It’s time consultants stopped thinking of people and companies as hyper-rational, robotic entities. With an improved understanding of how human psychology affects decision-making, consultants can give their clients even more value than they bargained for.
What is behavioural economics?
Economics is defined as the study of the interactions between various individuals, groups and organisations as they attempt to allocate scarce resources in a way that maximises their satisfaction. The field of Behavioural Economics aims to provide insight into the effects of social, cognitive, and emotional factors on the economic decisions of individuals and institutions.
What are cognitive biases and how do they affect our economic decision making?
Kahneman and Tversky, two prominent behavioural economists, realised that people have two systems of thinking. There is the more developed system that is deliberate and rational, slower and more calculated. It requires a lot of energy to use this system and it is “lazy”, rarely playing an active part in our thought process. But there is another system that is intuitive, effortless and fast. We’d like to think we are using the first system but it is this second system that is far more powerful and, more often than not, responsible for the way we think. This fast, intuitive system is making thousands of decisions every day, without us being conscious of them.
Problems arise when we allow our fast system to make decisions that we should really be processing through our slow system. The systematic mistakes that arise from using the wrong thinking method are known as cognitive biases and they are a crucial part of behavioural economics.
What does this mean for Management Consultancy?
Behavioural Economics has been utilised in the marketing industry for a long time and it is beginning to gain ground in the public sector. However, too many businesses still work on the assumption that their clients, suppliers and employees act in a purely rational manner. Knowing the circumstances in which people systematically act irrationally can help companies improve their service, increase revenue, and become more efficient.
If management consultants develop a strong understanding of behavioural economics they can use this to help the firms and individuals they serve. It is time we devote time and attention to the field.
There are a few consultancies that have started to use principles from behavioural economics to inform their work but it is not nearly as widespread in the industry as it should be. Consultancies that embrace behavioural economics by integrating its insights into their strategic advice will help their clients exploit massive unlocked potential.
How can you use Behavioural Economics?
To involve Behavioural Economics next time you are designing a solution for a client, it might be useful to keep the following key cognitive biases in mind:
- Confirmation Bias: We tend to seek information that will confirm our point of view, while ignoring opinions that threaten our views. Consultants should challenge their clients to think differently.
- In-Group Bias: We often overestimate the abilities and the value of those closest to us and similar to us. Draw on the opinions and inputs from individuals from diverse backgrounds and skill sets.
- Status-Quo Bias: We can sometimes be wary of change and often to do things the way we’ve always done them. Consultants know this all too well!
By Neil Mathew, Capita Consulting