Your Customers, Employees, Managers and Stakeholders are all Irrational: Behavioral Economics

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Cognitive Bias > Best Practices > Your Customers, Employees, Managers and Stakeholders are all Irrational: Behavioral Economics

Your Customers, Employees, Managers and Stakeholders are all Irrational: Behavioral Economics
Jaap de Jonge, Editor, Netherlands
Most writers treat Cognitive Bias as a negative phenomenon that explains why humans (managers) are incapable of making rational decisions. In their view cognitive bias is frustrating rational decision-making.
Dan Ariely, Prof at Duke University, author of 'Predictably Irrational: The Hidden Forces That Shape Our Decisions', in last HBR is introducing another view and proposes to replace rational economics (based on the assumption that humans fundamentally make rational decisions and that the market's invisible hand serves as a trustworthy corrective to imbalance) by behavioral economics (based on the assumption that humans fundamentally make irrational decisions and are motivated by the invisible hand of unconscious cognitive biases).
In behavioral economics, customers, employees, managers and stakeholders are assumed emotional, myopic and easily confused and distracted. Experimenting with things such as bonus schedules, product pricing, consumer choices and employee behavior are crucial to predict behavior. Ariely warns that the BE process is time-consuming, delicate and may not always provide clear results apart from showing that our initial assumptions were wrong.

Human Emotions
Colin Downey
Behaviours stem from the physical state of wanting to avoid pain and gain pleasure. Many decisions become irrational as you are dealing with human emotions and the desires of the person making the decision. In their mind the decision may be rational in others it may seem irrational based on who's desires are being fulfilled.

Economically People are Rational in General
Gonca Telli Yamamoto
It is important to take care of cognitions for managers of companies or other institutions. As economically people are rational in general, or when looking at a price. However when it comes to the personal life and negotiations it is mostly irrational because of the personalities which also a little bit explains the behavioral economics.

Behavioral Economics
Judy Nelson
I've been thinking a lot about the BE article since I first read it. The continuing revelations of brain research may make the conversation moot eventually. Until we fully -- or at least much better -- understand our brain chemistry, I think there is the ever-present danger of absolutes. As the authors of "Crucial Conversations" point out, this is an example of "Sucker's Choice" -- it's either one or the other. It may be wiser to try to avoid Sucker's Choice and look at this as either/and. In other words, human beings are not so easily categorized. Fortunately, they are also able to modify behaviors with the right motivation, training and feedback. Otherwise, the term "management" can easily be replaced by manipulation and my experience of 30 years as a CEO tells me that most employees are capable of choosing behaviors.

Not Economically Rational
If you read Dan's book and his experiments, you will see that customers are not rational even economically, that is, pertaining to price. Presumably this is because we use heuristics which worked once but are no longer so successful. Much of this is because we assess things in a relational way rather than in absolute terms - which is presumably how we manage complexity.

Cognitive Behavior in Money Management
Ronald Gross
I believe most members will find "The Seven Deadly Sins of Money Managers" written by James Montier to be invaluable. Although there are differences between money management and corporate management-the similarities are startling.

Going for the Gain
Richard Cushing
Dan Ariely should read Ludwig Von Mises' HUMAN ACTION, if he has not done so already. Human beings will ALWAYS take the action that they deem to be "gain" for them in EVERY circumstance. Even the individual that sacrifices his own life to save another does so because doing so -- in some way or other -- is GAIN to him or her.
However, it is NOT POSSIBLE, in every decision, to know the ACTUAL OUTCOME of the decision. The fact that an individual BELIEVES ex ante that a certain action will bring GAIN does not mean that taking that certain action will IN FACT bring GAIN ex post.
As a result of this UNCERTAINTY and because the outside OBSERVER cannot know absolutely what is measured as GAIN by any other individual, certain actions may SEEM TO BE IRRATIONAL. However, the fact that an action seems to be IRRATIONAL to me (as an observer) does NOT make the action IRRATIONAL IN FACT to the actor.

Cognitive Capacity
There is a new trending of awareness in this arena. I've witnessed how 'present' conversations transcend past or future concerns to bring a powerful activity into the cognitive realms. Possibility coagulation occurs as unreasonable or irrational linear thinking disappears. Non linear cognitive awareness overwhelms the senses initially, but the result is a new living awareness of 'now' that opens the mind/heart to listening at levels previously never known possible. It is a practice that think tanks and decision makers engage to transform.
The practice cannot be learned through reading or any 'thinking' process to date. It is experiential and engaged in the moment by a skilled facilitator, adept in the art and science of being.

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