I/O, HR and BE – 6 Letters to Account for the Fact that People Are Basically Impossible Part I

In this article, Jordan Birnbaum, Chief Behavioral Economist at ADP explores how behavioral economics affects the decision-making process and why it’s crucial to the practice of industrial-organizational psychology and HR.

Industrial / Organizational Psychology (“I/O”) is now more than a century old.  Its roots go back to around WWI, as militaries tried to determine how best to assign new recruits.  Questions about who should be in the trenches, who should be driving tanks and who should become engineers were exceedingly important. The powers that be figured there had to be a better way than asking new soldiers, “Well…what would you like to do.”  So, the concept of running assessments and assigning people jobs based on their competencies was born. 

From there, I/O began to encapsulate all aspects of human behavior in organizations, as the impact of psychological influences on individuals, and their subsequent relationship to organizational outcomes became abundantly clear.  Today, I/O incorporates the sciences of everything from leadership, motivation, organizational culture, organizational development, training, selection, compensation, and everyone’s personal favorite, performance appraisal.

Human Resources (“HR”) has followed a similar historical path in function, but was often under different names and points of emphasis, usually reflecting what was happening in society at large.  In the late 1800’s, it was called “Industrial Welfare,” in part as a response to the abysmal working conditions that led to the rise of the first labor unions.  In the early 1920’s, it was “Recruitment and Selection,” and in the 60s and 70s, “Industrial Relations.”  It wasn’t until the 1980s that the term “Human Resources” gained widespread use.

Modern HR came about largely as a function of strategic planning and risk management, particularly in light of new legislation and administrative requirements, globalization, and rapidly evolving technology and markets. Today, HR’s function remains largely intact, although the terminology seems to be falling out of favor.  Perhaps it’s because people don’t like to think of themselves as gigawatts or cantaloupes.  Resources, after all, are supposed to be for us, not be us.

The new kid on our “alphabet block” (see: title of this article) is Behavioral Economics (“BE”).  Unlike classical economics, which focuses on how people ought to behave (when driven by rational self-interest), BE focuses on how people actually behave, especially when that behavior doesn’t make sense. As a result, BE is often considered the science of irrationality, and its practice is heavily focused on human decision-making.  Many people tie the birth of BE with the emergence of Prospect Theory (Tversky and Kahneman) in the late 1970’s, which demonstrated the impact of risk on decision-making, providing concrete evidence that people do not always make rational decisions (as though evidence of that was necessary). 

Multiple discoveries since of biases (mental tendencies) and heuristics (mental shortcuts) have added fuel to the “irrational” fire, as each demonstrated how human beings have a tendency to abandon rationality at crucial decision points, instead relying on unconscious or emotionally driven “gut feelings.” While the crucial importance of classical economics was never in question, the need for a new emphasis on “humanness” in decision-making was necessary, if for no other than reason than to better predict how human beings would react to, well, anything.

But the explosion of interest in BE came about as a result of the book Nudge (Thaler and Sunstein) in 2008.  It’s about more than the mere existence of BE, and the categorization of the various ways in which people are prone to irrationality – it’s about how BE can be used to anticipate irrationality and construct interventions to help people make better decisions for themselves.

Probably the crowning achievement of BE comes from the world of HR – 401K participation.  Historically, people were invited to “opt-in” to their 401K programs.  In other words, it was necessary to take a proactive step (like checking a box) to become a participant.  As a result, 401K participation was troublingly low – typically in the range of 26%-43%. But during the 00’s, a BE intervention began to take hold.  Companies began to offer “opt-out” sign-up for 401K participation. Now, people had to check a box not to participate in the 401K program.  If they took no action, they were in.  The effect was dramatic – in most cases, participation rates rose to above 85%.

Now, is it rational that the difference between checking a box vs. not checking a box would impact retirement savings by 200%-300%? Of course not!  But is it human?  Most certainly!  Human beings tend to be passive decision-makers, also known as prone to the status-quo bias.  As a result, we tend to leave things as they are, including the defaults for choices we make, even for something as important as retirement savings.

With the success of these 401K interventions, the appetite for “nudges” grew exponentially, and nudges began to find their way into a whole breadth of areas: tax policy, health insurance plans, environmental policy, and education to name a few.  The British government famously launched a “Nudge Unit” in 2010, and the Obama administration followed suit in 2015.  The era of behavioral economics is officially underway.

But what does any of this have to do with HR and I/O Psychology? It may help to consider what HR and I/O are intended to accomplish.  Practitioners want to help leaders be at their best, help motivate and influence employee behaviors, help organizations adapt and change as necessary, help grow the organizations through effective hiring, help retain that talent and develop it, help drive collaborations across teams, help induce fair evaluations of employee performance, help ensure compliance with laws and regulations, and help support a healthy and productive culture.  (Wow – when do these people sleep?!)

Despite the incredibly broad range of goals and activities, there is a common thread that connects them all.  They all are ultimately about influencing people – their behaviors, their attitudes, their beliefs, and their decision-making.  And how do they drive that influence?  Through communications, through program design, through tool design, and through policy.  And all of that basically boils down to one thing – making predictions about how people will react.

Every email you write is a prediction about how someone will respond. Every program you design is a prediction about how people will participate.  Every tool you create is a prediction about how it will be used.  And every policy you craft is a prediction about how it will influence behavior.

So, if we’re making predictions about future behavior, should we assume that people will be driven by rational self-interest?  (If you answered “yes” to that question, then I am an awful writer.)  Every time we predict how people should react, we are making a terrible mistake that will significantly increase the chances of failure.  But if we predict how people would react, completely independently of rational self-interest, our chances of success increase significantly.  And that is why BE is so crucial for the practice of I/O and HR – without, we’re designing for people who don’t actually exist.

Towards that end, this piece begins a series in which we’ll be looking at how BE can inform and improve some of the fundamental pillars of I/O Psychology and HR.  In our next piece, we’ll focus on talent acquisition, and consider how BE can help us form better recruitment strategies, execute more impactful interviews and evaluations, and make the best hiring decisions for our organizations.