Thinking Business photo from ShutterstockCompanies are constantly struggling to find ways to motivate and engage their employees; behavioral economics may be able to help. This field of study examines the psychological factors that effect the economic decisions we make. People tend to make decisions based on intuition rather than on logic. The problem with this is that many times our intuition is wrong! Understanding behavioral economics may help companies improve their management by getting insights on how to motivate and engage employees and how to structure more efficiently run businesses.

I recently spoke with behavioral economist, best-selling author and professor Dan Ariely about his research on why people lie, procrastinate, cheat, take risks and give big bonuses and its link to performance and motivation at work. In his book “The Upside of Irrationality,” Ariely exposes the irrational side of human decision-making and the science of behavioral economics.

Ariely is a big proponent of testing his hypothesis and believes that our assumptions shouldn’t be taken for granted-they should be questioned, challenged and tested in normal experiments. The delightful part of his research in behavioral economics is that it gets you to think about the idiosyncrasies, quirkiness and irrationalities that affect our decisions. His insights are enriching and enlightening and could lead companies to make better decisions as managers learn to focus on things that matter over weighing things that are easy to measure.

Ariely’s advice is especially useful for entrepreneurs and managers who grapple with motivating and engaging employees who they’ve heavily invested in. Understanding human nature could help companies foster loyalty, keep employees honest and inspire them to contribute to the firm. Creating an ethical culture with good leadership, developing clear rules about conduct, tapping into the positive sides of your employees’ egos and encouraging people to take risks in helping others are a few ideas he poses for increasing workplace productivity and happiness.

How Can You Create A Culture That Encourages an Ethical Climate?

Ariely says that people cheat more when they feel they’re being treated unfairly and when they feel everybody else is cheating. His studies showed that once people start to cheat they develop a pattern in their behavior that leads to more cheating. Also, when people tell small lies or cheat a little they tend to justify their cheating. He adds some other surprising facts about cheating; more people will cheat a small amount than steal large amounts and people don’t cheat more when it comes to getting more money for a task. People also cheat more when it’s on someone else’s behalf, justifying their immoral behavior because it was intended to help another person.

He suggests that managers and entrepreneurs could reduce their losses from employees who steal by developing strategies to curb the petty thievery at work. Sometimes a simple prompt about a code of ethics is enough to disrupt this negative behavior. When upper management upholds and models high ethical standards their behavior gets transmitted to the rest of the employees. This top down approach is essential to combating unethical behavior in the workplace.

Should You Develop Clear Rules About Conduct?

Ariely says that management shouldn’t expect employees to know their code of ethics. Details and specific rules are essential. It leaves no room for an employee to say, “Why didn’t you tell me?”

Should Pay be Tied To Performance and Do Big Bonuses Work?

Management often assumes that there’s a positive link between the magnitude of the incentive and employees’ ability to perform better. Ariely’s experiments show that in reality, there is an inverse-U relationship between performance and incentives. In fact, adding incentives can backfire and reduce performance. Up to a certain point, they motivate us to learn and perform well. But beyond that point, motivational pressure can be so high that it actually distracts us from concentrating and carrying out tasks.

Studies show that the effect of high reward on performance depends on the level of the mental effort a task requires. The more cognitive skill involved in completing a task, the more likely that very high incentives would backfire. When people feel they’re under pressure they often become more distracted and perform worse at their job especially when their job is mentally challenging.

Ariely suggests that a better approach to high bonuses or a straight salary might be to keep the motivating element of performance-based payment but eliminate some of the unproductive stress it creates. To achieve this, we could, for example, offer employees smaller and more frequent bonuses.

How Can You Increase Productivity and Efficiency?

Sometimes, it’s difficult to understand where our work is going or what its long-term benefits are. It’s hard to stay motivated if our work feels useless, unappreciated or meaningless, even if we’re being paid. He emphasizes that what really motivates people at work is having the feeling that they’re doing something useful. He uses the example of blogging to explain the hope or need people have to be heard, even if it’s only one person who’s listening. Millions of people blog for free suggesting there’s a strong motivation for people to have a verifiable audience who value what they have to say. Ariely points out that work (not just pay) provides certain satisfactions and knowing this can help management develop systems that fill this need.

People Tend to Work Much Harder When:

  • They’re focused, challenged and engaged
  • They feel a part of creating value
  • They’re rewarded for imagination and creativity
  • When their contributions are recognized
  • When their self-esteem is enhanced because they see their work is making a difference

Ariely’s experiments highlight the fact that human motivation is far more complex than merely being paid to work. Finding identity and meaning in work are essential ingredients for employees to feel engaged. Companies who seek to reduce turnover will provide meaning through creating a sense of completion of tasks and acknowledging well-done work. Employees may be more productive if they take pride in their work.

Should We Ever Act on Our Negative Feelings?

Sometimes the best thing to do is to refrain from a behavior instead of relying on your intuition. Ariely says that there are times you might want to vent your anger to your boss or to another employee but the best response is no reaction. He explains the root of impulsivity is that ‘we value the present more than the future.’ We come up with an answer based on intuition and don’t feel a need to check ourselves. “Our intuition is so powerful that we create a systematic approach from what we think we know to what we really know.“

When choosing between two good choices for instance two good employees or two good suppliers we often focus on things that are easy to measure rather than what really matters. The problem Ariely explains is that we tend to over weigh things that are inconsequential but easy to see and under weigh things that really matter. He encourages that you try to project forward and imagine the negative outcome of your rebuke. Ask yourself, is it worth it? Will my venting actually improve the situation or could it cause more harm? This could help you control yourself from making a decision you later come to regret. Try to find a mentor, someone who has objectivity and experience in that area in order to gain more perspective on the best way to respond. If you’re not sure, your fallback should be to say nothing. It’s always better to be silent than to react impulsively.

There’s an upside in postponing a response especially when it comes to giving rebuke. Once your words are out it’s much harder to take them back. For better or worse he quips, ‘emotions are fleeting. If we react impulsively in response to what we’re feeling, we can live to regret our behavior for a long time. If we send a furious e-mail to a boss, tell off someone we love or buy something we can’t afford, we might regret what we’ve done as soon as the impulse wears off.’

Should We Do Favors at Work? The Upside of Irrationality

It’s not always easy to accept to do favors especially when you’re asked to do them all the time. Ariely shares his theory of luck to shed light on the upside of taking a chance to do things for others at work when there’s no guarantee for reciprocity. He admits that there are times when things haven’t worked out as promised from the person who requested a favor. But he still enjoys taking the risk to offer others’ help, acknowledging several upsides for being a giver and doing it without calculating what you’ll get in return. These chance encounters can enrich your life in unexpected ways; you could meet people and be introduced to ideas you otherwise might not encounter.

It’s the surprises that result after freely giving to someone who makes life interesting. For instance, managers who mentor a new hire may be surprised that they could also learn something valuable and gain a loyal protégé. Offering free consulting to a stranger in a waiting room could lead to someone sending you unexpected business. Many people agree with Ariely saying that frequent and small giving acts increases their sense of purpose and well-being and often times there is a tangible payback for the giver. For instance, when a seasoned employee mentors a new hire, the younger employees often reciprocate by teaching them valued skills in social media and in using technology.

When it comes to our motivations, he writes, we are less like “hyper-rational Mr. Spock” and more like the “fallible, myopic, vindictive, emotional, biased Homer Simpson.” Given these weaknesses, Ariely wants to help us break through our negative patterns of thought and behavior to make better decisions about our money, our relationships, what really motivates us on the job and our happiness.

His entertaining experiments shine a light on how we fail to develop products, services and businesses that are geared towards the real needs of consumers and employees. The results that came from Ariely’s experiments provide compelling insights on how businesses can increase their efficiency and improve morale through knowing more about human behavior.