Home Finance Behavioral Finance Helpful Behavioral Economics Concepts for the Business-Minded
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Helpful Behavioral Economics Concepts for the Business-Minded

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In corporate America, Gaussian statistics, deterministic interpretations of the world around us, and rational utilitarian models have long dominated the decision-making process. The fields of Behavioral Economics, Psychology, and Human-Centered modes of thinking have disrupted these lines of thinking and any business decision-maker would be wise to understand core concepts from them to succeed.

The content following this paragraph is a composition of different topics/ideas I’ve come across through books I’ve read and insights I’ve stumbled upon. While a few have already been adopted in mainstream-business circles at this time, others are still gaining prominence.

On Motivation

In his book Drive, Daniel Pink posits that while rewards and punishments may have been successful motivators in the recent past — motivation 2.0 —, they are not the most efficient methods for bringing the best out of people in the modern workplace. Instead, Pink stresses the role of autonomy and intrinsic motivation as key factors in driving successful workers. He discusses Atlassian’s success in engaging its workforce through allowing engineers to work on projects of their choice for 20% of the time. Pink also draws upon multiple behavioral studies to support his thesis: motivation once basic survival needs are satisfied is largely contingent upon creativity, autonomy, and perceived control.

Good Content

On Rationality

Dan Ariely denounces the rational actor theory economists have long used to model human behavior. He provides examples showcasing our bounded rationality. Behavioral Economics has found itself a large audience today in large part due to the applicability of insights within both government and NGO interventions as well as improving our understanding of what guides our economic decision-making process. Behavioral Economics collapses the boundaries between Psychology and Economics. To understand a “rational” choice, one should understand the motivations behind that choice and underlying psychological factors which will drive an outcome. For example, your grandmother would never expect compensation for cooking a Thanksgiving meal, in fact she may very well be insulted by your offer. She is not an economic rational actor and neither are the professionals you’ll encounter at work.

On Counterfactuals

Another important concept a successful professional must understand is the counterfactual. What would have happened if…? Answering this question is the job of many. Yet, too often we are hindered in our understanding by what we know and not what we don’t know. Past performance is indicative of future performance under specific circumstances. Nassim Taleb points out in his book Black Swan, it is easy to understand what a puddle will look like from a melting ice cube. It is impossibly harder to determine the shape of an ice cube from a melted puddle. Yet, we continue to make decisions in a cause-and-effect deterministic manner. We assign clear-cut explanations for past behavior and use these to approximate future outcomes. Understanding the high probability that circumstances will change is critical when making decisions at a successful venture. One can never truly capture counterfactuals, only represent them to a degree of approximation.

There are many more concepts a young business professional such as yourself will find worthwhile learning. I’ll continue to make short introductions to these concepts and relevant literature to dive into them.

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