Organizational leaders as behavioural economists? (Part I)
Leadership is about choosing how you show up
A recent Harvard Business Review article suggested that COOs should think like behavioural economists. The argument rested on three examples (the frivolous, the well-worn and the interesting):
- Providing free candy is not a good idea because most people have poor self-control so they eat more than is good for them, and more than they really want — hardly a top priority item for a COO;
- Default opt-in for retirement savings — a heavily overused and increasingly tired example of nudging (are there any people who have not yet heard many times that this makes more people put money aside?); and
- Prominently displaying a performance indicator is likely to make people focus on it disproportionately, possibly to the detriment of others — a good illustration of a well-intentioned initiative that can backfire.
On the whole it was not a particularly convincing case. We believe there are many more and better reasons why COOs, and people in a leading role at any level, could benefit from injecting some behavioural economics thinking in their daily business.
How do leaders lead? In essence leaders lead by communicating. The first thing that then comes to mind for many of us is a charismatic Chief Something Officer giving an inspiring speech to the troops on the latest company vision. But communication is not just about words, it is even more about deeds. The people in an organization don’t just listen to what a leader says, they look at what she (or he) does. They look at the decisions and choices leaders — from the top from the organization all the way to their immediate boss — make, day in, day out.
Saying what is important is not enough
In Organizational Culture and Leadership (1), esteemed professor Ed Schein lists the ways in which leaders can embed their beliefs, values and assumptions (p.246). All six primary embedding mechanisms reflect the actions that a leader can take, and which speak — as the proverb has it — louder than words. How come? Through our behaviour, and the choices that underlie it, we express what we find important. When we choose to go down one path, it is inevitable that we decide not to follow another one. In effect, we sacrifice the benefits that might arise from the alternative courses of action, in order to realize the benefits of the chosen route.
It is rather enlightening to look at Schein’s mechanisms with behavioural economics spectacles on, from two viewpoints. First, what choices is the leader making, and what alternative choices exist and have been given up? Second, how can a leader reinforce the desired message?
Let’s look at two of these mechanisms to begin (the other four are in Part II).
“How leaders allocate resources”
Allocating resources is central to (behavioural) economics, and an obvious way to interpret it is to think of money and budgets. Does the organization spend money on training or, say, subsidized child care? Such choices do indeed say something about how much the employees are valued. But they will also look at how that compares with other corporate expenditure. If employees are entitled to two training days per year, while the senior managers jet around the world in First Class, that is perhaps not as meaningful as if they can go to any training course (provided they show how it will benefit them), and the top brass flies Economy Class like everyone else.
But it’s by far not just the people in the C-suite, holding the corporate purse strings, who contribute to the perception of culture and leadership in an organization. There is more to resources than money: the one scarce resource we all have, with a hard limit, is time. So how leaders, at any level, spend their time, is hugely significant. If there is a scheduling conflict between an unexpected meeting with a customer, and a development meeting with a staff member, what choice does the leader make? Does she send a deputy to the customer meeting, or postpone the meeting with her team member by, (“hmm, full schedule next week, the week after I’m travelling, then I have some time off…”), four weeks? Or does she meet the customer, and at the same time offer to sacrifice her personal time in the evening to spend time with her employee? Different choices tell different stories.
There is no right way of allocating resources, but as a leader you need to be clear what drives your choices when it comes to doing so. Is there a default bias at work(“customer always first” — you just do so without even thinking), or maybe a corporate heuristic (“hierarchy dominates” — if your boss calls, you don’t push back) that you unquestioningly obey? Is there a social norm, pressure from peers to conform that determines the choices you make, or a profound belief that you need to make certain choices to get ahead that dominates your behaviour? Step back and think deliberately about how you spend your time, your most precious resource. Make sure the sacrifices you make align with the kind of leader you want to be, in the kind of organization you want it to be.
“Deliberate role modelling, teaching and coaching”
Imagine you want to encourage more collaboration among your team: get people to tap into each other’s knowledge, proactively contribute to each other’s work and so on. People may regard this as a distraction, though. They need to give up time they’d otherwise spend on their own tasks to help out others, and may not realize that the small sacrifice they’d make might pay off many times over for their colleague. If you make a conscious decision to be a role model for collaborating, then your employees have a template of what you believe it looks like.
Changing behaviour means effort and sacrifices. Change from the status quo requires effort, and making different choices means making different tradeoffs. What if you showed them how important you find collaborating yourself, by explicitly setting aside time (don’t be afraid to signpost it!) for your people to pick your brains, and to spend time with them providing input to their projects? How about teaching them what it is like to make the sacrifices that the desired behaviour entails?
And maybe also teach them how they can help themselves and others make the right choices and adopt the right behaviours: make it Easy, Attractive, Social and Timely (2). What obstacles are in the way of the behaviour you want to see that you can remove? How can you make it appealing and build momentum around it? What triggers can you come up with that help people make the right choice when the choice is being made?
As a leader in an organization, you create the conditions that become a very powerful source of employee commitment, identification, and involvement… if you want to.
Part II looks at the remaining four mechanisms:
(1) Organizational Culture and Leadership (3rd ed.), Ed Schein, 2004
(2) EAST: Four simple ways to apply behavioural insights, Behavioural Insights Team, 2014
This post was co-written with Paul Thoresen.
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(Click below for Part II)
