The following Q&A explores the role of behavioral economics in helping companies improve decision-making and drive better performance. It also offers a sneak peek into the HBS Executive Education program, Behavioral Economics—Virtual.
FIRST OF ALL, WHAT IS Behavioral Economics—Virtual?
Behavioral economics is the discipline that combines insights from the fields of psychology, judgment and decision-making, and economics to produce a rich understanding of the way humans make decisions. Building on this foundation, behavioral economics then offers a set of tools to help people make wiser decisions.
CAN BEHAVIORAL ECONOMICS BE USED TO IMPROVE CORPORATE PERFORMANCE?
All companies experience organizational problems—employees who are not productive, turnover that is too high, or products that are not succeeding in the marketplace. Lessons from Behavioral Economics—Virtual can help companies improve performance by helping their executives use the tools of behavioral science to shape the decisions of employees and customers.
WITH ACCESS TO SO MUCH DATA, WHY AREN'T EMPLOYEES AND CUSTOMERS MAKING BETTER DECISIONS?
It might seem that having infinite access to data from all sorts of sources is a good thing. But what experts know from psychology and the behavioral sciences is that people are limited in their capacity to process all of this information. Participants in the Behavioral Economics—Virtual program will learn how to make good use of the data and analysis that is available to them, and how to help employees do the same.
Individuals often make poor decisions. They get distracted, they use pieces of information that maybe they shouldn't be using, or they neglect pieces of information that they should be using. Sometimes they reach the right conclusion but fail to implement it. Behavioral economics gives us a way of thinking about what we can do to counteract these patterns of behavior.
HOW CAN COMPANIES IMPROVE DECISION-MAKING AND ACHIEVE BETTER OUTCOMES?
One way to reduce poor decision-making is to change the questions we ask about the data we are using. We usually ask: What information supports what I want to do? What data tells me the decision that I'm making is a good one? Instead, we should ask: Is there any information that suggests that what I'm about to do is not the right course of action?
In this program, the focus is on helping executives understand how and why poor decisions are being made across their organization. Then we provide innovative approaches and frameworks that they can immediately use to achieve better outcomes.
Behavioral economics tells us that we can help people make wiser choices by changing the environment in which they are making decisions. This idea has wide applicability in financial and health decision-making, workplace productivity, and life happiness. These are all domains where applying the behavioral economics framework improves outcomes by helping people to make better decisions.
WHY IS IT SO DIFFICULT TO CHANGE THE WAY EMPLOYEES AND CUSTOMERS MAKE DECISIONS?
The deep processing that the human brain uses to reach decisions is simply too hard wired and difficult to alter. So instead of trying to change the way individuals think in a very deep sense, behavioral economics tries to change the decision-making context to promote better outcomes. That means altering the playing field in favor of people making the right decision.
HOW DOES HIGHER AWARENESS OF ONESELF AND OTHERS FACTOR INTO THE DECISION-MAKING CONTEXT?
One of the lessons that executives are going to take away from this program is greater awareness of their own tendencies, as well as those of others. Data shows that it's difficult to recognize that we may be wrong. So we do a lot of irrational things to protect the perception that we are right, that we make wise decisions, and that we are always able to decide the best path for ourselves and for our organization.
HOW CAN A COMPANY USE BEHAVIORAL ECONOMICS TO CHANGE THE DECISION-MAKING ENVIRONMENT?
Behavioral economics accepts the human brain as it is and devises strategies for changing the environment in which people are operating. We can set up the environment to bypass the flawed ways that people make decisions and to encourage people to be more reflective. And we can engage the more effective decision-making processes that people fail to deploy when they're distracted or off course.
When one thinks about making a change to an organization's processes in order to improve outcomes, they often envision something that is going to be costly, take a long time, and require a lot of support from a lot of people. But what this program teaches, instead, is that very simple adjustments can often produce powerful improvements in their organization's outcomes.
Changing the environment is a much more scalable way to think about changing decision-making. This program can often help identify changes that are not costly to an organization and that will have a big impact.
WHAT ARE THE KEY TAKEAWAYS FOR EXECUTIVES WHO ATTEND THE BEHAVIORAL ECONOMICS PROGRAM?
This program asks executives to think in advance about poor decision-making that is happening right now in their organizations, and they come to the program with those examples. They can use what they're learning throughout the program to rethink the problem and to start crafting a solution that they can immediately implement when they return to their organizations.
Executives will walk away from this program with a deeper understanding of the way humans make decisions, as well as a framework for designing decision-making environments that help employees and customers make wiser choices.