Strategy

Behavioral Economics and Midsize Companies: A Q&A With Deloitte's Bob Rosone and Tim Murphy


If you didn't know what behavioral economics was before Nobel Prize winner Richard Thaler, you're not alone. A recent report explores how mid-size companies can address challenges and overcome competitors using behavioral science tactics.

FEI Daily spoke with Bob Rosone, managing director with Deloitte Growth Enterprise Services, and Tim Murphy, research manager with Deloitte’s Center for Integrated Research, about Deloitte’s recent report, Exercising judgment: How behavioral economics can help midsize companies become more agile, which looks at the people, workplace biases, and the behavioral tactics that can shift midsize company challenges into opportunities.

FEI Daily: This past October, the Nobel Prize was awarded to behavioral economics pioneer Richard Thaler. Explain to those who are unfamiliar what behavioral economics is and why they, as business leaders, should understand the basic concepts.

Bob Rosone: At its core, behavioral economics is the examination of how psychological, social, and emotional factors can be powerful drivers of economic behaviors. These factors are generally deeply ingrained in people, can impact the companies they work in, and often conflict with and override economic incentives when individuals or groups make decisions.

Given the rapid pace of technological change, behavioral economics often plays a significant role in today’s business world. In addressing why change and transformation can seem so difficult, behavioral scientist Dan Ariely describes humans as “predictably irrational.” Humans tend to fear change, can get overwhelmed by too many decisions, and often prefer short-term, smaller payoffs over longer-term, larger rewards. This type of loss aversion can result in missed business opportunities, from change management to hiring decisions.

 

We discussed these patterns in the report. Deloitte also interviewed Nobel Prize recipient, Richard Thaler back in January, and he pointed out that these underlying biases can result in business process inefficiencies. Thaler shared his thoughts on “choice architecture,” which reveals how the design of choices influences decisions. And as importantly, how simple “nudges” can meaningfully sway behavior. If business leaders have a working understanding of behavioral economics, they may be more equipped to recognize and avoid shortfalls in their decision-making. To overcome these potential shortfalls and resistance to change, it is important to identify employee motivators, provide psychology-backed tools, and leverage data analysis in business decisions.

FEI Daily: What are some of the unique challenges small and midsize private companies face? How can an understanding of behavioral science tactics help with those challenges?

Rosone: Midsize companies, defined as having revenues of $50 million to $1 billion, are a pivotal part of the global economy. There are more than 200,000 midsize companies in the U.S., comprising 34 percent of the workforce. While they may not have the resources of their larger rivals, midsize organizations and private companies tend to be more nimble. In this regard, their size and private status could work in their favor, allowing them to move quickly and evolve strategies and policies to fit the demands of the ever-changing market.

Understanding the correlation between people and performance through the prism of behavioral economics, midsized and private companies could be better- positioned to lean into their inherent agility. Focusing on how people make decisions and the biases every one of us have, could allow companies to be more effective. For instance, companies in this sector can adapt hiring and talent management-- areas typically heavily driven by behavioral economics patterns-- based on analytics and employee feedback.

When deploying new technologies, midsize companies can leverage behavioral techniques such as commitment devices, peer interaction, and strong coaching environments to possibly drive quicker change. Implementing behavioral principles can help midsize companies use size to their advantage—and potentially realize the benefits of being a truly agile organization.

FEI Daily: What psychological and emotional factors are the most powerful drivers that affect the bottom-line?

Tim Murphy: It’s tough to pinpoint specific characteristics that can drive the bottom line. One important factor could be making an explicit commitment to acting in a specific manner. This is to say, committing to the ways of an organization by outlining tangible steps to achieve a specific goal could drive the business forward. We see time and time again that walking individuals through predetermined steps can generally remove uncertainties during times of change.

Another significant factor can be motivation. On the talent management front, organizations can foster a motivated employee base by understanding the complexities of each individual. Currently, many talent departments focus heavily on extrinsic motivators like compensation and benefits. However, intrinsic motivators, like focusing on meaningful work and organizational recognition, are shown to be just as, and sometimes more important than those extrinsic benefits. Knowing this, midsize company leaders have an opportunity to evaluate and, if necessary, adjust their policies to target these motivations and boost employee engagement and productivity.