How do behaviours impact your corporate decision-making?
It is no secret that the science of decision-making has been deeply impacted by behavioural principles in recent years. We spoke with Professor Ivo Vlaev about the mainstreaming of behavioural economics and why corporate strategists should embrace its powerful insights.
In 30 seconds
- A leading decision-making scholar, Professor Ivo Vlaev, makes the case for taking a behavioural approach to corporate strategic decisionmaking
- Strategic decisions make or break companies; yet most business leaders would admit that the quality of their strategic decisions is far from faultless
- To optimise your business outcomes, you are best off adopting a behavioural approach that joins a real-world understanding of complex human behaviours with data-driven modelling
- MINDSPACE is an easy, practical checklist, drawn from behavioural economics, that businesses can use to influence behaviours
Economic models assume that everyone behaves perfectly rationally. A bit like robots - which, if you hadn’t checked the news lately, are moving into workplaces, by stealth, and climbing up the corporate ladder.
But humans aren’t robots, and they don’t act programmatically. So when the standard decision-making models are applied to corporations, the results are often dismal.
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Behavioural economists, like Professor Ivo Vlaev from the University of Warwick, focus not on robots but on humans in all their misbehaving, irrational glory. They mine the latest insights on what we know about human psychology, including social, cognitive and emotional factors, and use that to explain human decision-making. And over the past decade, this fairly marginal field has moved to the forefront, triumphing in academic circles, in the press and, increasingly, in policy and business spheres.
Professor Vlaev, a leading thinker in behavioural economics, has been working closely with corporates to help them improve their decision-making.
In this conversation he shares his views on how digital is transforming strategic decision-making. And he explains why business leaders need to consider the underlying dynamics behind the way humans think to bring forth successful outcomes. With these fundamentals unpacked, Vlaev then introduces a novel framework that arms leaders with practical tools and methodologies to influence behaviours for smarter business outcomes.
Behavioural economics tells us how to fix human biases if we can and, if we can’t, it tells us what to do about it.
BearingPoint Institute (BEI): What’s wrong with current approaches to business decision-making?
Ivo Vlaev: Businesses are fundamentally institutions, machines for decision-making, where every second there are hundreds and thousands of decisions made by various interrelated individuals.
Decades of research show that managers do not always act as rational decision-makers, as standard economic models assume, and the resulting biases can lead to costly errors.
BEI: So, what to do?
Ivo Vlaev: Behavioural economics is the descriptive science of human decision-making. This is in contrast to the normative science of decision-making – how humans should make decisions - which is called economics and statistics.
The big question is: are cognitive biases fixable? (See the MINDSPACE checklist below.) Behavioural economics can answer this question as it tells us how to fix human biases if we can and, if we can’t, it tells us what to do about it.
BEI: How are biases typically ‘fixed’ in business contexts?
Ivo Vlaev: Conventional approaches to eliminating biases focus on ‘changing minds’. That is, influencing the way people think through more information and better incentives.
Typically, this involves training people to recognise biases, to help them think more logically and rationally, leading to better outcomes. The implication is that decisions require de-biasing. This is because effective decisions are seen as more likely when managers act without bias.
BEI: What are the problems with the de-biasing approach?
Ivo Vlaev: Well, evidence suggests that the de-biasing approach is insufficient for effective strategising because it only deals with our conscious, slower analytical half. But our automatic, emotional, subconscious half also plays a role in decision-making.
Even irrelevant stimuli can significantly influence decisions, such as the impact of sunny or cloudy weather on which applicants for a job receive offers.
Importantly, our conscious, slower thinking often fails to correct for the problems created by our automatic, intuitive mode of thinking because decision-makers are unaware of how it influences their decisions. (See ‘Dual Process Model of Behaviour’ below.)
In cases where decision-makers do recognise these biases, they do not sufficiently adjust using the slower, more deliberate mode of thinking. In other words, even when steps are taken to de-bias managers’ decisions, the results may be suboptimal.
DUAL PROCESS MODEL OF BEHAVIOUR:
SYSTEM 1 & SYSTEM 2 THINKING
Consciousness involves different kinds of thinking. Psychologists including two recent Nobel laureates, have proposed two main thought processes that are commonly referred to as ‘System 1’ and ‘System 2’.
System 1 is the mind’s automatic, fast, intuitive approach to thinking. Here, the mind processes information quickly, and is heavily influenced by context, past experience and biology.
Intuitive thought processes are often regarded as irrational when in fact they may be highly practical and logical in specific domains.
Examples: routine conversations, detecting hostility in a voice, answer to 2
+ 2 = ?
System 2System 2 is the mind’s slower, conscious, more deliberate mode of thinking. Here, reason dominates and the mind is actively focused on tackling a demanding cognitive task.
System 2 thinking may produce poor and even irrational results, just as they may lead to favourable outcomes.
Examples: solving a complicated math problem, parking in a narrow car space, filling out a tax form, maintaining a faster walking speed than is natural for you.
The MINDSPACE framework is a practical behavioural economics checklist to help decision-makers design the decision environment to promote better outcomes
BEI: So how does behavioural economics help with biases?
Ivo Vlaev: Behavioural economics aims to introduce strategies for managing these faster, intuitive biases by ‘changing contexts’ – that is, the environment within which people act - as opposed to ‘changing minds’.
Instead of trying to correct our intuitive, automatic thinking, we seek to reframe the problem of de-biasing into a problem in which we actually try to engage different automatic processes.
The MINDSPACE framework (note 1) (see infographic at the beginning), for example, is a practical behavioural economics toolkit that can help with ‘strategising with biases’. This means engineering the decision context to direct managers’ intuition towards better outcomes. It can also address how to take advantage of competitor biases.
In general, whereas conventional de-biasing aims to make existing decision-making strategies more accurate, behavioural economics seeks to reframe the decision so that different automatic/emotional decision-making strategies may be recruited. The same errors that make us stumble can also be used to make better choices.
BEI: Can you give an example of a behavioural economics technique used in a business context?
Ivo Vlaev: Let’s take Salience [representing the ‘S’ in MINDSPACE]. Consider the problem of hiring ‘top talent’. Stereotype is a ‘salient’ cue and can work as a useful shorthand for identifying talent – the candidates who fit the stereotype are inferred to be more competent.
So, it has been observed that elite law firms in the UK may be over-represented by graduates from Oxbridge. One possible reason is that Oxbridge degrees are so salient that CVs with this cue are more likely to be considered further in the hiring processes.
But the use of this salient cue can be suboptimal. Graduates from other schools may be better than some Oxbridge graduates, but law firms cannot uncover these ‘false negatives’ unless they hire against the stereotype.
There will be more behavioural insight teams within organisations in the future, in the same way there are accounting and legal teams within organisations today
BEI: Do you have a real-world example?
Ivo Vlaev: Yes, this is what a leading law firm Clifford Chance tried to do. They adopted a ‘CV blind’ policy to break the Oxbridge recruitment bias.
By engineering the hiring context this way, the firm has managed to find many hidden gems where their competitors were not searching – that is, in the under-exploited pool of graduates from non-elite universities.
BEI: What’s another example of a behavioural economics technique?
Ivo Vlaev: Another category of behavioural cues is Priming [representing the ‘P’ in MINDSPACE].
Primes can be words - for example, one feels more powerful and confident when asked to describe an experience in which one person has power over others; sights - for example, larger size food containers make people eat more; smells - for example, the scent of all-purpose cleaner makes people more likely to keep their table clean.
We are not aware of how our preferences and decisions are shaped by these primes. Our actions may seem unpredictable and non-rational, but in fact they are often influenced by many subconscious cues.
Knowledge about priming can help strategists influence others – or at least avoid being taken advantage of by others.
For example, research shows that the colour of the cover of business proposals (a presumably irrelevant prime) can influence evaluation outcomes systematically: blue enhances the acceptance rate whilst red reduces it.
In the future, behavioural economics testing will be able to scale-up by using big data
BEI: Where is the new frontier of behavioural economics research?
Ivo Vlaev: First, there’ll be more field experiments to test behavioural economics assumptions in the real world.
It’s not sufficient to test those assumptions based on interviews, etc. You need to conduct randomised trials without the participants being aware they are part of the experiment. In business, it’s fairly easy and inexpensive because the structures are already in place: you only need to tweak certain environmental features to see the effect on recipients.
The second big innovation will be big data. Increasingly, we can take a big scale approach to testing behavioural hypotheses by utilising big data from hundreds and thousands of individuals using digital devices – for example, digital wearables – to actually track their movements, decisions, and behaviours. Typically, most experiments are smaller in scale and come from lab research.
Third, there will be more behavioural insight teams within organisations in the future, in the same way there are accounting and legal teams within organisations today. This is already happening, but in many cases the policies generated by these teams aren’t implemented in practice. I think not only will there be more Chief Behavioural Officer roles created, I believe that they will be accorded higher status so they will be more empowered to improve decision-making.
ASsess the quality of your strategic decisions here
Organisations are the sum of the decisions they make. Yet just how helpful and advanced are the tools, data, behaviours and processes that organisations use to make quality decisions?
Take this quick test to evaluate your organisation’s strategic decision-making capabilities by circling the letter next to the statement you agree with most fully. Then read how we rate your answers and the actions we recommend you to take.
Here you can see the recommendation and rated answers by all participating organizations.
37% - Outstanding Decision-Maker
Your organisation has formal processes in place, and displays excellent behaviours and smart metrics to enable quality decision-making. You’ve done your homework by developing feedback loops for continuous learning that i’s also buttressed by high quality data and digital tools. Yet whilst due diligence is prioritised, there’s a risk that accuracy comes at the expense of timely decision-making, and agility is muted by formality. For even better outcomes, consider how to build greater agility and efficiency into your decisions, perhaps by empowering people more.
26% - Very good Decision-Maker
Your organisation favours informal processes to govern strategic decision-making. This enables you to move with speed and fluidity at the local level, and affords an ability to respond to the specificities of context. However, should things go awry, there are no solid mechanisms of recourse built into your decision processes. Missing, too, is full oversight of your critical decisions. You would likely do well to begin the journey of embedding more digital tools and feedback loops, acting more collaboratively, and building a robust risk management strategy into your decision-making processes.
24% - Sound Decision-Maker
Your organisation has an eye toward developing a good decision-making culture; and your processes and practices are more informal than formal. Whilst this enables flexibility and may be supportive of growth, the flipside is you may be courting a level of risk that is higher than it needs to be, relying too much on the expertise and instincts of a few decision-makers. More attention toward formalising your processes and practices might be helpful, in addition to harnessing more data and throwing the net wide to solicit the input of diverse stakeholders.
13% - Satisfactory Decision-Maker
Your organisation strikes a good balance between formal and informal processes. As a group, you’re attuned to the techniques to raise the quality of your strategic decisions. Further benefits would flow if you take the next step in embedding more sustainable decision processes and practices; and lift your digital competency to even greater heights.
Notes and Bibliography
- Influencing behaviour: The mindspace way’, Journal of Economic Psychology, New York, NY, USA, P Dolan, M Hallsworth, D Halpern, D King, R Metcalfe, I Vlaev. Volume 31, Issue 1, pages 264-277, 02/12 http://bit.ly/JOEP_MINDSPACE ‘Kahneman’s Mind-Clarifying Strangers: System 1 & System 2’, Big Think, New York, NY, USA, web, Jag Bhalla, 2014, http://bit.ly/BigThinkSystems
- Thinking, Fast and Slow, Farrar, Straus and Giroux, New York, NY, USA, Daniel Kahneman 25/10/11, http://bit.ly/AmznTFS