What Is Behavioral Economics? And How Can You Use It Inside the Organization?

(4 Behavioral
Economics Strategies)Behavioral
economics is rapidly becoming one of the most useful skill sets for both
business and government. But the term, economics,
can create serious misunderstanding. Behavioral economics is not conventional
economics. Behavioral economics takes human behavior into account, basing its
insights on actual human behaviors. Traditional economics assumes that people
behave in rational ways, that the choices they make are made in a vacuum, and
that the conflicting, messy human factors we social scientists take for granted
are largely irrelevant in decision making.Richard Thaler, the founder of behavioral economics found
many examples of what he called the endowment
effect, especially for goods that are not regularly traded on the consumer
market. For example, suppose you’re in your early thirties and are a dyed-in-the-wool
fan of the popular band, “Black Keys.” You’ve been waiting for them to appear
in your city for several years and they are coming for a one night only
appearance. You get one of the last $200 tickets for a sold-out performance.
Now you’ve got your ticket and learn that richer or more desperate fans are
offering $2,000 for a single ticket. Would you sell? If you’re like most of the
audience at sold-out events, especially if they’re just one-time, you would
not sell. A believer in traditional economics would not understand this
behavior. Traditional economists believe that the person is focused on building
wealth, and so in this instance they would sell their ticket.Thaler, who was looking for some way to explain puzzles
like this found it in psychology, specifically the works of Kahneman and
Tversky. Thus, that blend of psychology—the social sciences—and economics became
behavioral economics.Why behavioral
economics?That’s an important question, but it’s related directly
to the knowledge economy. Since management processes have gone from top-down to
much more bottom-up, making vested power irrelevant, organizations need better
ways of managing people. Especially in knowledge-oriented companies, the
hierarchy has been flattened and responsibility has been passed down to the
troops. Silicon Valley has proven the validity of the behavioral economics
approach. When Marissa Mayer, Yahoo’s new CEO, ordered employees to work at
headquarters rather than from home, her belief in the need for face-to-face
innovation was built upon a behavioral economics strategy.Four strategies of
behavioral economistsThere are many possible approaches and strategies to
motivate change with employees and their families. As more and more research is
carried out in related fields, others will continue to surface.. . . . Framing—the
perspective or lens through which people look at a problem or decision. Is
your job 24/7 or 9 – 5? Learning culture or performance culture? Virtual
organization or face-to-face bricks and mortar? The way issues and decisions
are framed impacts employee motivation.. . . . Anchoring—a
number (or an idea) that is first offered to gain attention and set
expectations. In negotiating a salary, it’s found to be best for the most
interested party to state specific expectations or limits. (That goes against
conventional wisdom.)  Especially when
the other party is uncertain about the correct or fair outcome, the other will
gravitate toward any number that helps them focus and resolve their
uncertainty.. . . . Choices—provision
of a limited number to options to focus attention and encourage decisions. Many
cafeteria health plans offered by the smarter companies limit choices to two,
three or four, puffing the plan supposed best for the consumer, but often the
best for the company. School cafeterias are making choices into a discipline to
manage the obesity and diabetes epidemic of children.Contrary to the assumptions of traditional economics,
money isn’t everything. Nor, according to the conventional wisdom, does it buy
happiness. Behavioral economics, instead, looks at what really brings
happiness, and how to help people, business and governments make smarter
choices. What’s frustrating is that business is taking behavioral economics
very seriously, but that politicians often ignore empirical data. Ahhhh well, that
may be the subject of a future blog.Flickr photo: by chinadialogue
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