefore, the goal of understanding these dynamics is better to serve our conscious intentions, whether as designers or end users.
It is certainly possible that a designer could try to use BE as a means of encouraging people to make choices that work against their self interests. Yet the best defense against this practice is to spread knowledge and awareness of how BE affects us. Any way you slice it, expanding this knowledge is to our collective benefit.
OK – you’ve earned an example of what The Applied Guide will be bringing in the coming months. The BE principle for our example is called loss aversion, and was first introduced by Kahneman (same one) and Tversky as part of their original “Prospect Theory.”
Humans tend to be twice as motivated to avoid losses than to secure gains. I’ll address how this was validated in a future post, but this is The Applied Guide, so our focus is how to apply it.
Imagine you’re trying to devise a new campaign by which to encourage employee learning. Consider how loss aversion could help you frame the proposition to your employee base. Rather than focusing on how learning can expand people’s career opportunities, consider focusing instead on the lost opportunities resulting from not learning. The prospect of losing the opportunities will likely be more motivating than the prospect of securing them.
Or suppose you’re trying to turn a particular employee behavior into a habit, like creating meeting agendas, or arriving at meetings on time, or sending meeting recaps. (Can you tell what type of day I had?) Consider “gamification.” But don’t grant points every time someone enacts the behavior. Instead start everyone with the same amount, and subtract points each time they fail to. (And pick a good reward.)
It’s important to set realistic expectations when incorporating BE principles into your organizational strategies. They are not a panacea. These techniques leverage existing human tendencies rather than dictate them. These principles are validated under specific circumstances in field and laboratory experiments, and are not always as applicable to various practical contexts.
Nonetheless, by consciously incorporating BE into organizational decision-making, communications and design, we greatly increase the likelihood that our executional efforts serve our conscious intentions. As I will share in future posts, these effects can be enormous.
I’m going to close on a personal (and possibly sappy) note, for which I apologize profusely. I want to explain why I am so passionate about behavioral economics. To me, there are two rational reactions to understanding the powerful role of unconscious drivers in assessing other people’s behavior: empathy and forgiveness. And when science leads to empathy and forgiveness, I’m all in.
Jordan Birnbaum is VP and Chief Behavioral Economist at TalentX, an ADP Venture. In his role, Jordan is responsible for the integration of behavioral economics into software design and marketing communications of new talent-based products. Jordan has more than 20 years experience as a start-up specialist and entrepreneur, as a Founder / Senior Vice President at Juno Online Services and Founder / CEO of The Vanguad, Los Angeles. Jordan holds a BS from Cornell University and a Master’s degree in I/O Psychology from NYU.