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Repost: We are NOT rational beings so why do we try to make rational incentive programs?

Take the blndfolds offTake off our rational blindfolds…

Dan Airely, Richard Thaley, Cass Sunstein, Daniel Kahneman, Ran Kivitz, and many more psychology and behavioral economics  researchers have shown that while we like to think of ourselves as rational, thinking human beings who are out to optimize our well being, we aren’t.

In fact, we are very far from it.

Sharon Begley at Newsweek wrote this interesting blog “The Limits of Reason” in it, she states, “But as psychologists have been documenting since the 1960s, humans are really, really bad at reasoning. It’s not just that we follow our emotions so often, in contexts from voting to ethics. No, even when we intend to deploy the full force of our rational faculties, we are often as ineffectual as eunuchs at an orgy.”

We see this all the time.  I wrote about it in my earlier post from today “5 Lessons from the Maze.”  We tend to act and behave in very non-rational ways.  There are lots of irrational types of behavior and thinking and lots of theory’s about them (i.e., Loss Aversion, Status Quo Bias, Gambler’s Fallacy, Hedonistic Bias, Anchoring, Reciprocity, Inequity Aversion, etc…).

Here is what is interesting – we tend to still design our incentive programs and our motivational strategies based on believing that people act in a rational manner. We create programs that have 10 different ways to earn, with multipliers, qualifiers, and ratchet effects.  We create programs with multiple components and factors that we think will drive specific behaviors and elicit particular performance results.  We believe we know what people want and use only extrinsic rewards to drive our results.


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The Rise of Behavioral Economics

This is a very interesting video (albeit a little long) about the rise of behavioral economics and its impact on the economic and political world .  I find this topic fascinating as it helps in understanding some motivational impacts and also the limit of some motivational theories (including the Four Drive Model).  We can all learn from the insights here.

I want to state that while I agree with some of the comments I disagree wholeheartedly with some others.  In particular, I tend to agree with the ideas brought up by Leigh Caldwell and Mike Savage, and pretty much dismiss the conclusions made by Emre Ozendoren.   The idea that by nudging behavior in a way that is deemed more appropriate is in some way totalitarian is utterly preposterous.   It is indeed, in my mind, dismissing the idea that we have choice.  What Emre is missing is that we are already constantly nudged.  The fact that changing the nudge to be something that is going to be more beneficial for society or for individuals is not invasive – it is just a different nudge than the one that is currently going on.

Also, I believe there is a little bit of sophistry going on when the presenters talk about the behavioral economists calling people “irrational.”  The “irrational” component discussed by most behavioral economists does not propose that we are mad or a little cracked, but refers to the fact that we do not always behave in a classic economists’ rational manner.  In other words, emotions come into play and we don’t always optimize our economic well being.  The fact that some of the speakers in this are trying to position the behavioral economists viewpoint as stating people are mad is a little misleading.

All in all – this video raises some good thoughts and sheds some light, I believe, on the juncture of classic economics with the newer thoughts around behavioral economics.  Watch and enjoy!

PS – sorry for the big words – I think the accents got me thinking in a very academic manner…

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