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”

Purposeful Change – 6 steps to help keep you motivated and achieve your goals

Based on new research from behavioral economics, neuroscience, motivation and habit formation…six steps that can help you get and stay motivated to achieve your goals.

Labels – why they “are” and “are not” important

PlutoThe 9th Planet

Growing up in the 1970’s I had a fascination with Pluto.

It was cool.  It was the farthest planet from the sun.  It was the smallest planet.  It’s orbit intersected with Neptune’s and sometimes was closer to the sun and other times further away – but it would be 100’s of years before that happened since it takes over 200 years to orbit the sun.  It was the last planet discovered and it was discovered because they were looking for planet X.  It was cold and icy and mysterious.

I mean it couldn’t get much cooler.

The only downside was that Mickey Mouse’s dog was named after it…

But then, in 2006, the International Astronomical Union (IAU) downgraded Pluto from the 9th planet to a dwarf planet.

Now, the basic make-up of Pluto hadn’t changed.  It’s orbit was still the same.  It’s size the same.  It’s history hadn’t suddenly been altered – but Pluto was no longer a planet.

And now, my son, who was born in 2006, will never know Pluto as the 9th planet.  It will be just one of the many dwarf planets that are in the Kupier belt and not even the biggest one.  He won’t be reading about it in any of the new solar system books.  He will grow up in an 8-planet solar system.  Our knowledge of the solar system changed, and with it, so did Pluto.

But Pluto is still Pluto – only it’s label has changed. 

3 letters

I started my PhD process in 2003.  It took me 8 years to finish.  Over those years, I learned a lot and my experiences grew (mostly in the first few years where I was taking classes and researching my topic and less in those last 5 years when I was trudging through writing my dissertation).  However, the difference in knowledge and skill the day before I earned my diploma and the day after I earned my diploma was zero.

But people looked at me differently – my label had changed. 

I taught the same sessions.  I did the same consulting work.  Yet, I was now viewed as an expert.   I had three letters after my name and that gave me clout and authority.  It actually changed the way that they experienced the information that I shared with them. 

People who didn’t know me prior to my PhD would never know that I was once just one of the many struggling students out there working hard at getting their dissertation done.  To them, I was Dr. Nelson.  Just as my son won’t think of Pluto as a planet, these people will not think of me as anything but having a doctorate.

And that changes how they perceive me.

But I’m still me.  Pluto is still Pluto.  We just have different labels…but those labels change how people view us.  They can change the dynamics that we have with individuals – how much attention we get, how much credence is placed on us, and how they interpret the information that we provide.

And remember, we place a lot of labels on people: president, chairmen, all-stars, diva’s, minister, deviants, heroes, just to name a few.   Those labels impact how we interact with those people – but underneath it all, we need to remember that they are still human beings.

More info on Pluto here: http://en.wikipedia.org/wiki/Pluto

How We Are Developing a Reward and Recognition System using the 4-Drive Model

I’m consulting with a 12 Billion dollar sales division of a Fortune 500 company regarding the future of their reward and recognition system.  Without going into much detail, they are trying to take a strategic approach to how they can improve the effectiveness of their reward programs.  As part of this process, we are using the 4-Drive Theory as a model to help guide how we build this system.

As one can imagine, the organization’s current reward and recognition programs rely heavily on the Drive to Acquire & Achieve.  By far, this was the predominant focus for over 90% of the components.  Additionally, our research showed that the current system has a number of legacy programs and other recognition items that are no longer strategically aligned with the organizational mission.

There are a number of ways that a reward system can be developed.  We aligned on developing a system that would tap into all four of the drives and focus on motivating actions on three specific sales behaviors.  With this in mind, we wanted to create a framework that would leverage various reward and recognition components.  That framework is shown below:

Reward and Recognition components

Within each of these four components could be a number of different programs that would be focused on driving one or more of the desired behaviors.  We also identified that while any of the components could activate any of the four motivational drives, that particular drives would be more readily activated by programs within specific components.  We’ve mapped this below:

R&R and the 4-Drives

So while both the incentive compensation and the non-cash components easily activated the drives to acquire and challenge, group trips and other recognition were more likely to tap into the drives to bond and defend.   This provided us with a framework to think about how we could leverage all four drives with various reward and recognition programs.

While this is a high level perspective, it does provide a company with way to think strategically about their reward and recognition system that aligns it with the 4-Drive Model.  We were able to map out specific programs within this framework that provided both a means for effectively driving behavior as well as leveraging all four drives.

To our knowledge, this framework has not been used previously within a large company.  We are very excited about how this is being applied and the impact that it will have.
Please let us know if you have any questions or thoughts by leaving a comment below.   Thanks.

 

 

 

 

 

 

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!

Leadership blindspots and how to avoid them

Blindspots.

In cars, we have blindspots where we can’t see what is going on right around us.  The larger those blindspots are, the more dangerous.  We can have blindspots in our life as well – things and behaviors that we do that we don’t understand or appreciate the impact that they have on others and in ourselves.

In her book, Fearless Leadership, Loretta Malandro, PhD., identifies  10 behavioral blindspots that can derail leaders.  The following slideshare builds off of those 10 blindspots and helps to figure out ways to get past them and become fearless leaders.

 

Top 5 survival tips for small businesses – guest blog by Paul Schoening (3 of 3)

The following is the final blog of 3 posts from our guest blogger Paul Schoening, President of Plan C.  He is bringing a unique perspective on what it takes for a small business to survive.  In his first two posts (here and here) he talked about the difficulty of starting a business based on passion and how that passion is both good and bad.  He discussed how entrepreneurs need to look at building a sustainability plan and not a business plan.  In this blog are his final two tips.  Let us know what you think.  Enjoy!

4. Continually learn: I’ve mentioned education already but I need to stress how it’s important to stay ahead of the competition.   To do that, you need to carve out time to learn.  It doesn’t matter how you learn, but you must be constantly learning.  I’m not saying that you need to take classes – but you do need to keep up on things.

Read, attend conferences, sit through webinars, go to the library (I know – old fashioned but it works), find a mentor, network and learn more about your business than you think you will ever use.  Using the internet to learn is easier than ever – enter a topic in google and you have thousands of links to explore.  Subscribe to websites that help you learn and stay up on leading thought in your industry.  University sites offer a lot of free classes via the web (see here).  Apple even has iTunesU that you can get on your iPhone or iPad and learn while you are on the go.

When you are starting a business, finding time to learn can feel like you are taking away from other important aspects of the business – but it is key to long term survival. You’ll need to prioritize your time and make critical choices which will allow you to learn and grown your business at the same time…including how to more efficiently sweep the floors! Engaging your new employees through continuous learning is also a key factor in retaining the talent you need to succeed. Rick Osborn, president of the Association for Continuing Higher Education says, that’s a mistake.

“It doesn’t make sense,” said Osborn. I understand that when businesses are looking to make cuts, these are the kinds of programs that are the first to go. In the short term, those kinds of cuts might work for a business. But, in the long run, you’re going to have to restore the cuts.”

Businesses that offer professional development often have a strong track record for employee retention. In fact, employees cite continuing education programs as the No. 2 reason they stay in their jobs, said Susan Porter Robinson of the Washington, D.C.-based American Council on Education.

Source; www.bizjournals.com December 7, 2009

5. Connect, connect, and connect some more: Get connected with people in your industry, other small business people, and anybody else that could potentially be of benefit to your business.  Do this so you can understand the challenges, opportunities and resources available to be successful.   Research by the IBM T. J. Watson Research Center indicated that the effects of networking and connecting with other people have a long term positive impact.  The research found that 9-months after a networking “mixer” event, participants rated the top five benefits as

  • Being networked professionally
  • Feeling energized by the interaction
  • Gained a business insight
  • Established a collaboration opportunity and
  • Had found professional inspiration

Source: Enhanced Professional Networking and its Impact on Personal Development and Business Success, 2006

While every social engagement is not a sales call, it can be a potential opportunity to talk about your business and what you do.  Join Linked-In groups, start a channel on You-Tube, expand your twitter accounts.   Utilize your network of friends, family and acquaintances.     Make the effort.  You never know where the next sale is going to come from.  Don’t leave anything on the table, this is your livelihood!

Let us know what you think – leave a comment below.  Join in the discussion!