The Economics of Irrationality: Understanding Human Behavior to Increase Employee Engagement

The Economics of Irrationality: Understanding Human Behavior to Increase Employee Engagement

Author: Jordan Birnbaum

As a behavioral economist working in human capital management, I’ve witnessed how the concept of employee engagement has shifted among employers, from a “nice-to-have” to a “need-to-have.” Where in the past engagement might have been considered a “soft” luxury among business managers and HR leaders, today, they recognize that engagement drives hard business metrics. What caused this shift in perception?

Well, hard data of course.

Statistically speaking, companies with a disengaged workforce are likely to lose money, customers, and employees. The Gallup®2017 State of the American Workforce shows that engaged employees can lead to 17 percent higher productivity, 20 percent higher sales, 10 percent higher customer satisfaction, 41 percent lower absenteeism, and 59 percent lower turnover. Companies that are losing their employees to disengagement are losing out.

“By embracing behavioral economics, leaders can structure programs and communications in ways that boost intrinsic motivation”

It’s no coincidence that I am framing this in terms of losses, either. Doing so makes it twice as compelling to you.

I’m referencing a principle of behavioral economics called loss aversion, which is the human tendency to be twice as motivated to avoid losses as to secure gains. If people were perfectly rational, they’d experience equal gains and losses with the same level of emotional impact (albeit in opposite directions). But they don’t — losses are felt twice as powerfully as gains. Because human behavior is rarely driven by perfect rationality.

However, irrationality does not equal unpredictability. We can use our understanding of irrationality to anticipate how people will react to many different situations or things. By embracing behavioral economics (often thought of as the study of irrationality), leaders can then structure programs and communications in ways that boost intrinsic motivation and help their teams achieve their intended goals.

So specifically how can behavioral economics be used to boost employee engagement? First you have to know what actually drives engagement, and that it’s not always what’s logically predictable. For example, the Gallup Q12 survey, uncovered the top 12 predictors of employee engagement developed from millions of employee survey results. It found the top predictors of engagement are not salary or title but rather factors such as, “At work, my opinions seem to count,” “I have the opportunity to do what I do best,” and even, “I have a best friend at work.”

Ten out of 12 of these factors are affected by what happens at either a managerial or a peer level in the workplace. So a behavioral economics intervention would focus on how to improve those dynamics, through tools (providing “nudges”), processes, and communications.

However, there are two massive problems with leaders in the working world today that interfere with their ability to execute on any such plans. The first is straightforward: leaders have way too much on their plates. They are expected to engage their teams, execute strategy within the entire organization, and still complete their own work. It’s exhausting, if not impossible, for most team leaders to accomplish this, and so (for a variety of reasons) engagement responsibilities tend to get left on the backburner.

Secondly, leaders usually don’t become leaders because they’re good at leading. They become leaders because they’re good at executing. The best sales person becomes the sales manager, the best coder becomes the IT manager, and so on. People who tend to get promoted are really good at doing something, but that ‘something’ is rarely about leading people. This leaves many managers ill-equipped to engage employees despite the expectations put upon them.

Unfortunately very few interventions on the market have successfully accounted for these challenges. For example, many of the leadership development tools out there only provide employees with feedback in a report, which isn’t enough to drive actual behavior change. Leaders need action plans, encouragement, reminders, and feedback about progress.

Knowing this, we recently designed CompassSM, a talent activation solution designed to boost leadership and collaboration behaviors. By incorporating behavioral economics and adult learning strategies, Compass uses confidential assessments and reports to help leaders understand the unmet needs of their teams and colleagues via easy to digest feedback reports. It then guides them on how best to serve those needs through personalized email coaching. The results have been astounding, creating 10 percent score improvements from a total of 16 minutes of development work from leaders.

So how can your company use behavioral economics strategies to drive engagement? Consider these three tactics.

Loss Aversion

Back to the notion of loss aversion. With targeted use, this technique can help build team leaders desire to develop their skills. It is the difference between guiding them to think about, “What do you stand to gain in promotions, opportunities and career advancement by becoming a better leader,” versus, “What do you stand to lose in promotions, opportunities and career advancement by not becoming a better leader?” This creates twice the motivation by simply changing just two words.


Imagine this: a patient needs a serious medical procedure. A doctor could frame it one of two ways: “90 percent of the people who have had this procedure have recovered well,” or “10 percent of people who have had this procedure have died.” Unsurprisingly, most people would be more inclined to agree with the first statement despite the fact that both convey the exact same message. Now, think about how framing could be utilized in the workplace to motivate teams. “I think that 80 percent of the presentation is good,” versus “I think that 20 percent of the presentation is not good.” Despite the same underlying truth, how a manager frames any situation alters employees’ attitude and efforts towards it.


Priming is the idea that the more often people experience a term, concept, or idea, the more likely they will find opportunities in their day-to-day life to see and act upon that thing. For Compass, we created a diagnostic approach so that for each employee we can personalize a development plan and then follow up with a treatment in the form of eight weekly coaching emails. The emails always use keywords in the subject line to prime employees on the primary area of their focus. So it could be “recognition,” “inclusivity,” or “development.” This is one way to prime managers to remind them in small bursts to focus on that particular aspect of leadership.

These are just three of many behavioral economics techniques that can be used daily to help engage a workforce. This is becoming especially important as the economy is nearing full employment and companies are fighting tooth and nail to recruit top talent. In today’s talent marketplace, anticipating how employees will actually react (not how they should react), and then structuring your interactions to leverage that understanding can only give you a leg up in attracting, retaining and engaging the best workforce possible.

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 

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