Introduction
Many companies strive to have automated, efficient business models and processes that keep everything moving forward smoothly. On paper, this shouldn’t be so difficult– productivity, output, and growth seem predictable if you can measure resources and products.
However, an essential part of any company in any industry around the world is its people. And people aren’t quite as predictable as leaders might hope.
Classical economic theory’s limitations perfectly demonstrate that the assumption that people will always act in a logical, predictable way is wrong. Behavioral economics incorporates human psychology and behavior into the financial decisions that we make in order to better explain how different situations can impact the economy.
Behavioral economics can extend into the workplace. Employees will be impacted in different ways depending on the choices that leaders make. So, it’s important to take a look at some of the concepts in behavioral economics and how they might be utilized in the workplace to enact positive change.
Time Discounting
Human Behavior and Business
Time discounting refers to the phenomenon where the value of a prize tends to fluctuate with respect to time, as in, the amount of wait required before you can achieve it.
The field of behavioral economics considers the human behaviors that influence economics in ways that do not coincide with expectations set by classical economic theory. There isn’t always a certain answer when it comes to choices people make when it comes to financial decisions, and that is because human behavior isn’t always predictable.
Within a company, for example, some employees tend to be significantly more motivated by present rewards rather than future rewards, even if the future rewards are worth more. As such, while the theory takes notice of the fact that human nature tends to be impatient, it also considers that appropriate incentivization can get some people to prefer a longer wait. If you’re confused, it’s okay because the following example helps to shed a little more light on the phenomenon.
Time Discounting in Action
Recall the famous saying from Popeye, “I’ll gladly pay you Tuesday for a hamburger today.” What does this have to do with anything? Any incentives program, at its core, involves a trade-off between doing something and being rewarded. Wimpy, the character who made the statement, is a portrayal of the human need to be rewarded on the spot. He expressed his eagerness to have what he wanted then and there, and settle the deal later on.
On the other hand, if we increase the value of a prize significantly, its postponement won’t hold much importance. Would you prefer a 30$ bonus today or a 100$ bonus after a week? Of course, in this scenario, people will often choose the second option. Considering the increased value, the wait won’t matter as much.
The Time Discounting theory calls for appropriate, customized incentivization schemes to be put in place that would drive each individual to perform their best. It’s all a game of knowing who your employees are.
Time Discounting
People often make decisions by weighing the costs and benefits of their choices against one another. When it comes to rewards or bonuses in the workplace, the question becomes: what do I need to do now and when will it benefit me in the future? This mode of thinking is directly related to Time Discounting, a concept that suggests people tend to value rewards that are more immediate rather than potentially bigger rewards they would receive in the future.
So, what does time discounting really mean?
Time discounting essentially means you place a higher value on a good or service you would rather have now, than you would on the same good or service at a later date. As the amount of time increases, the value in the object seems to decrease. However, when the reward’s actual value is raised significantly, the wait time does not seem to matter as much.
People may enjoy rewards differently depending on the amount of time it takes to receive them. The theory separates people into two distinct categories: patient and impatient. For some, the idea of instant gratification is more enticing than waiting to receive something, even if it may be of greater value. For others, being patient and waiting for a reward that’s worth more makes more sense.
Time Discounting and Benefits
Would you rather have a dollar today or ten dollars at the end of the week? Initially, many people find the immediate reward to be the most appealing. However, if there were a greater disparity between the two, people often reconsider. For example, if the options were changed to receiving $100 at the end of the week or $1000 at the end of the month, the amount of time seems to matter less than the increased benefit.
For employees, a quick incentive can be very motivating. An immediate bonus or reward can be a necessary motivator to keep morale high for a short period of time. However, the promise of greater rewards in the future is also an excellent model for encouraging employees long term.
In business, there are typically options for ways to incentivize employees that either reward them now or later. One way to reward employees on the spot is through a direct bonus. A bonus like this can be for doing an exceptional job, for finishing a project, or at the end of the year, but no matter what it’s for, it’s often relatively immediate. Another way to reward employees is through stock options, which you can give over certain vesting periods. Although the employee has to wait to receive their reward, it still communicates that they are doing a good job and motivates them to keep working hard because the more profitable the company is, the more their stock will be worth in the future. In this scenario, both the company and the employee are rewarded, as it encourages valuable team members to stay with the business and to keep working hard by providing them with an incentive.
So, how can we apply it?
Depending on the needs of your company, setting goals in relation to time discounting and incentive programs can be highly beneficial. Whether you are concerned about employee motivation or someone’s work ethic, having clear and attainable goals for how to reward employees will help your everyone become more successful.
By accommodating different types of individuals (the patient and the impatient) through an incentivization program that offers multiple types of rewards, there is a way to ensure that everyone is putting in their best effort. For example, if you are worried about an employee leaving the company, you might choose to offer them stock options with a vestment period of a couple of years. In doing so, they will see that they are valued and will be motivated by the opportunity to cash their stocks in the future.
Setting specific goals for individuals is ultimately the best way to achieve the best results when it comes to time discounting. Knowing your employees and how they think is crucial in determining which incentives will work for them. The most successful companies are those that are able to accommodate different employees with unique personalities and mindsets, because they are able to recognize how different people approach time discounting and know what it takes to increase everyone’s effort.
Reciprocity
Reciprocity is another concept of employees are highly likely to reciprocate in the same positive manner if their managers/coworkers initiate the very same gesture.
Although usually discussed in an optimistic light, Reciprocity accounts for negative correspondence as well. That is why it is necessary to maintain a healthy environment where positive behavior is not only acknowledged but also encouraged.
Positive reciprocity is one of the tools used by marketing professionals to get their prospects interested in their products or services. “>behavioral economics that can help leaders better manage their employees in the workplace. This term helps explain the social norm wherein people are likely to behave in the same manner with a certain individual as that person has behaved with them in the past. Similarly, in the workplace, employees are highly likely to reciprocate in the same positive manner if their managers/coworkers initiate the very same gesture.
Although usually discussed in an optimistic light, Reciprocity accounts for negative correspondence as well. That is why it is necessary to maintain a healthy environment where positive behavior is not only acknowledged but also encouraged.
Positive reciprocity is one of the tools used by marketing professionals to get their prospects interested in their products or services.
Reciprocity in Action
For example, put yourself in the shoes of an employee at a company who has just caught the eye of his/her manager. The manager notices you exhibiting positive behavior toward your colleagues and, to ascertain that this deed does not go unnoticed, he/she decides to reward you with a small gift. You not only value the gift, but also the recognition that it has brought you. For that very reason, you feel a sense of obligation toward maintaining this behavior at all times.
However, if in the same scenario your behavior goes completely unnoticed, you won’t feel any obligation to maintain this behavior, so you won’t make a habit of this behavior. This is how reciprocation functions in the workplace.
Reciprocity and the OKR Framework
With Objectives and Key Results, companies institute a culture in their business of iteration and building on past progress. While this methodology centers on goal-setting and reaching quarterly targets to progress higher-order priorities and drive success, this framework can influence all aspects of work life.
When employees exhibit behaviors that align with the attitude and culture necessary to succeed with OKRs, it’s important to reward them. Timely, weekly check-ins on OKRs as well as substantial progress to goals and contributions in weekly PPP meetings are important habits employees can develop that should be encouraged by managers.
Managers can recognize this behavior in the Profit.co software with employee awards. These are available in the Employee Engagement module of Profit.co and are a simple, yet effective way to recognize an employee’s behavior and encourage them to maintain it over the course of the quarter, and their tenure at the company.
In keeping with the dynamics of this theory, managers must understand that they must set a good example for their employees. They must try their best to initiate positive, friendly, and cooperative behavior because, after all, change begins at home.
The Principle of Reciprocity
What might seem like commonplace manners (saying thank you, giving someone a gift because they got you one, or inviting them some place because they once invited you somewhere), is actually known in business as the principle of reciprocity. This idea of “returning the favor”, or treating others how they’ve treated you in the past, is simply a social norm.
In the workplace, your employers/employees and coworkers are likely to treat you the way that you treat them. If your behavior is typically positive, their behavior usually will be too. However, this idea also goes both ways. If your behavior towards someone is less than kind, you might get a similar demeanor in return.
The “Laws” of Reciprocity in the Workplace
Reciprocity can be extremely useful in the workplace, but only if it’s genuine. Employers should take note of employees who are exhibiting the types of behavior that they would like to see catch on in their companies. By rewarding those employees, others are likely to sincerely reciprocate the same behaviors. Setting up a system that consistently incentivizes certain actions is one such way to encourage positive behaviors.
This reciprocity principle extends beyond the bounds of coworker relationships as well. It’s important to consider how reciprocity can also relate to clients. In order to build that initial trust with a client, giving them something to show that you’re invested in their business can help build their confidence in your relationship. Showing periodic appreciation for clients throughout their time with you can also help to maintain that trust and continue to develop your strong relationship. Once this sense of confidence in one another is established, clients are more likely to give back to your brand or company and your business could grow through their referrals, helping to obtain your objectives and see positive results.
Commitment Effect
What is the Commitment Effect?
When you make a decision on an idea, and then a more efficient, innovative alternative comes along, what do you do? Do you stick with the original decision, or adapt with new information?
While you might think everyone would adapt, according to the commitment effect, that is not the case. The commitment effect is when people or groups are unwilling to compromise their ideas or thoughts even though they’ve been presented with facts or evidence that encourage them to do otherwise.
Barry M. Staw originally introduced the concept of the commitment effect in his work Knee Deep in the Big Muddy: A study of Escalating Commitment to a Chosen Course of Action, in 1976. Staw presented the idea that people are more likely to search for evidence that confirms their decisions or makes their ideas seem better than they really are, instead of evidence that proves their ideas to be wrong in some way. Even if we know that sometimes we might be better off to go in a different direction, we still keep doing what we’re doing.
The commitment effect has been used to understand everything from the delayed construction of Berlin’s Brandenburg airport, which is over 10 years behind schedule and billions of Euros over budget, to why monthly subscription services have become so successful. These subscription services try to draw in customers with small commitments, like a reduced-price trial, hoping that customers will sign-up and then continue to use the service once the trial period ends because it has become part of their lives and it’s less work to let it continue than it is to cancel.
The Commitment Effect in the Workplace
What if we could use the commitment effect to our advantage? What if the commitment effect could help drive worker productivity and employee engagement in the workplace?
In the same way subscription services lure us in with trial-periods, offering an employee the chance to lead a project or undertake a training course is a small step which makes that employee more committed to their work. The more responsibility and ownership an employee has over their work, the more likely they are to feel a commitment to see it done right through to the end.
For example, let’s say you have a team of twenty people working as Quality Assurance engineers to reduce defects in a product. If these engineers are working as one team with a single manager, it is likely that the manager is going to feel a great deal of pressure and responsibility for the product and ensuring that all of the targets are met. If the group fails to meet their target, the manager is more likely to take responsibility for the failing instead of the entire team.
If you broke the larger team into smaller groups, maybe four teams of five, people are more likely to feel accountable for their work. If one person in each group acts as the leader, they’re more likely to absorb the responsibility that the manager often feels. This way, the manager, who has their name and reputation on the line, has some pressure alleviated and the group leaders are motivated to meet their goals.
Or what if you’re on a sales team and you’re trying to increase your sales? The commitment effect can help you find a way; by asking members of the team to come up with a specific goal, they have something that emphasizes the importance of their commitment.
The Commitment Effect and Management
What if you’re in charge of a sales team and you want to use the commitment effect to increase sales? One thing you could do is have a meeting at the beginning of each month or at the start of a new project and ask each team member to write down a goal for themselves. To make sure that everyone is truly committed to their goals, there should be some sense of accountability.
Whether that be as simple as writing everyone’s goals on the white board or incentivizing those who reach their goals, the purpose of the exercise is to make these commitments important to the team. Maintaining motivation can be difficult, but in order to see improvements in the entire company, it’s important to consider the goals and objectives of the individuals who contribute.
Objectives, Key Results, and Commitment
The commitment effect doesn’t just apply to committing to actions, but also how we commit to ideas, and in this way, the commitment effect can be a powerful tool to help employees achieve their best work. We see the negative effects of overcommitment everyday.
Sometimes, you have people who constantly say “I’m just not a computer person” or “I just don’t get Excel.” When someone is insistent about their shortcomings, they’re not likely to get any better. Instead, it’s important to emphasize a “growth mindset”: the idea that abilities are not fixed, but rather something that can be developed and learned with time. By reinforcing to our employees that skills can be learned, and congratulating them when they complete a task they think they’re not good at, we can build up an idea in their head that not only are they good at the task, but that they can conquer new tasks too.
Essentially, the commitment effect can be used to encourage employees by making them see themselves as capable learners who can accomplish whatever is in front of them. So long as employers are careful to only reinforce positive commitments, they’re likely to see positive results with their employees and subsequently with their company.
While understanding the commitment effect may not be the only key to success, it’s important that employers are aware of it. For managers, their choices and words constantly have an impact on their teams, so it’s important to consider what kinds of behavior are being reinforced. Taking the time to think about your actions and actively encouraging a growth mindset can help both you and your employees avoid getting caught in a cycle of negativity and can instead cultivate positive behaviors that will bring positive business results.
Persistence & Employee Capability
When managing employees, it’s important never to underestimate them. When you’re a leader to hardworking people, you should do all you can to support their work ethic and make a positive impact in their working lives.
If you have been paying attention to the many inspiring stories of today’s renowned entrepreneurs, you will notice that they did not become successful overnight. You can learn how to start a business by looking to those who have nurtured their entrepreneurial skills by fixing and building gadgets in their garages and basements. They were selling lemonade and hosting small tournaments in their schools or colleges. Their unwavering entrepreneurial spirit inspired them to face failures head-on and have the willpower to come out on top.
For example, John Doerr introduced the OKR system at a preliminary meeting at Google. This system highlighted goal setting, goal tracking, and implementation details, as well as outlined a quarterly set of priorities for the company. It took many drafts to finalize the best OKR model. Persistence kept them going until they set the right OKR, which usually takes at least two quarters to figure out.
Below are examples of businesses that stood the test of time, each reflecting an element of the entrepreneurial spirit
Alibaba: BE PERSISTENT
The founder of the Alibaba Group, Jack Ma, truly embodies the entrepreneurial spirit. Jack applied to 30 different jobs and had to face rejection from every single employer. He struggled attending college and he sat for countless Chinese entrance exams until he finally passed. He would ride 17 miles on a bicycle just to give visitors tours and polish his English. He created a website about China during the advent of the Internet. Even though it did not give him the results he needed, he persisted to innovate and dream.
Jack was actually sharpening his entrepreneurial skills through these setbacks. He never gave up, regardless of bumps along the road. When he and his friends founded Alibaba in 1999, little did they know that it would become the giant it is today. Alibaba is the fifth largest internet company in revenue in the world right now. It focuses on e-commerce, internet, Artificial Intelligence, retail, and technology. If Jack Ma was not persistent in his dreams, Alibaba wouldn’t exist.
Virgin Group: TAKE RISKS
Richard Branson, the founder of the Virgin Group, a multi-industry company, started businesses that cut across publishing, music, mobile phones, travel and much more. What made him stand out from the rest?
He’s an adventurous person who enjoys taking risks, all while maintaining a work-life balance. One such risk is the selling of Virgin Records to Thorn EMI in 1992. Virgin Records had just signed the Rolling Stones, a feat they had been trying to accomplish for 20 years. However, taking the risk and selling the brand actually enabled Virgin Group to catalyze other popular business ventures. Branson’s intrepid character perfectly reflects the daring spirit of an entrepreneur.
Amazon: THINK POSITIVE
According to Jeff Bezos, the founder of Amazon, every challenge is an opportunity. Since its launch in 1995, Amazon has faced a lot of challenges ranging from lack of funds, reduction in shares, the launch of Barnes & Noble’s rival website, and the burst of other online stores. However, these obstacles did not dampen Jeff’s positive outlook. Initially, Amazon started as an online bookstore selling various books later diversifying to sell DVDs, Blu-rays, CDs, etc. Today, Amazon has become the one-stop shop by selling various products and also provides several other offers such as web services, prime memberships, distributes downloads and streaming of video, music, audiobook through its Amazon Prime Video, Amazon Music, and Audible subsidiaries. From this, being positive helped Jeff persevere and achieve his objectives and goals no matter the situation.
Pandora: IF YOU HIT ROCK BOTTOM, THE ONLY WAY TO GO IS UP
Pandora was founded in the year 2000 by Tim Westergren, with a funding of $2 million. Following the dot-com bubble crash, Pandora went bankrupt and it was unable to pay its 50 employees. This was a very low point for Pandora and it could have closed down just like other music start-ups that wanted to revolutionize the outdated music industry at that time.
However, Tim, the founder believed in his idea and was willing to go the extra mile to see it survive. Even without any resources, he believed that his team would find a way to continue working and grow the business. He decided to confront the issue head-on and talked directly with his 50 employees. He requested them to stay with him, work for free until he could be able to secure funding for the business. Funny enough, all the employees agreed to stay with him.
Tim Westergren went to over 347 potential investors pitching for his company and none of them was willing to invest in the company. This took a period of 2 years and the employees still trusted and believed in their boss and they went without pay for two years. Then for the 348th pitch, Tim secured an investment of $4 million. What actually moved the investors to invest in Tim is not about the business but his ability to convince over 50 employees to work for him without pay for two years.
At the moment Pandora is one of the biggest and most popular music streaming, internet radio, and automated music recommendation services with over 5 million subscribers and with over 81 million users worldwide.
A true entrepreneur is passionate, does not give up on their dreams, determined, hardworking, and a calculative risk taker. You cannot underestimate the spirit of a true entrepreneur. Just give them time and they will always come on top.
Conclusion
Using behavioral economics and its concepts in your organization can lead to higher productivity and less conflict when it comes to leading and managing employees. Being aware of how your actions can affect employee experience and behavior can end up being a big asset.
Using your knowledge of behavioral economics will not only give you insight to employee behaviors, but help you circumvent confusion when employees act illogically, and find better ways to keep employees motivated, and help them feel understood and satisfied at your company.