Author: steveshu

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A Perspective on How Behavioral Economists Think We Should Deal With Reason and Emotion in Decision Making

I thought I would re-post an answer to a question I was asked to answer on Quora, as it illustrates a conceptual flavor of how knowledge of behavioral economics can be applied to help navigate behavioral obstacles and opportunities.

The question:

How do behavioral economists think we should deal with reason and emotion in our decisions?

My answer:

The balancing act is tricky, and I think context and desired outcomes matter. For example:

  1. A thirty-year old might have problems saving for retirement because they think of savings as being for stranger. The solution might be to increase emotional connection between the thirty-year old and their future self so that the right behavior of saving can be achieved.
  2. A person might be emotionally attached to their home, and as a result, they might try to sell their home at too high of a price. It might be better if they can loosen their emotional attachment and feelings of endowment. Getting 3rd-party perspectives might be helpful to the seller in terms of distancing themselves so they can set a reasonable market price.
  3. Sometimes it’s hard to control emotions and desire, and people may try to precommit to a state so that proper decisions are more likely to be made in spite of the situation. I have heard of behavioral economists pouring salt over desserts at dinner (after they’ve had a few bites to get the taste) so they are less inclined to eat the whole thing.

The main takeaways are that there are essentially “two minds” at work, and they work in concert in different ways. Sometimes you need emotion. Sometimes you want less of it. Sometimes you can’t really change your emotions so you need self-control devices and external perspectives. Other times you need to try to slow down thinking. There are many different approaches to applying behavioral economics concepts.

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Please take a quick, 30-second survey for my book – Inside Nudging

I am writing a book for management professionals and those interested in implementing behavioral science (which includes behavioral economics and finance) in business settings. Situations include the incubation of innovation centers, behavioral science overlay capabilities, or advancement of existing organizations. I’d love your input on what challenges you see and what you’d like to see addressed!

 

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What Are The Best Management Consulting Books?

There are four books that I recommend as core to the generic practice of consulting. These are:

  1. The McKinsey Way by Ethan Rasiel
  2. Process Consultation by Edgar Schein (dry read)
  3. Flawless Consulting by Peter Block (optional and highly recommended for those coming from engineering versus consulting backgrounds)
  4. The Pyramid Principle:Logic In Writing and Thinking (for managers & consultants especially) by Barbara Minto

Beyond the generic core, there are three major dimensions that come to the top of my mind when considering practitioner-level knowledge of the management consulting space:

I have developed a working reading list that attempts to cover many of the areas above. It is a list for entry-level to advanced management consultants. It can be found here.

And for those readers seeking books and information on getting a job with a consulting firm, there are a number of other books out there. One site that sells such a book (“The Consulting Interview Bible“) is ManagementConsulted. As an aside, back in 2009 Kevin Gao (ex-McKinseyite) interviewed me for ManagementConsulted’s Life as a Consultant series.

The best historical account of the consulting industry I’ve read is The Lords of Strategy: The Secret Intellectual History of the New Corporate World by Walter Kiechel

Finally, I just released a book entitled The Consulting Apprenticeship. The book focuses on nuances passed on during apprenticeship and complements the four books I mention at the beginning of this post or can be read standalone. More info at ConsultingApprenticeship.com.

The Consulting Apprenticeship is available for purchase at Amazon.

Edit (November 28, 2017): I just completed a new book, So What Strategy by Davina Stanley and Gerard Castles. The two authors began their consulting careers at McKinsey & Company (communications specialists). The book is thematically aligned with the books above, and I’ve written a review of the book here: The So What Strategy – A Highly Recommended Book for Business Communications. I also recommend considering their online courses here.

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My Behavioral Science, Design, and Business Book Reading List

As I was gathering my thoughts for my Inside Nudging project (www.InsideNudging.com), a project that I envision tying together the application of behavioral science in business contexts and providing more of an inside look at innovation, strategy and implementation, I wanted to take stock of books that have probably influenced (liberally interpreted) the way I look at behavioral science.

Perhaps you’ll find something of here of interest to you for your weekend read. I am also open to getting more book recommendations. Thanks!

Psychology, Behavioral Economics and Finance

  • Phishing for Phools (Akerlof and Shiller)
  • Drunk Tank Pink (Alter)
  • Predictably Irrational (Ariely)
  • The (Honest) Truth About Dishonesty (Ariely)
  • The Upside of Irrationality (Ariely)
  • Save More Tomorrow (Benartzi and Lewin)
  • The Smarter Screen (Benartzi and Lehrer)
  • Thinking Smarter (Benartzi and Lewin)
  • The Foundations of Behavioral Economic Analysis (Dhami)
  • Risk Savvy (Gigerenzer)
  • Stumbling on Happiness (Gilbert)
  • The Why Axis (Gneezy and List)
  • The Happiness Hypothesis (Haidt)
  • The Righteous Mind (Haidt)
  • Inside the Nudge Unit (Halpern)
  • Decisive (Heath and Heath)
  • Made to Stick (Heath and Heath)
  • Thinking, Fast and Slow (Kahneman)
  • The Undoing Project (Lewis)
  • Dance with Chance (Markridakis and Hogarth)
  • The Irrational Economist (Michel-Kerjan and Slovic)
  • Scarcity (Mullanainathan and Shafir)
  • Democracy Despite Itself (Oppenheimer and Edwards)
  • Irrational Exuberance (Shiller)
  • The Last Mile (Soman)
  • Simpler (Sunstein)
  • Misbehaving (Thaler)
  • Nudge (Thaler and Sunstein)

Design

  • Hooked (Eyal)
  • Designing with the Mind in Mind (Johnson)
  • The Design of Everyday Things (Norman)
  • Envisioning Information (Tufte)
  • Designing for Behavior Change (Wendel)
  • Design-Driven Innovation (Verganti)

Business and Strategy

  • Negotiating Rationally (Bazerman and Neale)
  • Freakonomics (Dubner and Levitt)
  • Blink (Gladwell)
  • The Tipping Point (Gladwell)
  • Yes! (Goldstein, Martin, and Cialdini)
  • Blue Ocean Strategy (Kim and Mauborgne)
  • Insurance & Behavioral Economics (Kunreuther, Pauly, and McMorrow)
  • Behavioral Economics and Policy Design: Examples from Singapore (Low)
  • Drive (Pink)
  • Absolute Value (Simonson and Rosen)
  • Wisdom of Crowds (Surowiecki)

Communication

  • The Pyramid Principle (Minto)
  • The Sense of Style (Pinker)

On My Future Reading List

  • The Power of Noticing (Bazerman)
  • Happy Money (Dunn)
  • Switch (Heath and Heath)
  • Irrationality in Health Care (Hough)
  • The Art of Choosing (Iyengar)
  • The Organized Mind (Levitin)
  • King William’s Tontine (Milevsky)
  • The Marshmallow Test (Mischel)
  • Antifragile (Taleb)

PS. Here is a teaser video based on Chapter 1 of my book, Inside Nudging.

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Behavioral Economics and Behavioral Finance Manifesto

As 2014 comes to a close, I’ve been reflecting on various books, presentations, research, tools and solutions, software and applications that I’ve been involved with and organizations I’ve been consulting to over the years. I’ve always found reflecting on the past to be useful in helping me better understand nuances in my values. In this post, I want to share my thoughts on design values related to behavioral economics and behavioral finance (which going-forward in this post I’ll simply refer to as behavioral science for brevity).

But what are design values and why do design values matter with behavioral science?

Design values are architectural principles that one lives by or follows when building things whether it be software, tools, websites, paper forms, or everyday objects and environments. For example, in the case of building a home, an architect’s design values for a project might be to minimize ongoing water usage relative to landscaping, promote interactions among the family during cooking and eating activities, and foster an energizing and happy environment through the use of natural lighting.

When one examines behavioral science and design, one maxim is that there is no neutral design architecture. That is, whenever you create something, decision-making and behavior may be influenced by virtue of the architecture. As an example of choice architecture, if a school cafeteria puts the fresh fruit near the front of the lunch line closer to the kids walking by versus the cookies further away, more fruit may be selected. In the case of information architecture, if people are presented with the dollar costs versus the annual percentage rate associated with borrowing money, people tend to better understand the implications of the former method. Process architecture is yet another area to think about, and the list probably goes on and on.

The implication is that design architecture influences people whether one intends it or not. While some influences may not turn out to be statistically significant, the body of behavioral science research has shown that many other influences have been shown to be very significant. So it’s better to be aware of potential influences or at least disposed to seek the truth.

With that as backdrop, here’s my Behavioral Economics and Behavioral Finance Manifesto (much like I did with my Management Consulting Manifesto back in 2011). Consider it an ongoing work in progress:

  1. Every design architecture has behavioral implications – strive to recognize and measure what these are.
  2. Distinguish between the interests of others versus self.
  3. Intend to help, not manipulate. Recognize manipulation or influence (intended- or side-effects) and act ethically.
  4. After having helped others to maximize their interests, then can consider helping oneself as an add-on or jointly maximizing the portfolio of interests between others and oneself. Clearly separate interests and call out where they align, don’t align, conflict, or don’t conflict.
  5. Where possible, segment users. Where not possible, strive to design for most appropriate for most people most of the time. Recognize tiers or spectrums of possibilities.
  6. When assessing design impacts, give consideration to common behavioral themes, including but not limited to:
    • Think broadly
    • Make things easy
    • Consider individual differences
    • Consider shifting preferences
    • Consider social context
    • Consider timing
    • Consider uncertainty and variability
    • Consider digital differences
    • Consider cognitive capacities
    • Consider heuristics and biases
    • Consider numeracy and literacy
    • Consider emotion
    • Consider fairness
    • Consider incentives
  7. Be able to articulate the guiding principles for the design architecture, including guardrails and limitations.
  8. Seek transparency with design.
  9. Seek to understand the costs and benefits of design on behavior and outcomes.

Best wishes to all in the new year. Thanks for visiting!

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Emergence of Formal Behavioral Insights Teams and Initiatives

I recently ran into a short video by the New South Wales government which does a great job of introducing the notion of behavioral insights and application in the governmental space. Although still early, behavioral insights and the application of behavioral economics principles have been going global in the public policy space. At some point in the future we will see a wave build in the private sector – the value proposition for getting smart about  behavioral science is compelling. On the one hand, impacts can be large and returns can easily exceed 10X (see 22X cost savings for UK Nudge Unit). One the other hand, possibilities for competitive differentiation and new products seem limitless. For example, Opower tapped into a great market using software-as-a-service and a behavioral efficiency model for saving energy. Companies like Idomoo present companies with an opportunity to tap into behavior change using massively-automated and personalized videos.

But how do organizations get from here to there in the behavioral economics space? How will the wave build? The New South Wales government video really made me think about the gap in organizational knowledge about capitalizing on behavioral economics. It’s an opportunity. While some companies may be very sophisticated in their approach with behavioral economics, the broader industry is barely conscious of the power of behavioral economics (perhaps Behavioral Economics World 0.2 or 0.3) let alone able to reap large returns from it. How do we get to a Behavioral Economics World 1.0 or 2.0?

The UK Nudge Unit has a noteworthy approach. It is a consulting-like and scientific approach that essentially includes customized analysis and design, plus scientific testing and iteration.

As another example, when I was working with Allscripts we had more of a strategic, business unit approach. We took data we gathered in one market, build insights on top, and then tried to line up incentives and behavior change in complementary markets via offerings in a standalone business unit.

Yet as another example, at Allianz Global Investors we took another approach by setting up a Center for Behavioral Finance with a Chief Behavioral Economist and then establishing a number of initiatives within the Center to provide thought leadership and support the larger business.

Each of these routes is suited for different situations. For other organizations in general, I think it’s important to try and assess what the opportunity is, determine a strategy for moving forward, audit where you are and identify the gaps, and then design and execute on an operating model. Execution of the operating model could include building a behavioral team, outsourcing, augmenting, or partnering.

So to jumpstart your organization’s thinking on how to become a leader in applying behavioral economics, consider the following types of questions:

  1. Opportunity Assessment
  • Where do we get ideas from now?
  • How should we get new ideas related to behavioral economics?
  • How might we change the game?
  • What’s the potential opportunity?
  • How can we test new ideas related to behavioral economics?
  1. Strategy Development
  • What’s going on in the market?
  • What blue sky opportunities should we focus on?
  • What will our approach be with customers?
  • How will we competitively position ourselves?
  • What will the output of our efforts look like and how will we distribute?
  • How will we know when we are successful?
  1. Audit and Gap Analysis
  • Where are we at and how can we get smarter about developing ideas based on behavioral economics?
  • To what extent do we know how to design and test behavioral solutions?
  • How can we develop the organizational fortitude to succeed?
  1. Operating Model Development
  • What should a multi-year plan for the behavioral initiative look like?
  • What should our behavioral insights team look like?
  • To what extent should we build, outsource, augment, or partner for our team?
  • How should we incubate the initiative?

Please feel free to share your thoughts on other behavioral insights initiatives and teams, organizations implementing them, organizations not implementing but interested, who’s doing things right or not, unique approaches, new startups, etc.

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