Let the rational decisions come from you

If you’re tempted to argue that people act in their own self-interest, you’re mistaken. Richard Thaler, who was recently awarded the 2017 Nobel Prize in Economic Sciences, introduced to economic discussions the idea that humans often do things that in fact go against their own good.

As the father of behavioural economics, Thaler is a pioneer in applying psychology to economic behaviour.

Through his work, he has shed light on how people make economic decisions, and our curious tendency to reject rationality in that decision-making process.

As absurd as it might sound, the fact is, we reject rationality more often than we care to admit.

Why do we eat too much when we know it’s not in our best interest to do so? Why don’t we exercise enough or save sufficiently? Why do we waste time?

Do you believe that you act rationally, in your own best interest?

The question is relatively new. Since Adam Smith introduced the concept of the “invisible hand” in his magnum opus, The Wealth of Nations, in 1776, economists have assumed that we behave rationally and make decisions on the basis of all of the information available to us.

He reasoned that an economy can work well in a free market scenario where everyone works in his or her own interest.

Smith suggested that if people were allowed to trade freely, self-interested traders present in the market would compete with each other, leading markets towards positive output with the help of an invisible hand — people acting rationally.

The premise goes like this: In a free market scenario where there are no regulations or restrictions imposed by the government, if someone charges less, the customer will buy from him. Therefore, you have to lower your price or offer something better than your competitor.

Whenever enough people demand something, it will be supplied by the market and everyone will be happy. This way, the sellers make money and the buyers get better goods at the desired price.

However, Smith’s theory is flawed. Maybe the economy could work the way he described if people acted in their own interest, but people don’t.

By incorporating psychology into the economic debate, Thaler explained that people behave in ways that are not only irrational, but that even go against their best interests. For example, people simplify financial decisions by focusing on the narrow impact of each individual decision rather than on their combined effect.

You may place a higher value on a holiday experience while struggling to save for retirement. Or, you might spend money that you don’t have because you want something today. This thinking spills over into your workplace too, and raises the question: How can you help your employees make more rational decisions? Thaler’s conclusion is that we need to nudge people to act in their own best interest. If you want people to do the right thing, make it easy.

Opportunity to opt out

Instead of making the right decision optional, take the decision yourself and then give people an opportunity to opt out. As an example, this has worked well with pensions enrolment. The nudge has increased has driven the enrolment rate from 42 to 73 per cent.

I’ve always wanted to take a noble view of employees and believe that they act rationally and in their own best interest. As Thaler points out, however, that it simply is not true. Rather, employees consistently make illogical choices that sabotage their interests.

In the end, we are not nearly as rational as we like to think we are, and this is a reality that leaders must learn to adapt to.

In fact, if you apply Thaler’s Nobel Prize-winning insights to the way you lead, you’ll be able to nudge your employees towards greater self-interest and rational thinking, boosting productivity in the process.

Thaler started out by making a list of dumb things that people do and it was through this simple exercise that he made his discovery. The chances are, you would have no trouble creating such a list yourself.

The question is, what are you doing about it? For the good of your organisation and the people within it, give your employees a nudge!