The Rise of Behavioral Economics
"Give me a one-handed economist," demanded a frustrated Harry Truman. "All my economists say, 'on the one hand...on the other'".
Economics, although arguably the most influential social science, has long been hampered by significant disagreements between the different "brands" of economic theory. As a discipline, its most fundamental problem has been that various theories, based on different (largely untested) assumptions, can lead to wildly different conclusions. Hence, Truman's frustration.
Although it has been a long time in the making, the sub-discipline of behavioral economics is finally beginning to make progress on addressing this fundamental problem within economics. One of the unifying themes of behavioral economics is the importance of observation and testing of assumptions. While there is still considerable controversy among academic economists about the legitimacy of behavior economics, it is beginning to take hold in the popular press and is having an impact in the business world.
Google, HP, and Yahoo!, for example, have experimental economics labs. This enables them to safely test models before launching them in the marketplace (Netflix could have benefited from such a lab!)
So what are the most important implications for those of us who work on the people side of the business? For a highly entertaining way to answer this question, we'd recommend that you watch Moneyball, which is about applying the principles of behavioral economics to the business of baseball. (You know your discipline has arrived when there is a movie about it, starring none other than Brad Pitt.)
Some of the lines in the movie (paraphrased below) could have been lifted from McBassi's day-to-day client engagements in which we are applying the principles and insights of behavioral economics to the business world:
- "To get better answers, you have to ask better questions."
- "You don't have to have been in the business for 20 to 30 years to have important insights about it."
- "People are running the business on fundamentally wrong assumptions."
- "The reason people are resisting it is because it is going to change how they make a living."
In short, an analytic approach - fueled by the growing influence of behavioral economics - is beginning to have truly profound impacts on business. The laggards risk being the losers.
