The Next Discipline - Applying Behavioral Economics to Drive Sustainable Growth

KEITH ROBERTS

Partner

Gallup Consulting

twincities@gallup.com

gallup.com

Topic: Leadership

An emerging management discipline based on applying principles from behavioral economics is helping Minnesota’s global business leaders unleash the power of true economic decision making. Behavioral economics emphasizes the role psychology plays in economic decision making. It encompasses the management science that empowers leaders to measure and manage the intersection of their employee and customer encounters. Nobel Prize winner Daniel Kahneman’s research suggests that economic decision making is 70% emotional and 30% rational. Coined as the “next discipline” beyond the neoclassic principles of supply and demand, behavioral economics is a leading indicator of B2B and B2C economic decision making.

Behavioral economics also impacts a wide variety of business and societal spheres. Wall Street analyst conversations are increasingly addressing the implications of behavioral economics with corporate executives. President Obama’s administration is the first administration to have a behavioral economist (Assistant Treasury Secretary-designate for Economic Policy, Alan B. Krueger) on his advisory team.

Applied Behavioral Economics

Applied behavioral economics holds the promise of realizing breakthrough improvements in employee productivity, customer retention, profitability, and sustainable growth. Metrics based on behavioral economics — employee engagement and customer engagement — provide true leading indicators of future financial performance. When measured and acted on, these indicators demonstrate powerful levers of sustainable financial performance. Organizations applying these principles have outperformed their competitors by nearly 85% in sales growth and by more than 25% in gross margin.

Deploying the necessary metrics is the first step, but focusing an organization’s strategy on how human nature affects the employee-customer encounter is even more essential. Every organization should be focusing their human capital management on identifying each employee’s unique strengths (the ability to ultimately lead to the engagement of your most valuable asset — your customers. provide consistent, near-perfect performance in a given activity), then use this knowledge to position individuals in roles that allow them to be consistently successful. This will permit the company to build a solid infrastructure that will lead to consistent and sustainable performance.

Outcomes to Date

Gallup has implemented this system for the past 40 years, and has discovered the following key observations.

1. Customer and employee behaviors are influenced more by emotion than reason, and these emotional dimensions can be measured and managed.

2. Employees have a tremendous impact on customers’ emotional engagement, for good or ill.

3. There is vast variation in both employee and customer engagement from location to location and team to team within the same company.

4. Engaging employees is contingent on identifying the unique strengths they bring to their roles, positioning them for success by ensuring their strengths fit their roles, and by providing them with an engaging workplace and manager.

Conclusion

Building on a 70-year history as the world leader in studying human nature, Gallup’s approach starts by understanding and capitalizing on the true drivers of economic decision making. These drivers include selecting and positioning employees for success, managing and motivating them, accelerating their development, and unleashing their capabilities for innovation and productivity. By honing in on your employees, these drivers will