!DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Strict//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-strict.dtd"> Streamline Training & Documentation: How People Really Make Decisions

Monday, July 06, 2009

How People Really Make Decisions

An earlier post discussed the work of Nobelist Daniel Kahneman, one of the fathers of behavioral economics, a burgeoning area of research.

Behavioral economics departs from certain fundamental assumptions of neoclassical economics, notably the assumptions that
  • People invariably make rational decisions.

  • Markets are self-regulating.
In an article in the July-August 2009 issue of the Harvard Business Review, Dan Ariely, a professor of behavioral economics at Duke University, highlights findings from his research of particular significance for business managers.1

In his article, Ariely is looking to help managers "defend against foolishness and waste" that result from irrational behavior. He focuses on two behavior patterns that he has studied experimentally:
  • Cheating — People on teams tend to engage in mutually reinforced departures from ethical behavior. Managers need to counter this tendency by reminding teams of the organization's ethical requirements, a practice that has been shown to significantly reduce cheating.

  • Revenge — "If someone who works for you upsets a customer — even in ways unrelated to the job — you will very likely pay the price. Even the smallest transgression on the part of an employee can ignite the instinct for strong revenge against the employer, regardless of who is at fault."

    Experiments show that apologizing can significantly dampen the impulse to wreak revenge (assuming the transgression is not repeated to such a degree that the customer decides the apology is insincere). Companies can also monitor sites like Twitter to pick up complaints and respond to them promptly.
Ariely recommends that organizations invest in behavioral experimentation because doing so "can radically improve decision making and lessen risk." He offers several examples, such as running a pricing test for a new product.

Ariely explains that "the goal [of such a test] is not simply to find out the optimal price but also discover how people arrive at a decision to buy at that price." He goes on to caution that a company should "consider also how the introductory price could influence the perception of value for a long time." Think iPhone pricing, which started at $600 and has since come down dramatically.
1 For an extended treatment of Ariely's work, you can see his 2008 book, Predictably Irrational: The Hidden Forces that Shape Our Decisions.


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