How do behaviours impact your corporate decision-making?

It is no secret that the science of decision-making has been deeply impacted by behavioural principles in recent years. We spoke with Professor Ivo Vlaev about the mainstreaming of behavioural economics and why corporate strategists should embrace its powerful insights.

About the interviewee

Professor Ivo Vlaev, Professor of Behavioural Science at Warwick University

Ivo Vlaev is Professor of Behavioural Science at the University of Warwick and visiting Professor of the Faculty of Medicine at Imperial College London. Ivo received a DPhil (PhD) in Experimental Psychology from the University of Oxford. His research is to advance understanding of human decision-making (behavioral economics) and behaviour change. It is a convergence of psychology, neuroscience and economics, which achieves results that none of the disciplines can achieve by themselves.

Key research interests are human decision-making in various domains (social, financial, medical). Specific research topics are risk attitudes, consumer psychology, behavioural finance, cooperation, well-being. Ivo is also a co-author of the UK Cabinet Office MINDSPACE report, advising local and national policymakers on how to effectively use behavioural insights in their policy setting.

Ivo.Vlaev@wbs.ac.uk

Economic models assume that everyone behaves perfectly rationally. A bit like robots - which, if you hadn’t checked the news lately, are moving into workplaces, by stealth, and climbing up the corporate ladder.

But humans aren’t robots, and they don’t act programmatically. So when the standard decision-making models are applied to corporations, the results are often dismal.

Behavioural economists, like Professor Ivo Vlaev from the University of Warwick, focus not on robots but on humans in all their misbehaving, irrational glory. They mine the latest insights on what we know about human psychology, including social, cognitive and emotional factors, and use that to explain human decision-making. And over the past decade, this fairly marginal field has moved to the forefront, triumphing in academic circles, in the press and, increasingly, in policy and business spheres.

Professor Vlaev, a leading thinker in behavioural economics, has been working closely with corporates to help them improve their decision-making.

In this conversation he shares his views on how digital is transforming strategic decision-making. And he explains why business leaders need to consider the underlying dynamics behind the way humans think to bring forth successful outcomes. With these fundamentals unpacked, Vlaev then introduces a novel framework that arms leaders with practical tools and methodologies to influence behaviours for smarter business outcomes.

Behavioural economics tells us how to fix human biases if we can and, if we can’t, it tells us what to do about it.

BearingPoint Institute (BEI): What’s wrong with current approaches to business decision-making?

Ivo Vlaev: Businesses are fundamentally institutions, machines for decision-making, where every second there are hundreds and thousands of decisions made by various interrelated individuals.

Decades of research show that managers do not always act as rational decision-makers, as standard economic models assume, and the resulting biases can lead to costly errors.

BEI: So, what to do?

Ivo Vlaev: Behavioural economics is the descriptive science of human decision-making. This is in contrast to the normative science of decision-making – how humans should make decisions - which is called economics and statistics.

The big question is: are cognitive biases fixable? (See the MINDSPACE checklist below.) Behavioural economics can answer this question as it tells us how to fix human biases if we can and, if we can’t, it tells us what to do about it.

BEI: How are biases typically ‘fixed’ in business contexts?

Ivo Vlaev: Conventional approaches to eliminating biases focus on ‘changing minds’. That is, influencing the way people think through more information and better incentives.

Typically, this involves training people to recognise biases, to help them think more logically and rationally, leading to better outcomes. The implication is that decisions require de-biasing. This is because effective decisions are seen as more likely when managers act without bias.

BEI: What are the problems with the de-biasing approach?

Ivo Vlaev: Well, evidence suggests that the de-biasing approach is insufficient for effective strategising because it only deals with our conscious, slower analytical half. But our automatic, emotional, subconscious half also plays a role in decision-making.

Even irrelevant stimuli can significantly influence decisions, such as the impact of sunny or cloudy weather on which applicants for a job receive offers.

Importantly, our conscious, slower thinking often fails to correct for the problems created by our automatic, intuitive mode of thinking because decision-makers are unaware of how it influences their decisions. (See ‘Dual Process Model of Behaviour’ below.)

In cases where decision-makers do recognise these biases, they do not sufficiently adjust using the slower, more deliberate mode of thinking. In other words, even when steps are taken to de-bias managers’ decisions, the results may be suboptimal.

 The MINDSPACE framework is a practical behavioural economics checklist to help decision-makers design the decision environment to promote better outcomes

BEI: So how does behavioural economics help with biases?

Ivo Vlaev: Behavioural economics aims to introduce strategies for managing these faster, intuitive biases by ‘changing contexts’ – that is, the environment within which people act - as opposed to ‘changing minds’.

Instead of trying to correct our intuitive, automatic thinking, we seek to reframe the problem of de-biasing into a problem in which we actually try to engage different automatic processes.

The MINDSPACE framework (note 1) (see infographic at the beginning), for example, is a practical behavioural economics toolkit that can help with ‘strategising with biases’. This means engineering the decision context to direct managers’ intuition towards better outcomes. It can also address how to take advantage of competitor biases.

In general, whereas conventional de-biasing aims to make existing decision-making strategies more accurate, behavioural economics seeks to reframe the decision so that different automatic/emotional decision-making strategies may be recruited. The same errors that make us stumble can also be used to make better choices.

BEI: Can you give an example of a behavioural economics technique used in a business context?

Ivo Vlaev: Let’s take Salience [representing the ‘S’ in MINDSPACE]. Consider the problem of hiring ‘top talent’. Stereotype is a ‘salient’ cue and can work as a useful shorthand for identifying talent – the candidates who fit the stereotype are inferred to be more competent.

So, it has been observed that elite law firms in the UK may be over-represented by graduates from Oxbridge. One possible reason is that Oxbridge degrees are so salient that CVs with this cue are more likely to be considered further in the hiring processes.

But the use of this salient cue can be suboptimal. Graduates from other schools may be better than some Oxbridge graduates, but law firms cannot uncover these ‘false negatives’ unless they hire against the stereotype.

There will be more behavioural insight teams within organisations in the future, in the same way there are accounting and legal teams within organisations today

BEI: Do you have a real-world example?

Ivo Vlaev: Yes, this is what a leading law firm Clifford Chance tried to do. They adopted a ‘CV blind’ policy to break the Oxbridge recruitment bias.

By engineering the hiring context this way, the firm has managed to find many hidden gems where their competitors were not searching – that is, in the under-exploited pool of graduates from non-elite universities.

BEI: What’s another example of a behavioural economics technique?

Ivo Vlaev: Another category of behavioural cues is Priming [representing the ‘P’ in MINDSPACE].

Primes can be words - for example, one feels more powerful and confident when asked to describe an experience in which one person has power over others; sights - for example, larger size food containers make people eat more; smells - for example, the scent of all-purpose cleaner makes people more likely to keep their table clean.

We are not aware of how our preferences and decisions are shaped by these primes. Our actions may seem unpredictable and non-rational, but in fact they are often influenced by many subconscious cues.

Knowledge about priming can help strategists influence others – or at least avoid being taken advantage of by others.

For example, research shows that the colour of the cover of business proposals (a presumably irrelevant prime) can influence evaluation outcomes systematically: blue enhances the acceptance rate whilst red reduces it.

In the future, behavioural economics testing will be able to scale-up by using big data

BEI: Where is the new frontier of behavioural economics research?

Ivo Vlaev: First, there’ll be more field experiments to test behavioural economics assumptions in the real world.

It’s not sufficient to test those assumptions based on interviews, etc. You need to conduct randomised trials without the participants being aware they are part of the experiment. In business, it’s fairly easy and inexpensive because the structures are already in place: you only need to tweak certain environmental features to see the effect on recipients.

The second big innovation will be big data. Increasingly, we can take a big scale approach to testing behavioural hypotheses by utilising big data from hundreds and thousands of individuals using digital devices – for example, digital wearables – to actually track their movements, decisions, and behaviours. Typically, most experiments are smaller in scale and come from lab research.

Third, there will be more behavioural insight teams within organisations in the future, in the same way there are accounting and legal teams within organisations today. This is already happening, but in many cases the policies generated by these teams aren’t implemented in practice. I think not only will there be more Chief Behavioural Officer roles created, I believe that they will be accorded higher status so they will be more empowered to improve decision-making.