Five things every leader should know - lessons from behavioural economics

Eliminate corruption, structure decision making and give to charity - it could save your blood pressure.

by Kate Magee
Last Updated: 25 Apr 2016

How would you fare in this game designed by psychologists to test your honesty? You throw a dice. The higher the number, the more money you win. It lands on a 1 - so no money for you. But only you can see the dice. Would you pretend you got a different score?

If you fiddled your score, but only a bit, then you are in good company.
Dan Ariely, the psychologist behind the experiment and a professor at Duke University, found that people typically regulated their behaviour. They would often cheat a little, but rarely cheat a lot, because they would consider that to be stealing.

Ariely explains this restraint: ‘If you cheat just a little bit, you get to maintain your self-image. You get to balance feeling good about yourself while still getting the value from cheating.’
His experiment was one of several discussed at last week’s Behavioural Exchange 2015 event, handily dubbed the ‘Glasto for behavioural economists’.
Hosted by the UK government’s ‘Nudge Unit’ (a.k.a. the Behavioural Insights Team), the event saw leading psychologists, including Nobel-prize winning economist Daniel Kahneman, share their latest findings in this increasingly headline-grabbing area.

But instead of just being an academic talking shop, there were specific and practical lessons that emerged - to which savvy leaders should pay attention.

1. A corrupt culture corrupts

Be careful about the hidden messages you give to employees and customers about their environment. If people think your culture is corrupt, they will behave accordingly.
When Ariely conducted his dice experiment across the world – including in Canada, China, Colombia, Germany, Kenya, Portgual, South Africa and the UK - he found no significant changes in the way different nationalities responded, despite popular assumptions to the contrary.
But there was a twist. Some people taking part in the experiment were offered the chance to pay a small bribe to the researcher, in return for a greater payout. Those who paid the bribe – and 90% of those who were given the chance, did – went on to cheat much more readily than those who were not given this option.
If someone is shown an environment is corrupt, they quickly adapt to the new rules of operation.

‘Culture doesn’t change the base of humanity – we’re all similar - but it takes a particular domain and changes how we behave in that,’ says Ariely.
So creating the right culture - and strongly policing it - is crucial.

2. Decision-making needs structure to be replicable 


In many companies there will be groups of people making independent decisions on behalf of a company about the same thing – such as which stocks to pick or which loans to approve.
But these individuals will make conflicting decisions more often than companies realise, argues Daniel Kahneman, the Nobel prize-winning economist and author of the seminal book Thinking Fast and Slow.
‘Everyone assumes other good people would make the exactly same decision as they would. But people rarely independently make the same decision,’ he says.
On average, people expect a difference in decisions about 5-10% of the time. But in one organisation he tested, the difference was actually 40%. He calls this discrepancy in answers between individuals ‘noise’ and is currently working with companies to reduce it.
Part of the problem, he says, is that, unlike bias, companies do not recognise noise exists and so do not correct for it. ‘There’s an awful lot of decision-making going on, but much of it is really of very poor quality. It has evolved, it hasn’t been designed,’ he says.
The remedy is to introduce more structure to the decision making process, by breaking up problems into elements and dealing with them in a pre-agreed manner. For example, during an interview process, Kahneman advises working out which attributes are important, and then looking at them sequentially and scoring them individually.
‘An organisation is a factory that produces decisions. How can we improve the production process? What quality control can we apply?’ he says.
‘I don’t want to eliminate intuition from the decision making process – just delay it. I would like people to consider a problem before they have an intuition about it,’ he says.

3. When implementing change, think of the losers

In most situations, change isn’t neutral. It creates winners and losers. And the potential losers fight a lot harder than the potential winners.
‘Leaders typically don’t anticipate loss aversion and they have to compensate the losers. My advice to anyone trying to introduce change in any organisation is to work out who the losers are going to be, and what they are going to be able to do to you,’ says Kahneman.
His advice to leaders is to figure out what is preventing people from already doing what you are recommending. If you figure out what is going to hurt, you might be able to find ways to alleviate their losses. Remember, anything that will affect people’s status or power will be particularly tricky.

4. Publicise good behaviour

Credit: Matthew Hoelscher

People in the UK consistently overestimate how badly other people behave, according to new research from the Nudge Unit and Ipsos Mori. For example, we underestimate the amount of tax people pay and how much exercise they do, while we overestimate the amount of sugar they are eating.
This is significant, because an individual’s behaviour is strongly influenced by what they think others are doing. ‘If we think others are cheating, not saving enough, or not eating healthily, then we’re much more inclined to do the same ourselves,’ says David Halpern, the Nudge Unit’s chief executive.
The Nudge Unit has used this insight to persuade more people to pay their tax. By telling people in reminder letters that their neighbours had paid tax on time, his team saw a 15% rise in payments. This tweak has the potential to help the government collect an additional £30m a year.
So if you want customers to pay on time, or employees to act in a certain way, highlight the existing good behaviour of their peers.

5. Give to others – it can actually reduce your blood pressure 

Credit: Richard Croft

Is the stress of your job is having a negative effect on your blood pressure levels? Try spending your salary on someone else.

The link between giving to others and happiness is already well publicised, but it is not just feel-good hype. New research shows that it can have a tangible effect on your health.
Elizabeth Dunn, a psychology professor at the University of British Columbia in Canada, found those who spend their money on others have lower blood pressure, even when taking into consideration factors like the person’s age, amount of exercise or income.
The more connected people felt to the cause or person they were spending the money on, the stronger the effect. ‘Giving is not just heartwarming, it may be quite literally good for our hearts,’ she says.

As these five lessons from behavioural economics show, we are not all rational agents driven by cold hard logic, but far more whimsical creatures, led by secret motivations and hidden desires. The most successful leaders should take the time to understand the nuanced psychological drivers of its organisation, and remember that a small nudge can be far more effective than a sledgehammer.
And if all else fails, maybe you should take Kahneman’s advice. When asked how he persuades companies to implement his suggestions, he quipped: ‘I think every consultant should have a Nobel Prize. It makes influence much easier.’

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