Professor John Beshears, faculty cochair of the Behavioral Economics: Understanding and Shaping Customer and Employee Behavior Executive Education program, has conducted extensive research on behavioral economics, the field that combines insights from psychology and economics to analyze individual decision making and market outcomes. Our Facebook fans asked Professor Beshears questions about his research. See below Q&A for his responses.
One enormous mistake people make is failing to notice that they are facing a big decision in the first place, and as a consequence failing to take action. For example, most people acknowledge that saving for retirement is important, but when they start working at a new company, it can take them months or years to sign up for the 401(k) retirement savings plan. In this case, many people are failing to pay attention to the fact that they are implicitly choosing not to save for retirement. Furthermore, even when the 401(k) plan enters their mind, they may not think that they are facing a big decision—they can always join the plan next month, after all—and they procrastinate instead of taking action. Inertia is a major obstacle standing between people’s good intentions and good outcomes.
Another mistake I see frequently is people's tendency to adopt an egocentric perspective. When people decide on a strategy for an important negotiation, for example, they often focus on what they want to get out of the negotiation and what their alternatives are if they are unable to reach an agreement. It is just as essential, however, to think about what the other side wants and what the other side's alternatives are. As soon as a negotiator analyzes the situation from the other side's perspective, it is easier to reach an agreement that gives the other side something they value and that induces the other side to provide something of value in return.
Those are just two major mistakes that people make. If you're interested in seeing a more extensive discussion of people's systematic errors, I highly recommend Max Bazerman and Don Moore's book "Judgment in Managerial Decision Making".
Here's a powerful "guardrail" that can help a business leader overcome the dangers of adopting an egocentric perspective: appoint a devil's advocate in key deliberations. The devil's advocate is charged with coming up with compelling arguments against the course of action that is currently favored. It's important to make sure that the devil's advocate feels genuinely appreciated for asking tough questions and offering strong resistance. Having someone who is explicitly charged with the task of taking alternative perspectives helps to circumvent the problems associated with egocentrism. For more details on this approach, see Cass Sunstein and Reid Hastie's HBR piece "Making Dumb Groups Smarter". In addition, Francesca Gino and I suggest a wide range of "guardrails" in our HBR piece "Leaders as Decision Architects".
Retirement savings has been a major success story for behavioral economics. To turn the inertia that I mentioned above on its head, a lot of companies are automatically enrolling their employees in 401(k) retirement savings plans. Employees who do not wish to enroll are free to opt out, but those who might not have gotten around to enrolling begin saving in the plan at a reasonable default contribution rate almost immediately after they are hired. Automatic enrollment makes a night-and-day difference in plan participation rates.
Here's where I think the role of behavioral economics will continue to evolve in the retirement savings space. First, just because money goes into a retirement plan, it is not necessarily the case that money stays there until retirement. A lot of people withdraw savings from their retirement plans well before retirement age (see the Finance and Economics Discussion Series (FEDS) working paper). Many of these withdrawals occur at appropriate times, for example when someone experiences a job loss, but maybe behavioral economics techniques can be used to help people build up rainy day funds, which would provide a cushion to fall back on in emergencies and would preserve retirement account balances for the long run. Second, if people reach retirement age with a nice nest egg, what do they do next? Behavioral economics tools can help retirees manage the process of drawing down their savings. We are starting to see more financial products in retirement plans that simplify this complex set of decisions for people.
The Affordable Care Act has changed the landscape of the healthcare industry in a number of different ways, but perhaps the most interesting implication of the Affordable Care Act from a behavioral economics perspective is that millions of people are now obtaining health insurance in the individual market (as distinct from employer-provided insurance) through health insurance exchanges. The exact design of these exchanges has an important impact on the type of coverage people obtain. My friends Keith Ericson and Amanda Starc have spent a lot of time studying health insurance exchanges (see "Designing and Regulating Health Insurance Exchanges: Lessons from Massachusetts"), and here I rely on their insights. The health insurance exchanges group insurance plans into tiers (bronze, silver, etc.), with each tier associated with an approximate level of insurance coverage, and this format helps consumers compare the different plans available to them. Instead of trying to understand the complicated financial terms of different plans (which people find very difficult—see my research "Consumers' Misunderstanding of Health Insurance"), people can focus on attributes like provider network and price while knowing that the tier summarizes approximately what fraction of the cost of healthcare is covered by the insurance company and what fraction the consumer will pay out of pocket. Unfortunately, it is not clear that consumers make appropriate tradeoffs between the different plan attributes, even when the tier system makes comparisons easier. For instance, people may choose the plan with the lowest premium (up-front price) because they do not fully appreciate the financial risk that they are taking on as a result. As the different states set up exchanges with slightly different rules, we will get to see which designs are best at helping consumers make wise health insurance choices.
