Category: Behavioral Economics

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New Resolutions and Fresh Starts

As we approach the year-end, I wanted to share some thoughts from my book, The Consulting Apprenticeship: 40 Jump-Ideas for You and Your Business. It is a technique that I’ve seen a number of operating companies and management consulting firms use effectively. I’ve usually called it the Spring Cleaning technique, to connote a sense of renewal that often comes with the pastime of cleaning and refreshing a home early- to mid-year. That said, the technique can really be applied at any time of year.

The Spring Cleaning technique consists of an executive- or management-level meeting to talk about the business in breadth, capture issues (no-holds barred), rank issues, strategize, and divide and conquer. The basic value of a Spring Cleaning management team meeting is as follows:

  • The meeting forces people to think proactively. While management may have regular weekly management meetings, it becomes easy to become caught up in the day-to-day grind and push off things that people don’t have time for but know are important.
  • The manager that oversees the functional line roles has an opportunity to reset expectations and goals. The psychology of starting fresh can re-energize the organization.
  • Involvement of a consultant can provide a third-party perspective, and in some cases, extra project bandwidth to overcome organizational inertia. The consultant may be expected to work with all of the parties above to prepare information in advance, facilitate meeting discussions, organize issues and action items, and develop a project structure for making and tracking progress. The consultant can essentially act as right-hand person to the sponsoring manager.

In the Spring Cleaning meetings that I have worked on, typical meetings may last a couple of days. The first day of meetings may involve level-setting and brainstorming on strategies. Between these days, the consultant may work to organize the notes, data, or perform analyses. The next day of meetings may be spent working through the high points, prioritizing, and identifying more detailed next steps.

While situations vary, the consultant may be retained as a both a project manager for the larger effort and as specialist to work with a specific functional group to implement change. In these change management situations, the organization may be trying to get over humps or change course while running the business. The value of the project management aspect should not be underestimated.

Two other options that I’ve seen are to include specialized workshops that can either:

  • precede the Spring Cleaning meeting (as a standalone workshop)
  • be more tightly integrated into the Spring Cleaning meeting.

As an example of the first option, I am co-hosting Behavioral Economics Workshops in conjunction with one of my colleagues and partners, Namika Sagara at Sagara Consulting. For those unfamiliar with the term behavioral economics, it is a field that has really grown and examines the psychology of how people form judgments and make decisions. Companies may apply behavioral economics to solve problems in innovative ways. More information on Behavioral Economics Workshops can be found at www.BehavioralEconomics.Info.

It’s rarely a good idea to treat business as usual. Stay on your toes, and take a moment to brainstorm and think about the possibilities of a workshop, renewal session, or Spring Cleaning meeting. Please feel free to reach out to either Namika or me if you want to set up a short call to brainstorm.

Namika Sagara, namika at sagaraconsulting.com

Steve Shu, steve at steveshuconsulting.com

 

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Update on Inside Nudging and Other Behavioral Science Efforts


I’ve published an update to Inside Nudging: The Excerpts (in paperback form for talks, workshops, and academic inquiries). The update includes:

  • Chapter 2: Organizations Can Package Behavioral Science for Good – This chapter describes a case of using behavioral finance in the retirement plan design space. I use this case to demonstrate one example of what a successful innovation center might look like. I also provide a summary using the Behavioral GRIT™ framework, where GRIT stands for the business functions related Goals, Research, Innovation, and Testing.
  • Chapter 8: Nudges Refined, Ethics Examined, Acceptability Explored – This chapter introduces Nudge Psyche, a checklist of things to think about so that you can be deliberate about how you approach nudge design and ethics. It attempts to help design by thinking about things from two broad perspectives: nudge design and nudgee attitudes. This chapter has been one of the most difficult ones for me to write as it draws from  a diverse set of research and literature areas including decision science, medical ethics, government, organizational behavior, behavioral science, and moral psychology. I have found the Nudge Psyche checklist to be very helpful though as implementation in the real world can get grey at times. The Nudge Psyche checklist can help one to tease apart the underlying issues.

The chapter excerpts are also complemented by Appendix A: Ideas to Introduce Behavioral Science Initiatives, which I quietly published earlier based on increasing interest by companies in learning about how to get started with behavioral science. I argue that first a company needs to identify its goals and identify what type of predominant organization model it wants to pursue. This may be an innovation center like I describe in Chapter 2. I also define four other predominant organizational models I’ve seen. I also offer that a company should consider a number of implementation elements that may play a role during execution. Example elements include an advisory board and a behavioral science officer.

As a final update, I plan to give a limited number of talks on Inside Nudging and co-host Behavioral Economics Workshops in conjunction with one of my colleagues and partners, Namika Sagara at Sagara Consulting. More information on the workshops can be found here.

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Behavioral Economics and Innovation Workshops


I am co-hosting Behavioral Economics and Innovation Workshops in conjunction with one of my colleagues and partners, Namika Sagara at Sagara Consulting. The goals of these workshops are twofold. First, the workshops teach and demonstrate key behavioral economics (BE) concepts to participants. Second, the workshops provide an introduction to how companies can implement BE initiatives. In-class exercises and a mock innovation setting provide an experiential learning process for internalizing BE knowledge and skills. More information on the workshops can be found here.

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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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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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Integrating Behavioral Economics and Consulting

Over the past few years, I have been involved with a number of projects that utilize behavioral economics principles to improve outcomes or change people’s behavior. Since this blog has a long history covering management consulting, I thought I would share some thoughts on integrating behavioral economics into the practice of consulting.

For those unfamiliar with the term “behavioral economics”, I generally describe behavioral economics as a combination of psychology and a traditional science like economics or finance. Whereas models in traditional economics and finance often assume that people are supercomputers and can maximize complex notions of utility over a number of parameters, behavioral economics tries to account for the beauty and shortcomings of the human mind and spirit. For example, why do some people help or punish others when it is not in their best economics interests to do so? Why do some people not help themselves (e.g., fail to save enough for retirement) when they clearly can from other measures and/or field testing? How do we know when a commercial or public system has been set up in a behaviorally unfriendly way, and what can or should be done about it?

These last questions get at the heart of one model I have seen for integrating behavioral economics into the consulting model.  This model is the notion of integrating behavioral audits and recommendations into the consulting process.

In the book, “Save More Tomorrow” http://www.amazon.com/Save-More-Tomorrow-Practical-Behavioral/dp/1591844843, Dr. Shlomo Benartzi introduced the notion of a behavioral audit for 401(k) and defined contribution plans. In such an audit, questions are asked to the effect of:

  • Do employees have to opt-in or opt-out relative to joining the 401(k) plan? (This question addresses the behavioral challenge of inertia)
  • Are employee savings rates automatically escalated when a person gets a pay raise? (This question addresses the behavioral challenge of loss aversion)
  • Do participants get 401(k) statements that show projected income at retirement? (This question addresses the behavioral challenge of myopia)

The behavioral audit then opens the door for strategic recommendations such as defaulting employees into plan or at least providing them easy ways to get into a plan, changing employer match rates, restructuring choices in the investment menu, etc. If a company wants to go really deep on implementation, they have an opportunity to work with their consultant or financial advisor to create options, prioritize, and work on an implementation plan.

More generally, the notion of a behavioral audits and recommendations can be designed to assess many other processes. For example, how well does a software application work from a behavioral perspective in terms of getting people to take action? How effective are our management dashboards and processes for managing a portfolio of projects? How good is our website in terms of disseminating information and facilitating choices?

Beyond audits and strategic recommendations, there’s also a tremendous opportunity to apply behavioral economics principles to a second area: the design and implementation phases of consulting projects. Behavioral economics recognizes that people are influenced by things that won’t make a difference to a robot but do matter to humans – we have to pay a lot more attention to design, because design is there whether intended or not. And any design architecture, explicitly or implicitly imposes a value system. Such a value system could be to maximize value for a specific party.  Another value system might be to do the most good for the most people.

So where to start?

A first step is to open your eyes more broadly to behavioral economics. I think that cross-functional disciplines (whether behavioral economics or other) tend to be underappreciated because appreciation requires knowledge that cut across areas that are not traditionally combined.

A second step is developing a good base of knowledge regarding behavioral economics and applications. You can do this by working with people experienced in the area. You can also start to get introduced to these concepts through reading books like “Nudge” (by Thaler and Sunstein) or “Thinking, Fast and Slow” (by Kahneman). Although I am biased (since I was part of team to help with the book), Benartzi’s “Save More Tomorrow” book is a great book for shedding light on how behavioral economics principles are applied in detail to a very specific problem (i.e., design of defined contribution plans for retirement savings).

A third step is recognizing that while it is important to draw from research and core principles (done by academics and from certain areas of the industry), it is important to test your application of behavioral economics, whether that application be for consulting, a solution, or a product. Sometimes we think one behavioral principle will apply in a scenario when something else turns out to be the case. The use of solid behavioral principles based on research should improve the odds of success. Yet in my experience how we make judgments and decisions as people is, at times, both scary and fascinating. So remember that your application of behavioral economics should be tested before it is rolled out.

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