Behavioral Economics and Change

brain - left and right
Rational vs Emotional

For the past 20 years, I have been exploring how people change their behavior.  This exploration has led me down many different paths and lines of inquiry.  One of the most fascinating areas of research that I’ve investigated surrounds the now hot topic of behavioral economics.

I often describe behavioral economics as the “fusion of psychology and economics in order to gain a better understanding of human behavior and decision making.”

So what do we find out when we fuse psychology and economics together?

“Humans often act in very irrational ways.”

Now that is not ground breaking news for most of us.  Even when I graduated with an economics degree, I knew that people didn’t always act in rational ways – or at least I didn’t  (otherwise why would I stay up watching bad T.V. until 2:30 AM when I knew I had to get up by 7:00 AM for a meeting or why would I spend a hundred dollars on a dinner out but fret over buying a steak that was over $10 at the grocery store?).

However, for many economists, that statement was hearsay.  Many economic models are based on the fact that people act in rational ways to maximize their own utility (i.e.,  happiness).  These theories stated that we might make irrational choices in the short-term, or when we don’t have enough information, or that at least your irrational behavior would be vastly different than mine so that on average, we would be rational.

The truth discovered by behavioral economics is that is not often the case.  We don’t act rationally – in fact, we sometimes act exactly opposite of how an economist would think we should act.

For example, research has shown that we will judge the value of an unknown item using totally irrelevant data to help us in that decision.  Dan Ariely ran a wonderful study where he asked people to bid on a wireless keyboard (something that they were not very familiar with at the time), but before they answered, they had to write down the last two digits of their social security number (a totally irrelevant piece of data).   The results of the bid were fascinating (top 20% being SSN that ended in 80 or above, the bottom 20% being SSN that ended in 20 or below):

Anchoring results

This is a significant difference in how much they bid – entirely based on the last two digits of the SSN.

Here’s another one.

Would you work harder for a set amount (say $10) or for an uncertain amount (say 50% chance of $10 or 50% chance of $5)?  Most rational people would say that they would work harder for the guaranteed payout of $10…that isn’t the case.

In a study that looked at drinking a large amount of water in two minutes – some people were offered a $2 fixed amount for finishing it – the other group was told they would earn either $1 or $2 (random chance of either).  So what was the result?

Behavioral Econ Uncertainty

43% completion rate for the certain award versus 70% completion rate for the variable?  Not what you would think right?

Note – that this doesn’t apply to people choosing to participate – existing research suggests that we prefer certainty over uncertainty when deciding if we should opt-in for a goal.  However, uncertainty is more powerful in boosting motivation en-route to a goal.

So what does any of this have to do with change?

We so often want to drive change in ourselves or our organizations and think through the process of this – in a rational and systematic manner.  I’ve worked with companies who are baffled that they don’t see a long-term increase in employee productivity and satisfaction after they increase their wage (Hedonic Treadmill Effect).  I know people who have mapped out their exercise routine for the next day, only to hit the snooze button instead of getting up and going for their morning run (Hyperbolic Discounting).

Too often we try to implement a change program based on a belief that we are rational beings.

Behavioral economics highlights that this just isn’t the case.

Continue reading “Behavioral Economics and Change”

Improving performance in uncertain times using non-cash incentives

Change creates an emotional response

Even in the best of times, companies experience different competitive and environmental factors that can lead to organizational change and thus employee uncertainty. In hard economic times, those changes occur at a much greater pace and employee uncertainty can be even greater.   Employee uncertainty creates a number of challenges for organizations as employees often feel anxious, disillusionment, disappointment, confusion, and even anger over their lack of control in an unknown situation.  This often leads to decreased employee motivation, focus and subsequent decreases in productivity and performance.

Companies can employ a number of different mechanisms to help recharge employee motivation in changing environments.  One key mechanism is the use of targeted incentives to help engage employees and focus them on improving productivity.  Because incentives can be structured in a number of different ways and use a variety of reward options, it is important to understand what aspects of incentives will drive the greatest return given the uncertainty and emotional response that is felt by employees during these organizational shifts.

Understanding the psychological response:

The emotional response of individuals to potential negative changes is theorized to go through a process similar to grief.  The Kubler-Ross Reaction to Change[i] cycle shows how employees typically flow through recognized stages when faced with change.

Kubler Ross Change

Initial denial is followed by resistance, then a period of self-doubt and worry, followed by a time of letting go, with acceptance of the change and exploration of options, and finally moving to new commitment and focus.  This is an emotionally charged process that requires time to respond to change.

Organizations need to be able to manage this process and move people through these stages as quickly as possible.  The engagement of the emotional elements of the brain is vital to being able to achieve this. During the high stress, denial and resistance stages, our brains do not process rational arguments as easily or readily as they usually do.  In order to gain a foothold in this emotional cauldron, incentives need to have an emotional hook.  Non-cash incentives achieve this hook through a variety of behavioral economic principles.  First, they provide hedonic luxury escape which is about being able to remove yourself from the current state and imagine yourself with a luxury item or good[ii].  Second, they activate different sectors of the brain associated with visualization (i.e., right hemisphere brain functions) versus the more rational sectors associated with transactions (i.e., money and left hemisphere brain functions)[iii].  Third, non-cash elements do not push employees into a calculative modality in which they equate effort with monetary amounts.  In stressful situations, this calculation is short-changed and often interpreted as “they are trying to bribe me.”  Non-cash awards are evaluated as a separate, non-financial component that is viewed in isolation and not in factors that are associated with other compensation factors.[iv]

Examples:

Many organizations have utilized non-cash incentives in periods of uncertainty and change.  The following are just a few examples of these incentives and the results that they generated.

Y2K Angst

A technology firm out of Des Moines, Iowa was experiencing high levels of turnover and angst with its software programmers because of the uncertainty surrounding Y2K and how their jobs were going to be negatively impacted.   A non-cash incentive program aimed at achieving specific Y2K milestones was implemented across the organization.  AwardperQs (a non-cash point system) were awarded to individuals and teams that achieved specific milestones.   This program provided clear focus and motivation for the software programmers and achieved in excess of 90% of employees engaged/ participating/hitting one or more milestones.

Sales Force Integration

A leading medical technology company was moving from a product-centered sales philosophy to a customer-centric team approach.  This involved a realignment and adjustment to the sales force that created significant uncertainty in the field about their jobs and roles.  A six-month incentive program was developed that rewarded people for sales that required integration of two or more product groups.  A fixed award pool created a sense of urgency and engagement in the incentive.  The client realized a return of more than 300:1 on this program.

Realignment

A pharmaceutical firm was going through a major realignment of territories and product allocation due to a large product soon to come off of patent.  Many sales representatives had new managers, new doctors and new products that they needed to work with.  A short-term team based award was put in place that offered teams the chance to earn from selected merchandise if they were in the top 20% of districts across the nation.  Quota achievement across the division came in above the stretch goal, even with the distraction of realignment.

Other Factors

Obviously there are other factors that influence how quickly organizations move their employees through angst to engagement in situations that are stressful or uncertain.  While this paper does not expand upon those, two key factors that relate to incentives include:

  • Incentives should be short-term to allow for readily available goal progress particularly when dealing with uncertainty.  By providing short-term incentives and tracking to that, individuals will achieve a sense of progression towards goal which increases the perception of certainty in the program.
  • Communication is key.  Incentives cannot be viewed of as a bribe or they will be summarily dismissed.  The tone and narrative of the communication needs to be set up to have the most positive impact and create a separate interaction with the incentives that sets it as different from the cause of the uncertainty.

 


[i] Kübler-Ross, E. (2005) On Grief and Grieving: Finding the Meaning of Grief Through the Five Stages of Loss, Simon & Schuster Ltd.

[ii] Kivetz, R. (2010) Rewards Hierarchy and Hedonic Luxury, presentation at BIW Forum

[iii] Jeffrey, S., (2006) Cash or Hawaii: The benefits of tangible non-monetary incentives, dissertation

[iv] Jeffrey, S., (2008) The benefits of tangible non-monetary incentives, Incentive Research Foundation

Are you spending more on office cleaning than staff motivation?

There was a recent blog from HRZone UK that claimed, “Blog: Most employers spend more on office cleaning than staff motivation.”  I cannot vouch for the accuracy of this statement or info in the article.

That being said, accuracy is not the point.  The point is, you get what you pay for – right?  So what is it that your organization is paying for?

How is your company spending its money?  Is it on it’s people or on systems?  Is it on sales or is it on customer support?  R&D or discounts to suppliers?  The money often points to where the focus is for your company?

Two things that I often do when working with companies trying to improve their employee motivation is 1) interview key leaders to understand what the key drivers of the business are and 2) conduct a total rewards audit.   I use step one of this process to get at the underlying drivers of the business.  This often isn’t the first thing that comes out of leaders mouths.  In fact, it usually requires me to probe with them to really get at the root cause.  This understanding of the key drivers is vital to being able to motivate the appropriate behaviors and performance.  What we find in step two of this process is that the company’s Total Rewards are NOT in alignment with the key drivers.  In other words, companies are often spending their money on things that are not key to driving their success (similar to the clean office analogy in the HR Zone article).

This is not a good way to spend money.

Hopefully your company isn’t doing this.  But a simple way of finding out is to look at where you are spending money and then seeing if that aligns with the key drivers of the business.  If it aligns, you are doing well, if not, you have a problem.

Here is a link to the HR Zone article if you care to give it a glance: http://www.hrzone.co.uk/topic/managing-people/blog-most-employers-spend-more-office-cleaning-staff-motivation/119615

Have a great day!

4-Drive Summary

4-Drives I found this summary of Lawrence and Nohria’s “Drive” and thought that it was a nice summation of the book.   Josh Kaufmann does a nice job of laying out the key insights to the theory and some good ideas on how to apply the theory into the real business world.  I really like the final comment by Kaufmann regarding adding a drive around “feel.”  It is an interesting concept that I’m going to explore in more detail.

Click through to link to read more…

http://personalmba.com/driven/

Let me know what you think – leave a comment!

Remember – you can always follow me on Twitter @WhatMotivates

4 ways great leaders can impact employee motivation using the 4-Drive Model

In order to maximize motivation leaders need to provide an opportunity for employees to satisfy the four drives: Acquire & Achieve, to Bond & Belong, to be Challenged & Comprehend, and to Define & Defend.  Leader’s can begin to influence and start to fulfill each of these drives by using  some of the systems and processes they already have in place.  Alterations and enhancements to those systems and processes can help the organization be one in which employees can satisfy their drives and become highly motivated!

We attempt to map the connection between each of the four drives and the different organizational systems/processes that impact them.

 Drive A: Achieve & Acquire

This drive is primarily satisfied through a company’s Reward System. This drive is met when companies have a total reward system that: highly differentiates top performers from average performers and average performers from poor performers; clearly ties rewards to performance; recognition is given for outstanding performance; pay is above competitive benchmarks in the city/industry; and top employees are promoted from within.

 Drive B: Bond & Belong

This drive is mostly met through an Organizations Culture. Organizations who’s culture is one that: embraces teamwork; encourages the development of friendships and bonding; one in which employees can depend on their peers to help them; a culture that values collaboration; a culture that celebrates and shares; and a culture that is focused on the “employee first” are crucial to this drive being met.

 Drive C: Challenge & Comprehend

This drive is fulfilled primarily through Job and Organizational Structure.  Organizations need to ensure that the various job roles within the company provide employees with stimulation that challenges them or allows them to grow.  Job roles that satisfy this drive should: be seen as important in the organization; jobs should provide personal meaning and fulfillment; roles should engender a feeling of contribution to the organization; organizational structures that provide growth opportunities within the company; learning offerings (training, seminars, etc) that provide employees with new skills and knowledge,  job sharing/rotational opportunities that can provide new challenges are the key to fulfilling this particular drive.

 Drive D:  Define & Defend

This drive is met mostly through an employee feeling alignment and connection to the organization.  This can be done through a company’s Vision/Reputation and their Performance Management System. Organizations that have a strong vision or positive reputation in the marketplace can help create that alignment with employees.  The company should be perceived to be: fair; providing a valued service or good; ethical; and good stewards.  Organization’ performance management systems can also help through giving insight into the company’s vision.  Performance management system should be one that is: open and transparent; perceived to be fair; provides direction; and that is trusted by employees.

What great leaders need to do:

Rightfully or not, many employees look to the company to provide them their motivation for work.  While many of these motivations are inherently in a company, good leaders know that they have to work at it constantly to ensure that they are satisfying all four drives.

1. Focus on all 4 Drives:

It is important to understand that all the good work that a company or leader does in these four areas can be ruined if one of the four drives is lacking. Research shows that weakness on fulfilling one of the 4-Drives “castes a negative halo” on how the company or leader performs on all the other 3 drives. It is important then for a leader to ensure that they are identifying and addressing any issues that they see in any of the four drive areas.

2. Individualize motivation:

It is also important to know that individual employees each have a unique 4-Drive Motivational profile.  In other words, some employees will respond or require greater satisfaction of the A drive, while others will focus in on the C drive (or B or D).  Each employee will perceive how the company or leader is performing on these differently.  Good leaders are one’s who understand those differences and can focus specific employees on the satisfiers of their specific needs.

3. Communicate effectively:

Leaders need to be able to effectively communicate how their systems, policies and structure align with the four drives.  In other words, they need to be able to explain to map out the connections between what the company is doing or providing and how that would satisfy one or more of the drives.  For instance, a leader could discuss the reason that they are sponsoring a community service event is not only to help the community (drive D) but also to provide an opportunity for employees to get to know each other and their families (drive B) and to give them a chance to learn a new skill (drive C).

4. Experiment:

Good leaders need to constantly look for ways of enhancing each of the four drives.  This is an ongoing commitment that requires leaders to be focused on looking for different ways in which they can provide the opportunities for employees to satisfy their needs.  They should implement new structures and processes and see how they work.

Next steps:

We can help you or your company use the 4-drives to increase motivation.  We offer assessment, consulting and workshops on this.  You can contact us at 612-396-6392 or kurt@lanterngroup.com

Let us know what you think – leave a comment below!

Repost: We are NOT rational beings so why do we try to make rational incentive programs?

Take the blndfolds offTake off our rational blindfolds…

Dan Airely, Richard Thaley, Cass Sunstein, Daniel Kahneman, Ran Kivitz, and many more psychology and behavioral economics  researchers have shown that while we like to think of ourselves as rational, thinking human beings who are out to optimize our well being, we aren’t.

In fact, we are very far from it.

Sharon Begley at Newsweek wrote this interesting blog “The Limits of Reason” in it, she states, “But as psychologists have been documenting since the 1960s, humans are really, really bad at reasoning. It’s not just that we follow our emotions so often, in contexts from voting to ethics. No, even when we intend to deploy the full force of our rational faculties, we are often as ineffectual as eunuchs at an orgy.”

We see this all the time.  I wrote about it in my earlier post from today “5 Lessons from the Maze.”  We tend to act and behave in very non-rational ways.  There are lots of irrational types of behavior and thinking and lots of theory’s about them (i.e., Loss Aversion, Status Quo Bias, Gambler’s Fallacy, Hedonistic Bias, Anchoring, Reciprocity, Inequity Aversion, etc…).

Here is what is interesting – we tend to still design our incentive programs and our motivational strategies based on believing that people act in a rational manner. We create programs that have 10 different ways to earn, with multipliers, qualifiers, and ratchet effects.  We create programs with multiple components and factors that we think will drive specific behaviors and elicit particular performance results.  We believe we know what people want and use only extrinsic rewards to drive our results.

Ouch! Continue reading “Repost: We are NOT rational beings so why do we try to make rational incentive programs?”

You have more than me! Thoughts on fairness and 4 ways to make it better.

by Timblair

My four year old son was playing trains downstairs with two of his friends last week.  It was going great until one of the friends somehow ended up with 5 train cars while my son only had 4.  This sent my four year old into a tizzy in which he stomped out of the room and sulked on the floor in the kitchen.

“He has more than me.” was the response I got when I asked him what was wrong.

So trying to think quickly and forgetting that I was dealing with a four year old, I asked him if he had been having fun playing with four trains before he realized that his friend had five?  “Yes…but it’s not fair.  He won’t share and he has more.

My equally “way-too-old” for a four year old response was, “but right now you have none – which is more fun, playing with four or playing with none?” I thought I had him here….

He looked at me with a quizzical stare and held up his hand with all five fingers out – “Five!” he said in response with 100% conviction.  Ahh yes, I’m dealing with a four year old mind. Continue reading “You have more than me! Thoughts on fairness and 4 ways to make it better.”