Behavioural Economics and Organisations

Colin Camerer (Caltech) and Ulrike Malmendier (Berkeley) have written an interesting chapter on the Behavioral Economics of Organizations in 'Behavioral Economics and Its Applications', Princeton University Press, March 2007 (edited by P. Diamond and H. Vartiainen). The authors view this chapter as more of a research agenda than a review of what is known about how behavioural economics works in organisations. A rough summary of some of the issues in the chapter is as follows. Workers' perception of fairness in organisations is potentially very important (for effort disutility, reservation wages). Psychological influences on judgments of causality are also important; these include: hindsight bias, assymetric distribution (taking credit but avoiding blame), and overconfidence about skill. Overconfidence is also discussed in relation to managerial performance.

Camerer and Malmendier's chapter is more about the interal workings of organisations (particularly the management of human resources), rather than their strategic behaviour. A useful reference for the latter is the Economics of Strategy by Besanko, Dranove, Shanley and Shaefer. The Besanko et al. textbook covers four main areas: firm boundaries, market analysis, strategic position and internal organisation. Of course, the research agenda outlined by Camerer and Malmendier is relevant to future developments in the field of strategy economics, in particular internal organisation.

Behavioural economics has been applied to organisations in practice by Gallup Consulting. They provide a free-to-download document on their website, describing the process of "applying behavioral economics to drive growth and profitability":

Gallup research revealed that a study group of 10 companies that applied these principles outperformed peers by 85% in sales growth and more than 25% in gross margin during a recent one-year period. The key to achieving this kind of financial performance is for leaders to accept and work with human nature rather than against it... Mastery of... applied behavioral economics holds the promise of realizing breakthrough improvements in employee productivity, customer retention, and real growth and profitability.

John Fleming, Chief Scientist for Gallup's Customer Engagement elaborates further on the application of behavioural economics to organisations in this Harvard Business Review article: "Manage Your Human Sigma" (with Curt Coffman and James Harter). Human Sigma is a version of Six Sigma inspired by behavioural economics. Fleming has also written a book called Human Sigma with Jim Asplund.