Behavioural economics - a definitional step towards your guts.

This is an article published on TOI online, under coroporate dossier:

If you are offered two jobs – to be the CEO of Chrysler (this interview took place before the company announced it is filing for bankruptcy ) or the CEO of Toyota, which one would you choose? If you immediately picked Toyota just as you finished reading the question , hang on for a minute and think again.
Remember that irrespective of which one you select , you would need to improve performance by 10% or else the board and shareholders will want a new CEO. “At Chrysler, you have an unproductive workforce and are making cars people don’t want, where as at Toyota, all the processes that you would possibly implement at Chrysler to boost productivity are already in motion,” says Jim Clifton, global chairman and CEO, Gallup Consulting.
“At Toyota, the CEO needs something new to take the company to the next level, and that is when you turn to behavioural economics,” he says.

Behavioural economics goes against the essence of what classical economists swear by — that man is a rational being and hence, all his decisions will be rational — it didn’t get it’s due till a few years ago. Newer studies show that only 30% of decisions made by people are actually ‘rational’ , with the balance 70% being classified irrational or emotional. According to him, behavioural economics has really come into its own in the last few years, simply because all the other processes to improve productivity, right from Six Sigma to Business Process Reengineering and Just in Time, have been hugely successful.

Citing the example of US electronics retailer Best Buy, he says, the company first found how many employees had a ‘high level of engagement’ at work. “This means that rather than just giving the customer what he asks for, the employee was likely to ask him why he wanted it and suggest alternatives/ additional things he could buy as well and in the process make a bigger sale,” Clifton explains. After mapping where each employee was on the engagement scale, the CEO then doubled the level of engagement required. “The best way to make sure that it works is to have a system of mapping it that is as accurate as your accounting practices, and to link it to compensation,” he says. At Best Buy, a part of the compensation is linked with engagement, which Clifton feels people have far greater control over as compared to profitability. The end result: its nearest competitor, Circuit City, filed for bankruptcy.

Smart leaders are recognising that to take the company a notch higher, they need to look beyond the traditional theories, and behavioural economics appeals to people like them. Behavioural economics has no use in a ‘lousy company’ . It would work best in a company that has already straightened out its systems and processes and is now looking at newer ways of growing, ideally, with a minimal investment.

When the going is good, everyone will grow well. As the sector matures, companies need to look at new ways of retaining customers, finding new ones and most important, continuing to grow,” he says. According to him, most people rank towards the middle of the scale, and simply getting them to realise their full potential can result in a 30-40 % growth for the company.

Final thought. If you think that the impact of behavioural economics is restricted only to the boardroom , think again. It’s now a well established fact that US President Barack Obama relied heavily on his team of behavioural economists to get people to get out and vote in record numbers. And it seems to have worked just fine for him.