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.

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.

Review of “Open Leadership” Framework (Leadership and Social Technologies Book)

Charlene Li, founder of the Altimeter Group and co-author of the bestselling book Groundswell, was generous to include me on her distribution list for an advanced reading copy of her new book Open Leadership: How Social Technology Can Transform the Way You Lead. Open Leadership both motivates and provides an excellent framework & toolkit for changing and opening up an organization through support of social technologies. In this post I overview key elements of the book and my favorite contributions to the business & leadership book landscape.

Charlene Li describes “open leadership” as “about how leaders must let go to gain more.” Stepping aside from Open Leadership’stable of contents, I created a one-slide summary figure (sort of like a “cheatsheet”) to help describe the key concepts. While the figure doesn’t capture every element of the book, I think the figure focuses on the key areas a company must address when designing and implementing social technology-based strategy.

Open Leadership

I see her book as tying together five key areas:

  • Openness Strategy and Design – This part of the book covers an audit of where your company is at in terms of openness. This part also frames open strategy in terms of four objective areas (applicable to company/brand/product) of learn, dialog, support, and innovate and increasing levels of engagement with constituents. I like this part of the book particularly because it starts to weave together marketing, branding, social technologies, and the fringes of innovation.
  • Benefits & ROI – For those that have read Groundswell, this part is similar in that it covers some qualitative and quantitative models for using social technologies. One area where the book goes further is in its segmentation of these models by the learn, dialog, support, and innovation objectives outlined in the openness strategy section. Here I see the models as inspirational and thought-provoking as opposed to being ready off-the-shelf. Readers should draw learnings from these and figure out how to best adapt for their specific management context (as there are a mixture of top-down and bottoms-up quantitative analysis and numerical sensitivity issues). Charlene provides some additional perspectives on customer lifetime value and net promoter score, the latter which is a personal favorite for tying brand management and social technologies together in an instructional context (e.g., business school curricula).
  • Openness Covenants – This part of the book covers social media guidelines and policies. Covenants are about how an organization defines the “safe area of the sandbox to play in”. The use of checklists and case examples makes for a nice reference and workbook to drive an organization’s development process.
  • Openness Orchestration – I found this part of the book to be one of the most important areas of the book. Because the use of social technologies involves openness across the entire organization (sometimes cutting across isolated departments and functions) this book provides a nice treatment of thinking about customers and constituents, specific workflow areas (e.g., customer service, marketing), and organizational models (e.g., centralized, distributed) and tradeoffs for implementing.
  • Organizational Change – There are sections of the book dedicated to nurturing organization change, and this involves mindsets and traits, leadership assessments, and something Charlene Li calls the “failure imperative”. While organizational change is a “soft” topic in many texts, Charlene Li does a nice job reconstructing a variety of real-life case examples of how companies and individuals failed in specific situations related to social technologies. Some of the companies and individuals managed to pick themselves up, re-adapt, and succeed eventually. Similar to use of social technologies, effectively dealing with failure is something core to innovation, improvisation, and leadership. So the sections covering organizational change are a nice wrap to the book and provides concrete inspiration from which to draw.

Open Leadershipserves as an excellent, end-to-end process toolkit and is well-suited for corporate executives, marketers, business information technology professionals, and management consultants looking for leadership frameworks supported by social technologies. Treatment of the subject is just above the technology-evaluation level (which would include determining whether technologies such as BuzzMetrics, Yammer, Radian6, Communispace, Umbria, Twitter, WordPress, and Facebook are appropriate).

Candid Interview With Will Weider On Consulting (From A Customer Point Of View)

This past week, I had the opportunity to speak with Will Weider, CIO of Ministry Health Care and Affinity Health System, about using consultants. His perspectives are interesting because they are from a customer’s vantage point – not from a consultant’s viewpoint. Will Weider is author of the one of the earliest CIO blogs on the Internet, the famed “Candid CIO” blog.

Steve: Will, thanks for talking with me. As a management consultant myself, I’ve approached you for a “candid” view on using consultants. I am interested in constantly improving the practice of consulting and management. Hopefully this interview will shed light for both consultants to improve their practices and peer organizations of yours to improve their selection and use of consultants. To that end, when do you look to consultants, and what do you look for in consultants?

Will: There has to be a specific reason for using a consultant, and my philosophy is to use consultants as little as possible. A couple of thoughts immediately come to mind. The first is that consultant costs can give me heartburn (e.g., when comparing loaded hourly rates of internal staff against the consultant). Now as context, it is infrequent that my organization does not have the skillset to either get a project done or solve a particular problem.  A second perspective is that I have had some disappointing consulting engagements where the results have fallen short of my expectations. Part of the blame may fall on the consulting firm which may oversell themselves in order to get a deal done. Some of the missed expectations may be in part that the buyer has elevated expectations when using a consultant.

Steve: Do you have any thoughts on aligning an organization and its expectations when using consultants?

Will: I’ve found that the worst time to use consultants is when my organization is saturated. A client organization needs capacity to bring the consultant on board, ramp them up, manage them, provide feedback, etc. As an example, if I have estimated a project at requiring 100 hours to do internally, then I may need to allocate 125 hours when accounting for budget and overhead of managing the consultant. As far as aligning expectations, I have mostly seen consultants provide incremental value as opposed to exponential value and miraculous benefits as marketed. Consultants can get oversold on their value proposition too easily. I also wanted to note that some consultant agreements have unacceptable terms, rivaling those of my software vendors.  These include such terms as up-front payment, termination clauses and advance notice requirements, etc. Where these terms go in the new environment we are in is still to be determined, but they have to be more client-favorable.

Steve: What kind of advice can you provide on using consultants?

Will: For me, the best time to use a consultant is when you need a 3rd party advisor. For example, suppose there is a big, multimillion dollar project going off course. A consultant with the right background can provide an independent project audit. Our needs are aligned when using the consultant in this manner. We need a specific skillset (perhaps not a scarce resource), we don’t have time (e.g., because we have 60-70 projects going on), we need a fresh look, and we need an independent view. This is the perfect type of situation for a consultant because the scope is well-defined, the scope is narrow and the timetable is short.

Steve: Great insights, thank you. Changing gears bit, I think readers may be interested in your views on the federal stimulus package and its impacts on consultants.

Will: The package has clear intent, but everyone is still waiting for the clinical IT requirements to be defined on both the medical group and hospital/ambulatory side. Less than 2% of hospitals have real Computer Physician Order Entry (CPOE), so once the requirements are defined, there may be a flood of work for implementation consultants with CPOE and specific Hospital Information Systems (HIS) expertise. I’ve estimated tens of millions of dollars of eligibility for our provider organizations (medical groups and hospitals). We are working with a number of vendors and suppliers to plan for various scenarios so we qualify for these funds and deliver on the President’s vision for a more efficient and effective health care system. It’s all a new process – I’m not sure that anyone has an “inside track” as to how to get these funds.

Steve: Terrific info. Let’s change gears again and cover social media. How have things changed since 2005 when we first met via the blogging world?

Will: These days I use both Twitter and blogging, although there has been some shift towards using Twitter. I will say that consultants that I use have connected with me via social media. Some of these consultants demonstrate their expertise to me for free before I use them. These consultants may be those that are helping me with technology, preparing for swine flu impacts on my organization, or other dynamic areas. Consultants that are confident in their abilities to provide value are not afraid to pursue either risk-free or non-traditional models for engaging me.

Steve: Will, this has been a great dialogue, and I appreciate your candor for the benefit of the business community. Thanks for your time.

Will: Steve, thanks for the opportunity to be interviewed.

Will Weider is CIO of Ministry Health Care and Affinity Health System, and his blog is at the Candid CIO at http://candidcio.com.

Steve Shu is a management consultant focusing on organizations that use technology, and his blog is at http://steveshu.typepad.com.

For My Blog Diary: Whirlwind Notes On Blogs In 2007

For a snapshot of what I am sensing in 2007:

Compare this to what we saw in 2003-2004 and the rise of the blog in 2004.

On “Busyness” In An Increasingly Global And Technology-Oriented World

It’s results that matter – not activities.

That statement encapsulates a "widely-held" management perspective that managers should evaluate workers based on the effectiveness of output produced and not by how much they are working. But is it such a widely-held belief? Dr. Andrew McAfee writes in an older post (and in the context of E2.0 technologies such as blogs, wikis, etc.):

Companies that are full of knowledge workers and that have built cultures that value busyness face a potentially sharp dilemma when it comes to E2.0. These companies stand to benefit a great deal if they can build emergent platforms for collaboration, information sharing, and knowledge creation. But they may be in a particularly bad position to build such platforms not because potential contributors are too busy, but because they don’t want to be seen as not busy enough.

Dr. McAfee’s post made me back up and think more generally about busyness and cases such as the following:

  • where managers use instant messaging and presence to monitor whether employees are at their computers (as a proxy for work activity)
  • how those in Western cultures may tend view someone just sitting at their desk and thinking as being lazy and unproductive whereas those in Eastern cultures may potentially view such people as being productive
  • where consultants or analysts generate tons of paper or analyses (and which may vary by geography), but fail to tie things together into a set of cohesive key learnings or recommendations
  • how some workaholics may criticize or think less of the Levis 501 worker types (those that line up at 5:00pm and leave at 5:01pm)
  • where salespeople are viewed as wasting their time by sending cute emails to people or talking constantly about non-work matters with colleagues in their network

So I dunno. It seems plausible that busyness might be valued both to the detriment of productivity and with insufficient respect for technology limitations and global cultures. Are times and contexts changing?

World Wild Web

Some of the wildest technology news I noted from the past year:

The last one really hits close to home for me. I remember when I was a younger engineer designing computer chips perhaps seventeen years ago or so when state of the art chips were running at like 33Mhz. At the time, I recall that the DEC Alpha chip was running at like 50-60Mhz and people were saying that it was pretty much impossible to go faster. The clock signals simply couldn’t propagate fast enough or something like that (basically a limitation of physics). Well I guess we were wrong about technology progress slowing down. To put things in perspective, 1 Terahertz equals 1,000,000Mhz.

So as a message to those young engineers out there, in less than two decades one can see a tremendous amount of change in technologies. But more generally I suppose, in that period of time a lot can change in life too. Makes me reflect upon the kind of life we want to leave for future generations.

Edit (2/15/07): And as another technology one, I don’t if some people remember the early nineties. The World Wide Web was just developing then. I think I remember someone showing me the web, and there might have been something like 2 or 3 websites out there (well perhaps there were only a few interesting ones out there). No graphics at all from what I remember. Maybe a dozen hyperlinks or something. Now were are at a point where there are tens of millions of blogs out there, not to mention websites. Wild.