Resource Type: Behavior Tendencies: Domains:

Behavioral Economics got popular because it showed that people, in many ways, did not respond rationally to their own economic incentives. That doesn’t mean you can overlook them when doing touch point analysis. They’re still the foundation of human behavior, most of the time, even though they need to be completed by a behavioral analysis.

Incentives are still the foundation of human behavior

It’s easy to overlook this. For example, in a recent NBER working paper1, the authors were puzzled when the workers didn’t adopt a new technology that should be superior. Only 17 months of no results later did they investigate the economic incentives of the workers supposed to introduce this new technology in their organization. Well, surprise, if they did used it, they would see their salary decrease, given the way it was calculated. No wonder they were reluctant to go ahead…

That’s why in every behavioral intervention process, there needs to be a step equivalent to what I name “Analyze Incentives Structures”. Let’s see below how to make sense of human behavior through the multiple lenses needed for a thorough analysis.

The different levels of motivation for individual and collective behavior

We can distinguish essentially 3 different levels of motivators that help make sense of human behavior: mandates, incentives and nudges.

Mandates

Mandates are elements of policies—public (law) or private (processes)— that direct an individual to adopt a given behavior. If you don’t, you will be punished. If you attack another person, you will be charged. If you don’t show up at work or don’t follow mandatory processes, you will get sanctioned or fired. These are obviously very strong motivators and easy to analyze because they are public knowledge, due to their very essence.

Let’s use a sales representative as our running example to illustrate all these concepts. A common mandate for sales rep is to use the CRM system of their company to log their interactions with a client. In many company, to actually get paid their commissions, reps have to put client interactions and contracts in the CRM. If it’s not there, they don’t get paid. If they do not log anything, they are fired because they are assumed not to do anything.

Incentives

Incentives are perhaps the most complex motivators to analyze because they cover many dimensions across many domains.

Type

Incentives can be of many different type, coming down essentially to what the agents analyzed is valuing more. They can be economic of course (the commission set for each deal for our sales rep), but they can also be social (being valued as helpful by colleagues), emotional (having a good relationship with managers praising her value), political (gaining more power within the organization by befriending colleagues, say, in the legal department to get contracts approved more quickly), informational (being the only one with access to essential knowledge) etc…

Explicit or Implicit

Incentives can be explicit, meaning they are common knowledge among all agents involved. Explicit and public sales commissions are a perfect example. Some obvious ways to increase political power within an organization are also explicit: if a colleague is trying to look good to his manager’s manager, everyone know it will increase his power if successful.

But incentives can also be implicit, meaning they are not common knowledge among all agents involved. Those incentives need to be uncovered through observation, interviews and analysis. In the case of our sales rep, a possible and simple implicit incentive would be as follows:

  • for more complex technical deals, she needs the support of technical resources from the engineering group
  • the engineering group has no time dedicated to this task nor any explicit incentives given for this, which means this task is not recognized by the organization
  • the sales rep may then adopt behaviors in other situations that will increase her leverage on the engineering group to get this support when needed, and act in ways that may seem puzzling, but will be making sense when viewed with this implicit incentive in mind

People are not stupid (nor are they perfectly rational)

I have seen countless occurrence of puzzling behavior by workers at many levels that seemed unexplainable and in fine attributed to the fact that these people were not quite as bright and smart as the ones trying to understand their behavior.

Well, it turns out that people are very rarely acting in pure stupidity. The most likely explanation is that they are acting rationally according to their own incentives: you just haven’t uncovered their true ones yet. This premise is central to the organizational analysis methods I was trained to use.

People are rational, in a limited way, to the best of their abilities and information available and they are of course subject to cognitive biases. But when taking all these limitations into account, they are acting rationally. For people inside organizations, that means they are pursuing their own goals, which are defined by their own incentives, and they will use any source of leverage to reach those goals. If a behavior is puzzling, look for the true goals.

This seems like a simple theory. But it is a very powerful one, which explains a lot of otherwise unexplainable behaviors. It’s not easy to put in practice however, because you have to work hard to uncover those goals and use different methodologies. But it’s always worth the effort.

Nudges

For a primer defining what a nudge is in an actionable way, see here.

Nudges and all behavioral human tendencies are basically the last layer you should look at. This doesn’t mean it is the least important, it just means you won’t be able to identify the behavioral tendencies at work and their impact without a good grasp first of the mandates and incentives placed on the agents you are investigating.

Nudges rarely revert incentives and mandates though, but they can impact their effect by an order of magnitude, in many directions.

To continue our sales rep example, there could be many possible nudges used:

  • checklists to help the reps ensure they analyzed every dimension
  • tools to use with the client that help the rep but also shape how they will interact with their clients, etc.

Use all the lenses to avoid mistakes

If you think back to the NBER study mentioned at the start of this post, 17 months have been wasted just because the explicit incentive structure at the organizational level were overlooked when analyzing the behavior of the agents. For a corporate project, I’m sure the lack of results would have been investigated before 17 months, but even 1 or 2 months can make the difference when introducing a new technology.

It’s even more a shame since if they had even a look at the incentive structure, they would have seen very easily the issue with their strategy. Don’t make the same mistake!

  1. Organizational Barriers to Technology Adoption: Evidence from Soccer-Ball Producers in Pakistan; David Atkin, Azam Chaudhry, Shamyla Chaudry, Amit K. Khandelwal, Eric Verhoogen; NBER Working Paper No. 21417; Issued in July 2015 (link)
2015-11-06T13:44:47+00:00

About the Author:

Julien Le Nestour
Applied behavioral scientist & international consultant — I am using the results and latest advances from the behavioral sciences—specifically behavioral economics—to help companies solve strategic issues. I am working with both start-ups and Fortune 500 groups, and across industries, though I have specific domain knowledge in banking, asset management, B2B and consumer IT, SAAS and e-commerce industries.

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