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BEHAVIORAL ECONOMICS AND NUDGING

JAM VIEWS regularly attempts to take what politicians and academics claim to be complex and sophisticated economic issues and distill these subjects down to the simplistic, understandable concepts which they truly are.


For our members to run their organizations effectively, to vote intelligently, and to maximize their personal success, we must consistently explain how self-interests and behavioral economics are the keys - not much else matters. Forget the government employees who claim everyone will work for the greater good of mankind or whatever socialism flavor of the month. These are the ideas that have failed throughout history.

Therefore, this week I want to explain behavioral economics a little further, in order that our members have a foundation of these principles to counter Cousin Susie's silly opinions at Easter brunch after a few mimosas. People will always act in their own self-interests. People's filters will generate disparate responses based upon their different lives and experiences. Behavior economists categorize these issues into Heuristics (making decisions based on "rules of thumb"), Framing (using your filter), and Market Inefficiencies (mis-pricing and irrational trends).

In 2002, psychologist Daniel Kahneman was awarded the Nobel Memorial Prize in Economic Sciences for integrating psychology into economic science, and in 2017 economist Richard Thaler was also awarded this honor for "establishing that people are predictably irrational in ways that defy economic theory." In other words, if we desire to be great business leaders, leaders of humans, we must understand people's feelings and motivations in order to design incentives which point people toward our strategic goals. Make sense?

John is only going to spend all weekend on your sales report if he truly understands and believes how it will promote his own career. The blind-side offensive tackle is only going to train all summer protecting the quarterback if he has deep-down instilled the cause and effects which reward him personally. Humans, through kinetic energy, will remain on a path until a force acts upon them, and all data prove that positive influences on those self-interests are radically more effective than negative influences (fear and control).

These positive influences are called "nudges," as formulated in Cybernetics by James Wilk in 1995 and gaining more prominence in 2008 in Richard Thaler and Cass Sustein's book, "Nudge: Improving Decisions About Health, Wealth, and Happiness." These studies refer to influencing behavior without coercion as "libertarian paternalism" and the influencers are named "architects." A nudge may alter people's behavior in a predictable way without forbidding any options or significantly changing their economic incentives. To count as a nudge, the intervention must be easy and cheap to avoid.


Some examples of Nudges are:


1. Companies which have employees automatically "opted in" to the 401k plan to save for their retirement, as opposed to having to make a phone call. They may easily make the phone call to "opt out."


2. Having fruit at eye level and potato chips at the lower level which require the shopper to bend down.


3. Healthy snacks at the checkout counter instead of candy bars for impulsive purchases.


Some examples which are not Nudges, but Big Brother decisions (which they believe benefit us):


1. NYC Mayor Michael Bloomberg banning Big Gulps and trans fats in New York (Krispy Kreme left!).


2. Philadelphia imposing a large tax on sodas (Eagles fans drove to New Jersey to get Pepsi!).


As with all academics, behavioral economists use a thousand terms which over-complicate these theories, but this week we simply want to reiterate we must design our organizations, and our country, to support free people and free markets. This is how everyone wins. Great CEOs incentivize and reward their employees to think like owners, not clock-punchers. They help their customers truly understand why using their product or service greatly benefits the customer. Great government leaders, like Ronald Reagan the Great Communicator, help people understand how specific policies benefit their own economic and security interests. This is all behavioral economics.

Train yourself to always "put yourself in their shoes." Don' ask people to stay late, run in the charity 5k, or backup their teammates until you first build a culture and understanding in which they realize how this benefits themselves, and their families. Don't fall for ridiculous government policies and programs which redistribute people's money or opportunities by force or coercion. Support the local business startup which provides fifty new jobs instead of taxing high-income earners to give money to inefficient government programs.

People are "predictably irrational" and operate on feelings and beliefs, not classic mathematical models of supply and demand. Great leaders have always understood this. Economically incentivize everyone, even nudge them if you like, vote for government policies which create economic incentives - not redistributions - and don't worry about Cousin Susie's silly opinions. Nod politely, smile, and order her another mimosa - light on the OJ. Have a great week!


On one trip en route to a conference in Australia, Dr. Elwyn B. Berlekamp was asked by a border-control agent whether he was traveling for work or pleasure. He replied that he had arranged his life "such that there shall be no distinction between the two."



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