The revolution in our understanding of human psychology and behavior unwind in the last decades thanks to the research done by Daniel Kahneman, Richard Thaler, and others. We found out that we are not as rational as we thought, and a new field emerged by blending insights from psychology, cognitive science, and traditional economics called behavioral economics. BE can give us a more complex and nuanced view into how we make decisions, and how we can help ourselves and others to make better ones.
The principles of BE echoed through the world and caught up in some places, resulting in, for example, forming the Behavioral Insights Team by the British Government to improve policy and services, known as the Nudge Unit. There is also the World Bank’s behavioral sciences team – The Mind, Behavior, and Development Unit (eMBeD) working to diagnose, design, and evaluate behaviorally informed interventions.
But what about businesses? How can and how some of them already are using BE principles and insights to improve their operations? BE can help in understanding from how the physical design of retail spaces influences how people behave to how a new policy on available work-from-home days influences employee satisfaction.
Businesses have many functions and every single one of them offers the opportunities to rethink, redesign, and improve processes, strategies, and in final, our work. And most importantly for any business, BE is using an experimental approach and testing to understand how any change is influencing actual behavior and measuring what really matters.
BE in HR
These days, when many of us are working from home, we are working in an always-on environment, available on our devices 24×7. Information, technology, and data are overflowing our lives and as a result, we have less time to think, to process information, and we have to make decisions faster. That makes us more vulnerable to not-so-well-thought decisions.
Behavioral economics provides a powerful set of principles to help us improve our thinking and decision-making, as well as of our coworkers. By utilizing its insights, we can design initiatives that work with, not against, the grain of human behavior and positively influence employee decisions and outcomes, all along improving the employee experience.
As the Deloitte article states, there are three major themes from behavioral economics, the “three bounds,” that should be utilized in redesigning HR practices:1
- Bounded rationality – Acknowledging the fact that the human mind relies on storytelling—not statistics and logic—to make everyday decisions;
- Bounded willpower – Understanding our imperfect willpower and using a toolkit called choice architecture to help employees make better diet, exercise, charitable giving, and investment decisions;
- Bounded self-interest – Improving business performance by recognizing that traditional reward-based policies (like incentive pay, goal-setting, performance ratings) have far less impact than traditionally thought.
Looking at talent acquisition, crucial moments are providing a clear employer brand message (the storytelling – from the text in the job add to the narrative on the interview) and a candidate journey that truly resonates with the candidates. If we’re looking at employee training, pilot testing traditional training sessions against shorter, frequent micro-learning sessions can show which of them increases accountability and focus (bounded self-interest). Behavioral economics can also help with employee engagement and performance by improving the company culture to attract, engage, and retain the best employees.2
And sometimes, even small and cost-effective changes like adjusting the way we communicate can have radical effects. The chapter from the book Work Rules! shows this with the email reminders with five simple steps to Google managers the night before their new hire starts. New hires whose managers took action on the email became fully effective 25 percent faster than their peers, saving a full month of learning time.3
Behavioral design offers a middle ground to establish healthy behaviors, often more powerful than awareness-raising. Here is a simple idea for tackling the long and inefficient virtual meetings we all attend while working from home. It can be implemented immediately and with no cost. Set the default duration of the meetings in the software you use to less than the standard 60 minutes.4 And don’t forget to test and measure the results.
Utilizing behavioral economics in HR is a fascinating topic for me and I will be exploring and writing more about it. If you are as interested as I am, a good start can be Deloitte’s article HR for Humans: How behavioral economics can reinvent HR, the book The Behaviour Business, and the TED Talk What makes us feel good about our work? Happy learning!
BE in Product Management
Product Management is such an exciting area since it produces new products and solutions that add value to people’s lives. But, it’s a challenging area, too, since new solutions have to be technically feasible and economically profitable for the company to thrive. So companies need to build a sustainable business model which is validated by the customers. For doing so, it is crucial to understand the decision-making process and how likely a product (or a service) would be bought by the customer.
Businesses that aim to understand how products influence our behavior are the ones that create strong customer habits and ultimately gain a significant edge against their competition. There are other benefits, too, including:5
- Higher Customer Lifetime Value (customers stay around longer);
- Pricing plasticity (users become dependent and less price-sensitive);
- Increased usage (people use the product or app multiple times a day);
- Reduced promotion costs (users return to the product on their own);
- Viral growth (a happy customer/user is likely to spark word-of-mouth).
As product manager’s role is to prioritize, design, and develop the features and go-to-market plan, he or she requires a deep understanding of both customers and market forces. Behavioral insights can be invaluable in this process, at all stages of the product development cycle.
In the ideation phase, a behavioral diagnosis (including collecting data about existing behaviors and mapping out the user’s environment of decision-making) enables going beyond what customers say they want and reveals the underlying psychology driving a person. Because what we say that we want is not always what we want and do in the end. Rapid testing in the research phase to isolate key assumptions and narrow down the list of possible new features enables avoiding relying on intuition for product decisions.
In the design phase, the focus is moved to behaviors instead of the solutions (people make different decisions depending on the design and context of an experience), and in designing small ways to drive customers to those behaviors. Launch strategy with testing possibilities can include generating an experimental design, following through, and promoting both successful and failed experiments so the rest of the company can learn from the experience.2
This is just a short preview of how behavioral insights and practices can enrich, optimize and focus product management processes for the greatest results as I learned. More on this you can read in Penn’s publication Building Behavioral Science in an Organization and of course the Nir Eyar’s book Hooked.
BE in Marketing
Marketers have been applying behavioral economics long before it was formally established as a scientific area, often unknowing, just following what worked. A century ago, advertisers were using habit loops for selling anything, from Quakers oatmeal to Pepsodent.6 As consumers, we probably have at least once bought that 2 for 1 offer, or got that third product for FREE, even if we didn’t really need it.
Behavioral economics can provide valuable insights for marketers by helping to identify behaviors and creating a framework to understand when and how people make decisions. They can tap into BE to conduct deeper market research, then create environments that nudge people towards certain products and services and analyze the success of their marketing mix.
Now, even more than before, as McKinsey’s article shares, these insights are needed to identify consumers’ new beliefs, habits, and “peak moments” which emerged with the global pandemic and crises, as they are central to driving behavioral change. Five actions are identified that can help companies influence consumer behavior:7
- Reinforce positive new beliefs;
- Shape emerging habits with new offerings;
- Sustain new habits, using contextual cues;
- Align messages to consumer mindsets;
- Analyze consumer beliefs and behaviors at a granular level.
The full article with more specific detail on every action can be found on the link. Also, Yale’s Center for Consumer Insights gives a good overview of consumers’ beliefs, goals and behaviors in their article.
Looking at marketing from the lens of behavioral economics, the key is understanding the challenges and needs of the customers but also the irrationalities shaping their behavior. Behavioral economics can make those irrationalities more predictable, and even more, the companies that develop a deep understanding of the beliefs, habits, and goals of their target consumers, and adjust accordingly, are apparently the ones in the best position to thrive.
Conclusion
Although we like to think we are rational beings, our everyday thinking is far from flawless. It is often affected by the context in which we make decisions, the time pressure, insufficient knowledge, and even the social norms in our societies. Most of our decision-making at the end is not the result of careful consideration and sometimes is really not in our best interest.
Organizations where we work, where we build new products and services, through which we communicate and try to influence others, are places of immense opportunities to understand and improve our decision-making through behavioral economics, and in final, our lives.
Smartly designed and implemented behavioral interventions can help individuals make better decisions, build better products and services, alter the way organizations operate, for the better, and help businesses improve their profitability. The theory, great examples that work, and tools to do so, and measure the results – we have, we just now need to make a decision.
References:
1. HR for Humans: How behavioral economics can reinvent HR, Delloite Review, Issue 18, 2016
2. Building Behavioral Science in an Organization, Edited by Zarak Khan and Laurel Newman, Action Design Press, March 2021
3. Work Rules!, Laszlo Bock, Twelve, 2015
4. Nudge management: applying behavioral science to increase knowledge worker productivity, Philip Ebert & Wolfgang Freibichler, Journal of Organizational Design, March 2017
5. Hooked: How to Build Habit-Forming Products, Nir Eyar, Portfolio, 2014
6. The Power of Habit: Why We Do What We Do in Life and Business, Charles Duhigg, Random House, 2014
7. Understanding and shaping consumer behavior in the next normal, McKinsey & Company, July 24, 2020
Behavioral Economics Hub 