Behavioural economics is a crucially important field for HR. Beyond the administrative, consider the strategic purpose behind much of HR – to help employees perform at their best, thereby serving the organisational mission. This support comes across a broad spectrum of activities: helping people make the best hiring decisions, helping people learn and develop, helping people feel engaged with their work, helping people provide and receive useful feedback, helping people achieve and sustain wellness, creating/sustaining an organisational culture most conducive to success for all involved, and many more.
HR practitioners address these goals in a number of ways; including programme design, policy design, communications, training, event planning, change management, and many more. In all these cases incorporating behavioural economics principles through nudges can mean the difference between success and failure.
Let’s consider the example of loss aversion from behavioural economics, and how it may apply to leadership development. Loss aversion describes the human tendency to be twice as motivated to avoid a loss as to secure a gain of equal value. For an HR practitioner trying to drive participation in a leadership development programme this can be extremely important. The practitioner could try to incentivise intrinsic motivation to participate by communicating: ‘Think of all the promotions and career advancement you stand to gain by improving as a leader’. Alternatively, the practitioner could communicate: ‘Think of all the promotions and career advancement you stand to lose by not improving as a leader’. One of those two statements would be twice as motivating.
Or consider the example of the default option (what happens when a person does nothing). This is an extremely powerful tool, and the decision to make participation in any given programme opt-in versus opt-out can have monumental consequences.
By way of example, in Germany the path to becoming an organ donor is opt-in; meaning that a person has to check a box to become an organ donor. There is a 12% sign-up rate for organ donation in Germany. In Austria, however, the path to becoming an organ donor is opt-out; meaning a person has to check a box so they don’t become an organ donor. There is a 99% sign-up rate for organ donation in Austria. Given that these two cultures are so similar it is reasonable to conclude the nearly 90% difference is directly attributable to the design of the default option.
Examples of behavioural economics-inspired influences on HR include Adult Learning Theory, which considers what actually motivates adults to learn, and the distinction between developmental and evaluative assessments, which recognises that how data is shared has a huge impact on how people interpret their assessment findings.
Given its history and trajectory, it is reasonable to expect a nudge ‘boom’ within the next few years in the HR space. In fact, my joining ADP as chief behavioural economist is a sign of that.
Jordan Birnbaum, chief behavioural economist, ADP