Unlikely bedfellows: HR and economics

Inputs from behavioural economics have direct business implications for HR
By Tracey White
|Canadian HR Reporter|Last Updated: 11/14/2016

How people make choices is the focus of a new field of research that marries psychology and economics. Known as behavioural economics, it offers human resources practitioners an evidence-based framework to design and deliver services. 

And Julian House is a leading Canadian expert.

“Around the world, organizations in the private, public and non-profit sectors are demonstrating the value of a more nuanced understanding of human behaviour. Their work shows that behaviour is incredibly complex, influenced by seemingly small factors in the context surrounding a decision. Adopting a scientific approach to behaviour change is an effective way to improve outcomes,” he said.

The idea that human beings are rational decision-makers constantly seeking to advance their self-interest was a powerful idea born of the Age of Enlightenment. It has endured for over 200 years as the foundation of economics and business, even though it’s not based on evidence about how people actually make choices.

Perhaps unsurprisingly, human beings are not as rational as imagined. We often make decisions that are not in our self-interest. For behavioural economists, human beings are better understood as “predictably irrational.”

We now know the human brain is wired to make decisions using familiar defaults, by taking mental short cuts or by adopting the status quo. Our choices are influenced by an assortment of cognitive biases and we are sometimes led astray by the context of information received.

It’s extremely difficult to rewire the brain to alter patterns of behaviour that lead to faulty decision-making, but by recognizing how choices are influenced, we can alter the environment in which decisions are made. It’s a phenomenon called “nudging.”

“Often times, organizations focus on high-level strategic goals and pay relatively little attention to the ‘last mile’ where those strategies will actually interface with the end user,” said House.  “By focusing here, HR can make program improvements at little or no cost.” 

It’s precisely at the last mile that the context surrounding a decision can exert outsized influence on people’s behaviour, he said.  His example is an administrative form: Is it easy to complete? What happens if the receiver forgets to fill it out? Does the form frame information in terms of gains or losses?

Understanding that information and motivation are often not sufficient to help people make the best choices is a crucial insight for HR. Research shows improving choice environments can complement more traditional approaches to program design, such as education or monetary incentives.

Inputs from behavioural economics have direct business implications for HR by offering evidence-based methods to uncover how employee choices impact the outcomes and efficacy of programs that, until now, have been the purview of marketing.

Tracey White is the owner and managing director of Strategy in Action in Toronto. She focuses on innovation in organizations, governance and employment.

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