Is Behavioral Economics Used in Business?

This post is reproduced from an answer that I wrote on Quora to the question posed to me, “Is Behavioral Economics Actually Used in Business?”

Broad, conscious, and concerted efforts to apply behavioral economics probably did not begin until sometime after 2008 with the release of Thaler and Sunstein’s book, Nudge. And then when new applications of behavioral economics started, they seemed to be mostly applied in the government space. While many principles of behavioral economics have preceded that and have been applied, I think the introduction of a popular science book and clever packaging helped the principles rise to a new level of consciousness.

Since then, the implementation of behavioral economics/science initiatives in business has started to grow, but it’s still somewhat early. Back in 2010, I was part of a team that started one of the early behavioral finance centers with one of the investment manufacturing firms in the United States. We introduced thought leadership materials like some of the other firms, but we also took it further by equipping financial advisors with specific tools to help assess the behavioral architecture of retirement plans offered by companies.

One key observation I’ve had is that certain companies can have different strategies for implementing behavioral economics. This can include wanting to do holistic innovation that touches on service, products, and applications. Or they can pursue narrower approaches, like research and thought leadership. I wrote a book, Inside Nudging: Implementing Behavioral Science Initiatives in 2016, mostly to help bridge the gap between science and the application in business. That work is based on my background in closely collaborating with academics in behavioral economics and companies looking to be on the cutting edge.

Here are a few examples of how the field of behavioral economics has touched business in my corner of the world relative to behavioral finance:

As an additional reference, you might also be interested in checking out the book by one of my colleagues, The Smarter Screen. That book specifically addresses behavioral economics in a digital world.

Thoughts About Finder’s Fees to Other Professional Services Providers as a Consultant

This answer is based on a question posed to me on Quora.

I’ve only used finder’s fees sparingly over the course of my professional services career. Here are some reasons why:

  1. Some of the best referrals for me have come from other people that currently work either for the client or as a consultant to the client. Providing a referral fee can sometimes create a conflict for those parties providing a referral. The same applies to me providing referrals.
  2. Other referrals come through people that know me or know of me. In these cases, I may provide a referral fee (or something else) more as a unwritten gesture than as a contractual, business regularity, mainly since business through these channels is very much appreciated but more irregular.
  3. Unless designed properly, the referral fee can be stranded between a space where not enough incentive is provided (or even insulting to the referrer), too much incentive is provided and margins are decreased too much, and/or an unwritten obligation is created where the referrer feels overly responsible as to whether the referred is successful or not (as opposed to being arms length from both the referred and the client).

Others may have different experiences, so make sure to get some other perspectives.

Do Consulting Firms Rely On Hiring Salespeople to Sell Work?

Many consulting firms (especially management consulting firms) rely on prior consultants in terms of selling work. Why? Mostly it is because people are the product. In consulting sales, you are selling yourself and your team. More specifically, you are affirming the problem statement, the problem-solving approach, and your team’s experience with solving similar (or comparable) problems in comparable situations. It is hard for external, non-consultant salespeople to do this.

Suppose the problem statement is to develop a new product. People who have experience in the relevant consulting area will know how to refine unstructured problem statements like this, design an engagement to solve the problem, and get the right people staffed on the project. Hiring people from the outside to sell unstructured consulting work (say professional salespeople who do not have consulting experience) may not work very well, although success of this type of approach usually depends on the type of work. For example, some large professional services firms do have more dedicated business development people in cases when the realm of consulting is more focused (e.g., HR consulting, accounting) and solutions are more regular, common, or repeatable.

In summary, to sell many types of consulting services (not all), one often needs to know how to actually do consulting work. That tends to be the primary reason why consultants sell work and not salespeople brought in from the outside. A corollary to this is that partners in consulting firm will often have to do some minimum amount of consulting work and not just sell services; consultants need some continuing involvement with field work to stay fresh and be able to sell.

What is the Best Organizational Model for Implementing Behavioral Science?

During a recent conversation about user interface design and the differences in approach compared to behavioral science, the topic quickly turned to a question about what is the best organizational model for implementing behavioral science?

While behavioral science has been on the rise worldwide, the organizational model is still an important, unresolved question. Should the function sit within marketing? Within the user experience team? As a separate Behavioral Science Officer or Office of Behavioral Science to make the quality high and initiatives vivid? Or perhaps the behavioral science function should lie within the product team? Maybe within the digital strategy group?

In my work with Digitai in the past year, I’ve done work with companies in countries like Australia, Germany, Spain, UK, and the US. Although anecdotal, I’ve seen significant (albeit still emerging) activity with setting up behavioral science initiatives which go beyond pure marketing and are attached to innovation. This inherently requires more cross-functional integration of behavioral science with other existing functions within a company. Furthermore, this sometimes means helping to elevate the sophistication of the innovation ecosystem. This might include new technology partnerships, partnerships with researchers from the scientific community, and upgrades to a company’s testing and production platforms.

Yet while I have worked across many types of companies in the behavioral science area, it’s been somewhat skewed toward large companies with some increasing activity in the middle-market company space (e.g., which see the potential to disrupt the market by leveraging behavioral science principles). What about other companies that have more modest aspirations or resources compared to the large companies that are committed to more substantial investments?

The answer to that would need to be addressed separately to be responsible, but it does brings me back to the original question, which is “what is the best organizational structure for implementing behavioral science?” The key to answering this question is to think about strategy and goals first and then to design the organizational structure to fit the strategy. If your strategy is to innovate, then you may need a model that allows for a lot of cross-function interactions both within and outside of the company. You might want a behavioral science officer and an advisory board. If your efforts are focused mostly on marketing, then you might be fine with a simpler model and hiring or assigning some specialists to the department. If resources are even more limited, then perhaps the solution could include occasional use of outside resources, some training, or use of some do-it-yourself thinking tools (e.g., checklists and things to think about for behavioral science). A key to implementing behavioral science initiatives is to really think about strategy and goals first. Then you can think about the predominant organizational model that you’d like to follow plus any elements that might help with implementation.

Think strategy first, then tactics.


Readers of this post might also be interested in the following short video on implementing behavioral science initiatives

Tips on How to Sell Consulting Services Without Giving Away Everything During Pre-Sales

A lot of consultants fear that they will give away too much in terms of advice during the pre-sales process. Here are some thoughts on how I’ve tried to keep sales processes on track:

  1. As you are engaging the client prospect, try to envision the big picture for the solution approach to the prospect’s business problem. For example, you may see that the client needs to a) better articulate the problem statement and the key priorities (vision), b) decide on an approach (strategy), and c) execute on all the tactical operational things to carry out the strategy (tactics).
  2. Communicate the big picture approach to the client.
  3. Try to add some value by helping them to articulate and refine the problem statement and perhaps also add a detailed item or two that they should consider as part of the more detailed solution approach workstreams. Yes you might consider this giving something away, but you will need to be able to add value and show the client how you are thinking to be able to sell to them consulting services. The client prospect needs to be able to trust you.
  4. Keep your pre-sales activities pretty tight. For example you might limit your pre-sales sessions to 2 to 3 meetings of 1–1.5 hours each. This will also help to provide some separation between planning and doing the work. If you are doing a good job selling your services, you should be able to tell within say the first 1-3 sessions whether you have a serious sales prospect and what the high-level requirements are to close the deal. Note you might be able to get to a high-level proposal or conceptual approach after the first 1–2 meetings.
  5. For many deals, you should be making it clear to the prospect that you are trying to better understand the problem statement so that you can propose the right approach to solving the problem; you are not solving the problem right there as solving the problem will take days, weeks, or months of collaboration and work.

To recap, make sure that both parties understand the problem statement. Both parties should understand the approach and should appreciate that solving the problem will take both time and work. Offer some value to the client in advance of sale; this does not necessarily have to be much, but you need to establish credibility and trust. Finally, set some expectations on the cadence and timeline to get to a proposal or no-go decision.

I’ve finally released Inside Nudging: Implementing Behavioral Science Initiatives

InsideNudging-3D

Inside Nudging is written for management professionals and scientists to feed their thinking and discussions about implementing behavioral science initiatives (which includes behavioral economics and finance) in business settings. Situations include the incubation of innovation centers, behavioral science overlay capabilities, and advancement of existing organizations. Companies need to develop grit – the ability and fortitude to succeed. The book introduces the Behavioral GRIT™ framework and covers key takeaways in leading an organization that implements behavioral science. Behavioral GRIT™ stands for the business functions related to Goals, Research, Innovation, and Testing.

The chapters are complemented by an appendix which covers ideas to introduce behavioral science initiatives. I argue that first a company needs to identify its goals and identify what type of predominant organization model it wants to pursue. There are five 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.

Note that the purpose of this book is not to teach people about behavioral science; there are many other books out there for those purposes. That said, Inside Nudging introduces some behavioral science concepts to provide context and help develop a common language between management professionals and scientists.

I see the application of behavioral science as still being in the early adoption phase. Many companies will benefit if they take time to develop the right approach. I hope Inside Nudging helps you with your journey.

Steve Shu

Praise for Inside Nudging

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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.

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.

Secret Techniques to Overcoming Obstacles as a Manager or Consultant

Over the years, I have had to opportunity to manage different groups and perhaps more importantly observe how different managers and consultants face obstacles. Often these techniques for addressing obstacles are passed down through mentorship or peer exchanges, and as such, these techniques are less documented. Here are some of the techniques that come to mind and are especially more common in entrepreneurial or intrapreneurial situations:

  1. The Experiment – In this case the obstacle that the manager wants to overcome is to make forward progress into an unknown area. For example, suppose a manager wants to adapt a software product for an adjacent customer market. The manager may allocate a budget to a small business development and delivery team to explore and develop a lead customer in the new market.
  2. The Audition – In some cases, the problem to be tackled is either new or the prime resource to deliver is an unknown. For example, suppose the manager needs someone to serve as the principal consultant to lead a new group of services professionals. The unspoken audition may be that the manager may want the principal to lead one engagement with key folks on the delivery team as part of the engagement. The other aspect of the audition may be to have the candidate assist with proposal development and lead an aspect of a customer sales pitch meeting.
  3. The Process Versus Milestones Approach – Some situations arise where it is not possible for one group to dictate the larger process that a company (or another group) should follow. In these cases, the basis of the conversation can be shifted so that groups agree to measure key milestones and outputs. For example, suppose one internal group wants a sales organization to follow a certain process to control focus and quality of customer messaging. While the internal group may find it difficult to instill explicit processes within the other group, the two groups can agree to have review meeting milestones and measurements to assess focus and quality indirectly. So the technique is based on the concept that processes and milestones go hand-in-hand. If one has trouble on the process, try working from milestones angle instead.
  4. The Associations Versus Strategic Approach – Strategy ideally comes before tactics. However, strategy often requires a lot of top-down thinking and heavy analytical brain power. For example, in top-down marketing one may need to define targeting and positioning methods after one has done a complete analysis of the customer segments, value propositions, competitors, company strengths, etc. Yet the battles in the field are happening today & right now. What are the soldiers supposed to do at this moment? Here’s where intuitive thinking, improv, and emergent strategies come to mind. In these cases, immediate tactics are based on doing something consistent with what has been done in the past, creating connections, or taking actions that create consistent associations (such as brand associations).

There are obviously many more techniques that managers use for overcoming obstacles in dynamic situations. What are some techniques that you’ve learned in the field?