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.

Start each day with Gratitude

Thanks

A few months back I read/heard a line that went something like this, “start each day out by stating what you are grateful for.”

I thought I’d try it…really, there was very little cost to me (a minute every morning while I brush my teeth) and it made sense – think about those positive things in your life in the morning and you will probably feel better about the day ahead.

It brought me back to work on Appreciative Inquiry and Management.  David Cooperrider from Case Western Reserve University developed this model of management interaction in the 1980’s and 1990’s (see here or here) that is based on the assumption that organizations change in the in the direction of their inquiry (i.e., if you  inquire or focus on the positive you will find or grow more positive in your work – the opposite is also true – if you inquire or focus on the negative, you will find or create more negative elements in your work).

By starting each day with a positive affirmation of what I appreciate, it has helped me view things in a more positive light.  Some key things that I’ve found in this:

1.  I immediately feel a greater sense of calm. By thinking about what is good in my life, I tend to find that much of the worry about deadlines or budgets or workload get pushed aside and I physically feel a calm come over my body.

2. I feel rejuvenated.   The act of being grateful tends to rev me up.  It makes me feel like I want to work harder to achieve more.

3.  I tend to be more appreciative throughout the day. My morning gratitude exercise helps me focus on positive things throughout the day – I tend to be more aware of them and grateful for them.

So I welcome you to try this little experiment for yourself.  Take a minute each morning when you wake up to just say thank you for the things that are going well in your life.  If you are like me, you will find that this little activity can have really positive effects on your entire day.

So thank you for taking time to read this and for letting me expound on my little touchy-feely side…

I would love to hear from people (click on the comment section) and find out if they tried this (or something similar) and what it does for them.

Thank You!

Play “The Lotto Game” – what would you do with your life if you won?

I am too much of an analytic to play the Lotto much.  The odds are just not there for me to spend my money on.  I might as well take my dollar and throw it out the car window – at least that way, somebody might find it and get some use out of it.

However, while I don’t play much – on occasion I do.

It is on these occasions that I make it a rule to play a game that I call “The Lotto Game.”  It involves spending time dreaming about what I would do with the money if I won.  Would I go out and buy a bunch of things?  Would I take a trip around the world?  Give it away to charity?

I can spend hours visualizing what I would do with my millions.  This way I feel that I am getting something for my money – the entertainment value of the dreaming. Continue reading “Play “The Lotto Game” – what would you do with your life if you won?”