What has Behavioural Economics ever done for us?

And a few psychological theories for good measure

As I talk to business owners, I often enquire as to what is high on their list of headache inducing issues - and the 2 that are most commonly mentioned are money and people. And it's been like that for many, many years. The specific details may change, but those 2 categories haven't. 

As a life-long observer of human nature, I am fascinated by how we make decisions. And all too often, I see people (including business owners) making the same sorts of decisions in the same sorts of situations often counter to what they are trying to achieve - business success. And this despite years of experience and evolution in business practices, and advances in technology, market analysis, finance, and human resources practices. So, are there some underlying human behaviours that are impacting our decision making, and while perhaps not being the cause of our financial or staffing issues, may not actually be helping us solve those issues? 

Well, here's what I observe. There are a number of 'biases' that affect all human beings.  Some are there as part of our survival mechanism, and some help us make quick decisions especially when the pressure is on. The speed of decision making is the crucial flaw here - it's part of our automatic or subconscious thinking. However, this automatic, quick thinking and decision making doesn't always serve us well, especially when we find ourselves navigating through the complexities of modern business. 

So, here are some biases - any sound familiar? 

Attribution Bias.  Simply put, if something goes well, it's my doing - if something goes wrong, it's someone else's fault.    The impact of this for us humans is that we will try to attribute setbacks to external forces rather than our own decision-making. While this helps us maintain a positive self-image, it can stop us digging deeper into our issues (another bad hire!!!).   And it can hinder our willingness to consider the other biases below. 

Loss Aversion. We tend to give loss considerable more weight in our decision making than gain.  This makes the potential pain of losing money seem more significant than the joy of gaining the same amount. This bias can lead to overly cautious decision-making in finance or hesitancy to invest in necessary staffing changes. 

Planning Fallacy.  We humans, in general, are not very good at estimating, especially abstract or numerical things, and certainly when faced with new situations. And so, we tend to underestimate the time, costs, and risks associated with a project, while overestimating the benefits. This bias can lead to overly optimistic financial forecasts or underestimating the challenges such as in integrating new staff into our businesses. 

WYSIATI (What You See Is All There Is). In more common parlance, this is 'in the box' thinking.  We tend to make decisions based on the information immediately available to us, and often overlook critical, unseen factors. We often don't take the time, for seemingly good reasons, to explore what we don't know.  This can result in financial or staffing decisions that, with hindsight, were not ideal. Scarcity Bias. When we perceive a scarcity of resources (such as time, food, money, or staff), our cognitive bandwidth narrows - we drift into survival mode. This narrowing leads us to focus more intensely on the immediate scarcity, at the expense of wider context and longer-term planning, often resulting in poorer decision-making.  This is an insidious bias as it can lead to a cycle of scarcity where immediate decisions to alleviate scarcity (such as taking out a high-interest loan to cover an urgent financial need) exacerbate the situation in the long run, further limiting the already scarce resource and available options. This is particularly relevant in discussions about financial decisions, where a lack of money can lead to choices that seem rational in the short term but are detrimental in the long term. There are many more biases (sometimes known as heuristics), but those are ones I observe commonly at play. If you recognise that you do any or all of them, it means that you are a normal human being - congratulations :-)  

Moving Forward with Insight

Recognizing these biases in ourselves can be difficult - and acknowledging them is a great first step. However, allied to the scarcity bias is the feeling that we don't have time (to think about things). My mother used to tell me "less haste, more speed", and within lean thinking, there is a concept of 'slow down to go faster".   Both of these words of wisdom recognise that we tend to naturally think fast and automatically, and in some situations (not all) then perhaps we need to be more conscious and critical in our thinking.   

Things that can really help include:

• Get multiple and diverse perspectives, especially if the people involved can call out each other's biases when they see them.
• Encourage constructive feedback from trusted advisors, employees, and peers - these can provide new insights and help challenge assumptions.
• Reflect on decisions and their outcomes - if the outcome is causing you to diverge from what you want to achieve long term, then time for a major rethink.

 As business owners, we are on a continuous journey of growth and learning. By understanding the cognitive biases that influence our thinking, we can make better business decisions. This isn't about assigning blame but about empowering ourselves with the knowledge to make more informed, effective decisions for our businesses and the people who make them thrive. 

Non of this is easy - especially as it's often going against our very human nature - and often we need a bit of help. Let me know if you want to chat.  

Graham  

While he does not specifically talk about staffing or finance, the psychologist Daniel Kahneman won a Nobel Prize for his work on Behavioural Economics.  In his work, he explores human decision making, including the impact of biases and heuristics, and its role in economic health.