Make FI$Cal work for you. Start now.

The Nobel Prize In Economic Sciences Highlights How Poor Decision Making is Globally Impacting Businesses’ Ability to Grow

Congratulations to Dr. Richard H. Thaler, University of Chicago, for being awarded the 2017 Nobel Prize for Economic Sciences for his contributions to behavioral economics.

Thaler’s theory of limited rationality and mental accounting

Thaler points out that people are naturally inclined to focus on the narrow impact of each decision, rather than their overall effect. Within a strategic decision-making context, strategies are often created in isolation, without taking into account the potential impacts of other initiatives taking place in the organization.

Companies that neutralize these biases and drive more measured decision processes will have the definitive competitive advantage of accelerating their business by maximizing the potential of every investment they make.

The significance of this award, supported by over 20 years of ongoing research and data from multiple interdisciplinary sources around the world, is a clear indicator that Fortune 1,000 companies that will thrive in the 21st-century economy will be those that remove biases that lead to funding poor and unproductive strategic decisions.

Companies that neutralize these biases and drive more measured decision processes will have the definitive competitive advantage of accelerating their business by maximizing the potential of every investment they make.

M Corp supports Dr. Thaler’s research and has applied these increasingly powerful behavioral economic models into its subscription-based execution capability measurement platform, named ReM Score™. ReM Score uses many of the same principals to measure a company’s ability to execute and deliver on every strategic initiative it is considering before the investment is made.

Address root cause

By addressing root cause “Human” decision issues that prevent strategic initiatives from succeeding, ReM Score provides executives the data necessary to prioritize only those initiatives that have the capacity to meet the stated outcomes and accelerate their business growth.

Dr. Thaler’s research gives great insight into how individuals make decisions and how human traits impact market outcomes. He incorporated psychologically realistic assumptions into analyses of economic decision-making and proved how human traits impact both individual decisions as well as market outcomes. [1]

Dr. Thaler summarized three core areas of human decision making which have economic implications: limited rationality, social preferences and lack of self-control.

Rationality

Unbiased data collection has proven to be vital in informing decision-makers during initiative selection and planning.

Thaler showed that aversion to loss can impact an individual’s decision making. Often participants in an initiative will give biased feedback in their assessment of the project, in order not to jeopardize their standing within an organization. ReM Score uses an anonymous survey method, with randomized questions, which safeguards organizations from employee collaboration during the survey, and protects employees from potential backlash as a result of their feedback. By eliminating the potential for individual employee loss, ReM Score fosters an unbiased data collection process, which has proven to be vital in informing decision-makers during the initiative selection and planning process.

Fairness

Pertaining to social preferences, Thaler and others pointed to fairness as a potential influencer of decision making. He noted that “some individuals will behave fairly towards others even in anonymous settings without reputational concerns; second, some individuals are willing to forego resources to punish individuals that behaved unfairly towards them.” [2]

In most cases, projects or initiatives are evaluated within a social setting. In this environment, where the individual contributor is known, false data and a lack of accountability are often the results. Some individuals are naturally inclined to protect one another from necessary accountability during a project since they believe it is the fair thing to do. This natural thought process produces false data in determining specifically where risks lie in a project; a recurring problem we have witnessed during our 14 years of assessing execution capability.

By taking into account anonymous feedback from all key-players involved in the execution of an initiative, ReM Score is able to provide an all-encompassing quantitative measurement of an organization’s capability to successfully execute an initiative. As a result, decision-makers are informed by an in-depth assessment of where their risks lie, based on data specific to the current initiative.

Lack of self-control: Fact-based data

Thaler also co-authored a book titled “Nudge” and referred to the concept of anchoring, which is a natural tendency of humans to overweigh one piece or trait of information and make an assumption based on it. [3]

In our experience, decision-makers often anchor their execution capability analysis on an understanding of where a similar project had failed or succeeded in the past. This tendency can be problematic for the following reasons:

  1. Decision-makers’ assumptions of where a project failed in the past often prove to be incorrect
  2. Every initiative presents very different challenges and risks, regardless of how similar they may appear to be
  3. Most organizations blame the project team without evaluating any other factors.

In summary

Thaler’s work gives visibility into human tendencies which could potentially increase risk involved in the strategic decision-making process. A numerical, bias-mitigating tool like ReM Score™ can significantly decrease the impact of these human tendencies on the decision-making process, contributing to both fact-based project prioritization and much greater project success.

See it work

ReM Score is just one way we pinpoint specific risks and roadblocks in operations, helping executives address certain deficiencies before moving forward with their investments.

Learn more about it and schedule a demo.

References

[1] https://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2017/press.html
[2] https://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2017/advanced-economicsciences2017.pdf
[3] https://www.farnamstreetblog.com/2015/12/biases-and-blunders/

Categories