Behavioural economics examines patterns of human behaviour, often surprising ones, and has superseded the neoclassical model of the rational homo economicus. It is a discipline that provides valuable insights into how best to flourish in your chosen career, as Matthias Sutter explains
From starting a career to reaching the top as CEO of a company, business is about dealing with people, and therefore you’d better know how those people behave. It starts when applying for a position and interviewing for it. When I was younger, I thought my surname – starting with an ‘S’ – would be a disadvantage because queues are often formed alphabetically, including frequently the order of interviews for a job.
Research on how the order of performing in musical competitions influences the outcome has changed my mind. The later in the game, the better a candidate’s chances are. This is related to human cognition. Early candidates rarely get the best possible grades – because there could still come a better one. Later interviewees suffer less from this cognitive pattern of human decision making, thus increasing one’s chances to get a position. So, it’s not a bad idea to ask for a later interview.
Naturally, there are also many other factors that help finding a good job, not the least to have a good network. This can be a social network, but also personal and private networks. One reason for this is that most firms have implemented employee referral programs to fill their vacancies. In fact, referred people are those with denser networks and hiring them pays off for companies, as referred people are on average better educated, perform better and are more quickly hired, thus reducing recruitment costs. Yet, such employee referral programs have also a hitherto completely overlooked side effect, as Guido Friebel from Frankfurt University and his colleagues have recently shown.
Introducing employee referral programmes not only attracts good people into a company, but it improves the workplace satisfaction of employees already working for the company. Most importantly, such programmes increase the average tenure of these employees. This is a very valuable side-effect of employee referral, since in the current labour market it is a major challenge not only to get good people, but also to retain those already working in the company.
Behavioural economics not only helps starting a career, it also promotes our understanding of how important social preferences are in professional life. With social preferences, one often means that people don’t only care for themselves. Sounds trivial, but it has far-reaching implications. It is obvious to expect that if someone treats another person in an unfair way then this other person will not improve motivation or productivity. The evidence clearly supports this expectation. But what happens to a worker‘s productivity if a leader treats another worker unfairly? Does an unaffected worker care?
To study this question, Matthias Heinz, several co-authors and I rented a call centre and hired about 200 people who were supposed to work for two days doing phone interviews. By the second day, we had introduced three different conditions: one of them was that all recruits had to work on the second day. Then we laid off 20 per cent of hires and informed the remaining ones that for cost reasons we had to lay off the 20 per cent. In the third condition, 20 per cent of hires were dismissed, but the remaining ones were not informed about the reasons, other than that firing was decided on a random basis.
How did the workers we kept react, even though none of them was affected by any layoffs? In terms of the third set of circumstances, with the unfair firings, productivity fell by a staggering 11 per cent compared to the other two conditions. People care for others, even if they are not directly affected, and this has tremendous consequences for workplace behaviour.
Our study is related to the value of good leadership (firing people randomly is certainly not an example of it). How would employees in your company respond to the following questions about their leaders (on a scale from strongly disagree to strongly agree):
- The leaders communicate clearly what work performance they expect
- They offer regular coaching and tips on how to improve performance
- They actively promote an employee’s career
- They involve other people in important decisions
- They create a positive mood within the work team
- They are people you can trust
Mitch Hoffman and Steve Tadelis have published evidence from US hi-tech companies about the value of good leadership. The better the score based on the previous six questions, the higher the workplace satisfaction of employees. They also discovered that the longer employees stay in the company, the less likely an employee‘s departure is judged as ‘regrettable’ (instead of ‘good’) for the company.
Moreover, leaders with higher scores get larger pay increases. So, it pays off to take care of others, to promote and help them. This is something that traditional economics would have had a hard time to acknowledge. Behavioural economics has changed that and provides sound evidence for why understanding human behaviour and its patterns helps enhance your career.
Matthias Sutter is the director of the Max Planck Institute for Research on Collective Goods in Bonn, Germany and professor of experimental and behavioural economics at the universities of Cologne and Innsbruck. He is also the author of Behavioral Economics for Leaders: Research-Based Insights on the Weird, Irrational, and Wonderful Ways Humans Navigate the Workplace, published by Wiley, in which he presents 50 insights for a successful professional career.
Photo credit: ECONtribute, Markets & Public Policy
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