September 16, 2010

Secrets of the Moneylab: How Behavioral Economics Can Improve Your Business

I have now started to read Secrets of the Moneylab: How Behavioral Economics Can Improve Your Business by Kay-Yut Chen and Marina Krakovsky. A rather important change has been (and is still) taking place in the science of economics in the last few decades. In 2002, the Nobel prize was awarded to psychologist Daniel Kahneman "for having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty" and to Vernon L. Smith "for having established laboratory experiments as a tool in empirical economic analysis, especially in the study of alternative market mechanisms". The increasing popularity of the experimental method in economics had led to -and is further leading- to importants insights about what motivates human beings and how they decide in matters of money.

Traditionally economic models were based on a model of human behavior which is called the 'rational man' or 'homo economicus' model. This model held that humans were purely rational, narrowly self-interested, labor-averse and opportunistic actors who have the ability to make judgments towards their subjectively defined ends. This rational man model was not based on research but based on intuitions and philosophical considerations. Now that economists and psychologists have started to systematically test these notions, they have turned out to be very limited in scope, one-sided, partly plainly wrong and unfounded. Of course, we all can be rationally driven, selfish, lazy and dishonest from time to time but there is now ample evidence that we often can be emotionally driven, surprisingly altruistic and fair and intrinsically-motivated. Also, we are often less rational that the rational man model would have us believe in the sense that our rationality can be strongly limited by many types of cognitive tendencies and biases and by lack of information.

There have been many books about the transformation that is taking place in economics. Some personal favorites of mine are several books by Robert H. Frank (for example Luxury Fever, What price the moral high ground?: ethical dilemma's in competitive environments) and a book by Eric Beinhocker (The Origin of Wealth). Several recent bestsellers also have been heavily inspired by advances in behavioral economics (for example Predictably Irrational: The Hidden Forces That Shape Our Decisions by Dan Ariely, How We Decide by Jonah Lehrer, and Drive: The Surprising Truth About What Motivates Us by Dan Pink).

I have not finished reading it, but Secrets of the Moneylab seems like an excellent contribution to the field. To many people it has not been very clear what the practical relevance of experimental behavioral economics could be. But this book has a very practical focus. Also it can contribute to a more evidence based approach to business. From the book description on Amazon: "First author Kay-Yut Chen started behavioral economics research at Hewlett-Packard, founding a "moneylab" at the company. His groundbreaking research into human behavior has led to tangible results for HP. In fact, he has saved the company millions of dollars by showing how changing the right conditions can make people behave very differently. The book offers practical lessons being put to use right now at HP and other leading companies. It explains, for instance, how to: 1) Use incentives to influence employees, suppliers, and buyers, 2) Determine whom to trust, and how much, 3) Reduce the negative effects of irrational behavior by noticing patterns that don't seem logical-but are utterly predictable, 4) Overcome the human tendency to game the system, 5) Profit from motives beyond money".

2 comments:

  1. Thanks for the introduction to the book. I will look out for it. I like Kahneman's work, so this should also be interesting.
    Cheers, Sharon

    ReplyDelete

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