Loss Aversion Bias and Corporate HR Policies

I usually give a lot of examples of seeing loss aversion bias in real life, from rickshaw-wallahs in Indian cities to amateur investors, but none from the world that I come from.

Company Policies

I don’t know how many crazy people like me exist out there, but in every company that I have worked in the past decade, I have made it a point to read their HR policies and manuals. I don’t admit it in public because, as an employee, it’s kind of uncool to jump in a conversation and say, “you know, actually, as per our company’s HR policy this or that can or cannot be done!”. It was hard enough for me to be called a nerd in school and now I have an image to uphold. I’ve worked for a lot many companies, to the distaste of my potential employers. And never have I worked for a company, where my first week in the office was spent in awe or saying, “This company’s policies rock!” If you have worked in a corporate environment, you would know and understand when I ask you, “Are any of the policies posted on your company’s intranet really made for the human resources, i.e., you?” In most likelihood, unless you have worked for Zappos.com in the recent past, your answer would be unequivocally, “NO! Hell No!” I came across a video link on a tweet recently (it’s pasted below this video) titled, “Why You Should Trash Your HR Policy Manual”, by Heather Bussing (Heather was kind enough to send me a direct link to the video). Anyway, intriguing, isn’t it? Go ahead, watch it and come back! [youtube id=”2DXBo6O48WQ” width=”600" height=”350"] I never knew what was wrong with the policies until I read one of my favorite books, Rework, by the co-founder of 37Signals.com, Jason Fried. Here are a few things he had to say about organization policies:

Don’t scar on the first cut

The second something goes wrong, the natural tendency (of managers) is to create a policy. “Someone’s wearing shorts!? We need a dress code!” No, you don’t! You just need to tell John not to wear shorts again. Policies are organizational scar tissues. They are codified overreactions to situations that are unlikely to happen again. They are a collective punishment for the misdeeds of an individual. This is how bureaucracies are born. No one sets out to create bureaucracy… they are created one policy — one scar — at a time.

So, let me ask you again, “Have you come across an HR policy that was written keeping the human resource, i.e. you, in mind?”

Loss Aversion Bias

Scientists have discovered that our human brain is fundamentally loss averse. We just hate the prospect of losing (giving rise to the wonderfully accurate “Prospect Theory“, by economical behaviorists, Daniel Kahneman and Amos Taversky) and would choose options where we think the loss would be least or gains would be greatest. So, let’s just try and answer these simple questions:

Question 1: Would you play a game where you had the probability of winning:

A. 0.1 % of 5,000 bucks, or

B. 5 bucks

Question 1′: Would you play a game where you had the probability of losing:

A: 0.1% of 5,000 bucks, or

B: 5 bucks

What did you answer for the first question? Well, it doesn’t matter! If you are like any average human, you would have selected option A for the first question. Actually, as per their (Kahneman and Taversky’s) studies you would have a 72% probability of choosing option A. Which means, when there is a gain to be made (win scenario), people generally are effected by the expected value of the gain. In short, at the prospect of winning you become risk takers. What about question 1′? If you are an average human*, there is an 83% chance that you would have chosen option B, which is that if you are looking at losses, you are unlikely to risk it and would prefer losing a smaller amount than incurring a large loss at a small probability. (Read more here)

Back to Corporates and their HR Policies

Companies are run by people and hence are limited only by our limitations. And the guys drafting or signing off on HR policies are the subset.

In one of last consulting assignments, I was working for a organization that didn’t seem to concerned about being employee friendly. Every policy in that organization said to an employee, “We don’t trust you! And if we could run this company by ourselves, we’d fire your ass right away!”

Starting from the offer letter. This is perhaps the first formal communication that a potential employee has with the company. Generally, going by the rule of first impressions, companies try to make this letter warm and congratulatory. In this case, the offer letter dispensed the congratulations in an obscure manner (in a paragraph) and then spent the next page and a half, listing down rules of the company with regards to joining and joining formalities. Rules!!

“As a part of this company, you are not to take unsanctioned leaves.” or “The work timings of this organization are 9am — 6:30pm. No exceptions!”

And then came the agreement letter. Usually, it’s a set of sheets printed on the letter head of the organization, giving details of the job description, salary break-ups and other relevant information. In this case, the agreement was on a stamp paper, with page after page of clauses that would intimidate even the seasoned troops.

“You are to submit your education certificates in original at the time of joining. These will be held with us until your relieving. Should you leave before the period of two years, you would be required to pay the company Rs. 2 lacs to cover the investments made by the company on you. Your certificates will be released to you on the receipt of the payment.” (or something to that effect!)

I never understood joining agreements. I mean, the employee never seems to have a say in the agreement and she has no say on what conditions she would like the company to comply with. And the rule is simple — you don’t sign the agreement, you don’t join!

Loss Aversion and Policies

As an adviser to the company, we asked the MD to modify these policies to make them employee friendly. He refused. Why? Well, he reasoned that all these clauses were to safe-guard the company from employees who might leave them after learning valuable product and marketing secrets, or from those who might act unethically or unprofessionally, or from the ones who might steal its resources and need to be fired, and every other act of crime possible against the company.

There’s nothing wrong about safe-guarding oneself, but these clauses would turn even a dedicated employee sour. And that’s what had happened. None of the employees liked working there. The good ones left for better opportunities and the risk averse ones stayed on by conditioning themselves to be slaves or machines.

By thinking of the possible losses, this company failed to capitalize on the potential gains that every happy employee could bring to the growth of the organization.

Had the management seen the lack of employee engagement as a definite loss rather than a possible gain, then they would have been in a position to compare a loss with a loss. For example, comparing the loss of a sales-person taking your product prices or cost structure to a competitor with the loss of the sales-person not being motivated enough to generate revenue and yet hang around because of a two-year employment clause is easy to understand and decipher.

Do HR Policy Makers suffer from Loss Aversion?

By now, you would have started introspecting on your own employer’s HR policies. Does that attendance policy make sense? Do you really need to fill up 10 different requisitions to hire an associate? And what’s with that policy which stops you from communicating your views and concerns to senior management under the pretext of channelizing the flow of thoughts?

Policy makers are people and people don’t like getting their fingers burnt. But instead of not poking the finger in an open flame, they douse the fire. Which really doesn’t make sense in the bigger and longer view of things.

Loss Aversion is a cognitive bias that affects all of us. However, in an organization it affects more than just you. It affects all others that are genuinely concerned and care for the growth of the company. And so, instead of scarring on the first cut, understand the larger implication of your decisions to lay down rules. Perhaps, as shown earlier, put both scenarios on the level playing field and determine the best of the two evils. Taking a step back and thinking critically is the only way you can create a culture that leverages on the freedom of thought, actions and speech for the benefit of all.

After-mints!

Here are some awesome quotes on the average (ness of) humans:

Don’t let the opinions of the average man sway you. Dream, and he thinks you’re crazy. Succeed, and he thinks you’re lucky. Acquire wealth, and he thinks you’re greedy. Pay no attention. He simply doesn’t understand. — Robert G. Allen

The average dog is a nicer person than the average person. -Andy Rooney

America believes in education: the average professor earns more money in a year than a professional athlete earns in a whole week. — Evan Esar

Originally published on January 22nd, 2013

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