REPOST: Why COOs Should Think Like Behavioral Economists

The article below by Harvard Business Review explains why a successful COO might need to think about the environment in which his employees make choices. It could be the key to a happier and more productive workplace. Read more:

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When Yelp was a startup with just 15 employees, the office manager began to stock the kitchen with drinks and snacks to get everyone through the long afternoons. Juice, water, fruit, chips, and as much candy as could be stuffed into the small kitchen drawer. Being at work was like being, well, a kid in a candy shop: a bottomless supply of Snickers, Twix, 3 Musketeers, M&M’s, Almond Joys — the list goes on.

And at first, everyone loved it. If a 3 PM hunger pang struck, it was a delight to find a Snickers to nosh on, without even having to leave the building. But within two weeks, one of us (Geoff, who was COO at the time) realized he was averaging a Snickers bar per day. This was a bit odd for two reasons. First, he had barely eaten candy bars in the years before that. Second, he didn’t really want to eat candy bars; he just did it as part of his newfound afternoon routine. A quick poll among coworkers revealed that the whole company had experienced a sharp uptick in candy bar consumption. Simply by existing, the candy drawer had created a cadre of candy eaters.

In a world of rational economic decision making, more — and more choice — is always better. If you don’t want a candy bar, skip it. If you choose to eat it, that’s because doing so is better than ignoring it. This is what economists refer to as revealed preference; in this Panglossian view, whatever choice you make must be the best one, given the information and incentives you have. Geoff and the rest of the Yelp team had run into an important limitation of revealed preference. A growing body of research demonstrates the myriad ways in which our choices run counter to our interests. That is, sometimes our decisions reveal systematic mistakes or short-run temptations, rather than our preferences.

Ultimately, the team agreed they should eat fewer candy bars. They tried their hand at resisting temptation, but to no avail. The candy bars continued to vanish at alarming rates. So they made a radical decision: They decided that less choice is better and got rid of the candy bars. And although there were days that people wished they had easy access to a Mars bar, they agreed that this change was for the better.

For Geoff, this was the moment he realized that a successful COO needed to think about the environment in which employees make choices. More broadly, this illustrates a point that all COOs should keep in mind: A successful COO needs to think like a behavioral economist. What does this mean, exactly? First, it means recognizing that employees are, well, people. They exhibit the complexities and biases that we all have. And managers need to understand what kinds of biases occur. Second, this means the COO needs to think not only about compensation packages and incentives but also about creating an environment in which employees are set up to make good decisions.

In other words, rather than telling people about their mistakes and hoping for improvement, changing behavior is partly about changing the environment in which decisions are made. Nudge, a 2008 book by Richard Thaler (winner of the 2017 Nobel prize in economics) and Cass Sunstein refers to this as choice architecture. And it turns out the workplace is full of opportunities for better or worse choice architecture. Just consider the following:

Stock a drawer with candy bars? Expect people to be tempted to eat them, even if they think they shouldn’t.

Display a performance metric on the wall? Expect it to rise, potentially at the expense of other ones.

Create more-diverse hiring committees? Expect that you may see a more diverse workforce.

Default 401(k) contributions to 6%? Six percent may become the norm.

Yelp’s 401(k) plan was initially an opt-in benefit, meaning employees needed to actively sign up for it. When the company changed the enrollment process to opt-out — meaning employees were automatically enrolled but could choose to unenroll — enrollment skyrocketed from less than 20% to more than 80%. Yelp had choice-architected its workforce into higher long-term savings rates. (Research by John Beshears, James Choi, David Laibson, and Brigitte Madrian first demonstrated the power of 401(k) defaults in other settings, which is a powerful finding that extends well beyond the tech industry.)

Seemingly innocuous decisions such as these can define a company’s ethos and employees’ well-being. The reason why is that systematic mistakes are pervasive — even among smart, well-intentioned people. And the way decisions are framed subtly shape the decisions we make.

The idea of the COO as a behavioral economist can run counter to the libertarian streak that we often see in the executives we interact with — especially in the tech industry, which prides itself on having a fierce sense of independence and autonomous decision making. But the idea of neutral decision making is in many ways an illusion. As Thaler and Sunstein discuss in Nudge, just as architects choose where to put an elevator and where to put stairs, a choice architect shapes the way a decision is framed. The COO, and the management team more generally, must choose when to default employees into a 401(k), how to shape the interview process, and whether to stock the kitchen drawer with candy.

So, when you think about the choices you make at work, consider not only the decisions you’d like to improve but also the environment in which the decisions will be made. You may find simple ways to change the environment to improve your decisions and those of others around you.

And if you are a COO, embrace your inner choice architect. Your company will be more productive and happier for it.