In the last e-newsletter we saw that research has shown how prone people are to bias, myopia and peer pressure: the new discipline of behavioural economics has uncovered peoples’ susceptibility to distortion by random factors or manipulation. The key concepts are shown in the box below.

Human Irrationality: A Primer

Behavioural economics is a comparatively new discipline which has used empirical research to highlight the often irrational bases of human behaviour. The main concepts are summarised below; click here to read a previous e-newsletter with more detailed description, examples and sources.

Priming is when people’s behaviour is shaped by other, unrelated forces; for example the attractiveness of a student influences the grade given on an essay; the background music played in a store influences consumers’ buying decisions, and the price of a pill influences peoples’ experience of the pain relief it provides.

Anchoring is when people’s estimate of something is influenced by what came before, even if unrelated: when students were asked to write down the last four digits of their social security number and then bid on a variety of products, those with higher social security numbers bid substantially more than those with lower numbers.

Peer pressure and bandwagon bias can be seen in experiments showing test subjects’ perceptions are affected by the (incorrect) answers of other ‘plant’ subjects.

Loss aversion is when people overweigh the fear of loss relative to the prospect of gain: in experiments people needed the chance to win $40 before they would place a $20 bet.

Overconfidence can be seen when people overestimate their own ability, for example ninety percent of drivers believe they are above-average drivers.


With our shortcomings laid bare like this, we’re left wondering: Where to from here? What’s the upshot from this litany of human liability?

Aside from efforts by businesses to leverage human weakness for commercial gain, smart executives and managers can harness the forces of priming, anchoring, peer pressure and loss aversion to accomplish organisational goals and improve overall performance. Here’s what that looks like …

To Improve Operational Performance
Priming can be used to good effect to improve operational performance (reducing waiting times, lowering defect rates, controlling costs etc.) because improved performance is shaped by the organisational context in which it occurs. Many of us have worked in environments where performance is secondary to politicking, or the culture is one of simply putting out fires. Such environments, unsurprisingly, breed poor performance. People operate at the level to which the environment conditions them.

But the opposite also holds: a context of high performance breeds great results. It’s a truism of performance improvement that people respond to the level of demand made on them. As Peter Drucker says: one improves performance by making high demands of people; they will be engaged and rise to the challenge.

By setting a clear performance target (cutting customer waiting times by three working days, reducing operating costs by 12 percent, increasing subscriber numbers by 10 percent per month …) and actively and visibly managing to it, a clear organisational context for performance is created, and staff will be primed to perform. Making the performance target as specific as possible (quantification is good here) will also utilise anchoring to shape people’s perceptions of what is important. Likewise, drawing on a solid base of facts and evidence during executive deliberations anchors decision-making in reality rather than exchanges of hearsay.

I advise against cluttering the conversation with multiple targets, or else the effects of priming and anchoring will be diluted.

To Marshal Support for an Agenda or Change Program
If your goal is to change the culture of your team or organisation, for example, celebrating those staff who exemplify desirable behaviours (such as enhanced team-work, or resolving conflicts constructively) or new ways of working (eg. resource-sharing across divisions, breaking down silos, and so forth) and doing so consistently and vocally will prime your people to adopt the change.

People don’t resist change; what they resist is ambiguity, so it is critical that the messaging be clear and, above all, consistent. As with improving organisational performance, this will create the climate in which desired behaviours and new ways of working will be taken up by staff. In other words, staff will be primed for the change as new expectations are embedded in the fabric of day-to-day practice.

In addition, bandwagon bias is utilised here to influence people to do as others are doing. Those who are held up as models and feted by leadership set the pace and create a ‘slipstream’ in which others ride.

To gain support for a change program it’s not only important to highlight its benefits, but also to crystallise the risks associated with not implementing it. The behavioural economics findings suggest the latter will loom larger in peoples’ minds, reflecting people’s overweighted fear of loss.

For example, you may want to promote a change program that includes enhanced cost control; it can be to your strategic advantage when pitching the program to highlight the effects of not bearing down on costs (budget blowouts, reputational impact, worse budget cuts with job losses down the track over which we have no control compared to smaller cuts now which we can control etc.).

Negative reputational impact from not following your recommended agenda can be a highly persuasive factor, especially in the public sector where risk-aversion is often the order of the day.

To Improve Personal Performance
A personal effort to increase the number of gym visits will be more effective if I anchor it to a vision of a slimmer me.

I’m more likely to resist eating sweets and opt for a healthier alternative if I’m primed with a picture of myself fitting into some smaller clothes that are currently too tight. All the more so if I’m dieting with a friend where we can apply a mutual healthy peer pressure.

And I will make better use of my time and be less prone to procrastinate if I’m primed with a vision of previous work wins and a forward view of work well done.

All of these hold more promise than a straight battle of willpower against staying at home in the warm watching Netflix rather than going to the gym; choosing to eat an Iced Vo-Vo rather than a carrot straw; or making yet another cup of tea instead of getting stuck in to that report I need to write.

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So, where has this excursion into human error landed us?

It’s true that these kinds of human weaknesses can be exploited, or leveraged for straight commercial gain. I’ve outlined what I take to be strategic responses to utilise our shortcomings in constructive ways.

At their heart, efforts to marshal the human irrationality laid bare by behavioural economics represent our best attempt to overcome them. I contend that we deal with these foibles not by denying them or trying to tackle them head-on, but by rising above them and diverting them to productive ends.

And perhaps that’s as much as we can hope for. Leadership frames organisational efforts and creates the context for performance. Perhaps another facet of leadership – organisational as well as personal – is marshalling human energies (rational and irrational) for productive ends.

It’s a big ask, to be sure. So much of work and personal life is about contending with irrationality: relationship friction, decisions that don’t make sense, personal agendas … the list goes on. It’s exhausting.

Operating however at a ‘meta’ level where we get a handle on the irrationality, and channel it in directions which are productive might just be our best, rational response to dealing with the river of irrationality.

In any case, it beats being flooded by it.

Warm regards,

Director I Michael Carman Consulting

PO Box 686, Petersham NSW 2049 I M: 0414 383 374

© Michael Carman 2017