Behavioural Economics: What HR Needs to Know

If traditional economics assumes humans are completely rational, always acting in their own best interests, then behavioural economics (BE) shows us that reality is much more complex. In real life, we make counter-intuitive decisions, act against our own preferences or patently disregard the economist’s assumed best option.

BE takes this actual human psychology into account, working instead with our innate ‘irrationality’ to develop insights which reflect how we actually behave – not just how we assume we should. It acknowledges the importance of context and recognises the fundamental gap between intention and behaviour that so often leads us astray. It’s evidence-based and offers low-cost solutions to tricky problems by ‘nudging’ us towards better decisions, making it as easy as possible for us to act in our own best interests.

Why does it matter to HR?

For HR and management in general, the implications of BE are huge. So many business practises are based in outdated models of human behaviour; how we hire, incentivise, support, engage and develop employees to name a few. Humans don’t always make effective decisions, choose to take up personal development opportunities, or improve performance based on a pay rise, yet our performance management, L&D, and reward practices continue to assume that we do. Shifting the focus from how people ‘ought’ to behave, towards what they actually do – and how this can be influenced for the better – is a step change in how to approach management and HR.

Where are we now?

Kiddy sees many organisations using BE to dramatically reshape how they design products, influence customers, or improve sales, but only a few market leaders are applying the insights internally to transform how they interact with their employees and manage their human capital. The cost of not doing so is high, often hidden in wasted development budgets, badly designed processes, and poor commercial decisions. Businesses that recognise and act upon this new ‘frontier’ in HR will therefore reap the dividends in terms of better performance, improved efficiency, and happier employees.

What next?

HR practitioners can improve the ROI on critical programmes by utilising the insights of BE to design initiatives that work with, not against, the grain of human behaviour. Small and cost effective changes, such as adjusting the way you communicate with and present options to employees, can have radical effects – and often explain why previous interventions may not have been as successful as you had hoped.

Kiddy works with clients to understand and shape the context in which decisions are made, which can help to ‘nudge’ employees towards better decisions such as the uptake of L&D opportunities, or create the conditions for more effective decision-making.  We also help clients to implement evidence-based HR practises by rigorously testing what works in your context to enable you to develop interventions with the best opportunity for success.

To find out if BE could be the next step to transforming your organisation, contact us.