You operate a small business with five employees, all of who make $20 per hour. Your business is doing well, no real problems. But unemployment is up and other similar businesses are hiring reliable workers at $15 per hour.
Is it okay to cut your worker’s hourly rate to $15 and match the market?
Most people say no. When Daniel Kahneman ran a similar experiment, he found that 83% of people saw this as unfair. It seems very wrong to cut someone’s salary while the business is doing well.
But what if we changed the situation slightly?
Consider the same scenario, but as employees leave, you hire on replacements at $15 per hour. Is that okay?
The overwhelming majority now say yes. You, as the owner, are not obligated to pay the higher wage to the position. But it would be unfair to cut someone’s wage when they’re already at that level.
The entitlement is personal. And this is good. We don’t want managers ruthlessly cutting employee salaries just because they can. For businesses that do, they deserve the impact of reduced productivity and customer support that will almost assuredly result.
But this bias goes far beyond worker salaries. Our belief that possession is nine-tenths of the law drives us toward today’s status quo. And left unchecked, it severely limits our ability to innovate and create new opportunities for tomorrow.
Don’t be a Victim of Inertia
“It is the ability to choose which makes us human.” — Madeleine L’Engle, Walking on Water
In the 1960s, only a third of the federal budget was locked in, with a full 2/3 available for changing priorities. This freedom helped fund the Apollo Program and place a man on the moon at the end of that decade.
Today, only 20% of the budget has this same freedom, with that number projected to drop to 10% in a few years. The vast majority of the federal budget is locked in from year to year, limiting the country’s ability to make new investments and quickly respond to emergent problems.
Instead of having meaningful debates on where to best use money, and actually solve problems, politicians spend their days spouting rhetoric and drumming up their base. And they hope no one notices that very few things seem to improve. As Tyler Cowen described the situation in The Complacent Class,
“The harsh exchanges across different points of view mask an underlying rigidity and complacency: For the most part, American politics does not change and most voters have to be content — or not — with the delivery of symbolic goods rather than actual useful outcomes.”
This problem isn’t limited to our federal budget — the majority of our companies have the same struggle. It’s much easier to continue funding an ongoing project than it is to start a new one. Once we establish a priority, it becomes increasingly difficult to pivot onto a new path. As Richard Thaler warned in Nudge,
“Never underestimate the power of inertia.”
Whether we realize it or not, we assess these two categories with different standards. Instead of starting with a blank slate, we assume that all of our ongoing projects should continue. Instead of asking what’s the best use of our limited resources, we tie up the majority of our budget, time, and attention to existing commitments, regardless of their worth.
Then, we try to use the leftovers for new opportunities and growth. Many promising new opportunities never get off the ground because there’s simply no budget to support them.
This practice doesn’t do any favors for our existing projects either. Programs without constraints rarely end in breakthroughs. There’s less drive to demonstrate success and deliver results. Complacency quickly becomes the norm.
We need to break out of this cycle. If we’re going to move forward and adapt in a dynamic world, we can no longer budget and plan for a static one.
Manage by Design. Not by Default.
“An inner process stands in need of outward criteria.” — Ludwig Wittgenstein
Like many of our behaviors, this tendency occurs due to a mix of biases, including sunk cost fallacy, loss aversion, and the endowment effect. And again, like most biases, the first step to counter it is simply recognizing it.
The next step is to interrupt that default behavior.
Our biases are most powerful when we don’t think about them. In those cases, they keep us running on autopilot, quietly taking those mental shortcuts that keep us from thinking too hard.
By interrupting our default behavior, we shine a light on these biases. We shock ourselves out of that autopilot mode and begin to question our actions. Mainly, we start thinking again.
In Imagine It Forward, Beth Comstock needed to challenge this same mindset at GE. In order to spur new project innovation and challenge entitlement funding, she implemented stage-gate reviews. In her words,
“Every ninety days, new projects would be judged by a growth board on whether they were meeting their goals, and whether they should be killed, pivoted to a new direction, or given another ninety days to move forward as they were. It was classic VC metered, or milestone-based, funding, in which you fund based on progress. It allows you to kill a project early if you determine it’s not succeeding.”
Having implemented this program myself, I can attest to it’s worth. By interrupting the typical decision process, it’s easier to confront those legacy projects that aren’t performing. It’s easier to set everyone against an objective criteria and make sure that your resources go to those areas best positioned for success.
Not only does this encourage innovation, it drives a new standard of performance across the board. Legacy programs can no longer simply exist. They need to either perform or get out of the way for those that will.
Whatever method works for you, focus on interrupting that default mindset. We all have limited resources. Whether its money, time, attention, or energy, there’s usually less to go around than we’d like. It’s on each of us to make sure we’re using them in the most effective manner.
How are you making this decision? If you leave it to chance, you’re leaving it to your entitlement bias. By interrupting that with a process, it’s much easier to manage by design. In the wise words of Elizabeth King,
“It is only process that saves us from the poverty of our intentions.”