In this edition of HR News You Can Use we look at two different academic studies that provide insights into how we think and behave.
The first study looks at whether making more money will lead to greater measured happiness.
The second study looks at how we make decisions and shows that quite often we do not make good ones because of powerful behavioral and psychological forces that drive our actions.
Study Shows That Money Can’t Buy You Love
A study by the London School of Economics, which looked at responses from 200,000 people, found that while salaries have more than doubled in the last 50 years, on average people have become no happier, according to Lord Richard Layard, who led the report.
The study asked the respondents to measure on a scale of one to 10 “how satisfied are you with your life, these days?” The results showed that even when people have two times the average income their happiness scores rose by less than 0.2.
The conclusions from the study point to the fact that “people adapt to higher levels of income over time but also they "compare their own income to that of their peers". Unfortunately, these comparisons only lead to the never ending cycle of trying to keep ahead of your neighbors and never being truly happy with you have.
Study Shows That We Are Not Great Decision Makers
Frank Kalman, Managing Editor of Talent Economy magazine recently published a great article “Hey Executives, Remember That You Are Not That Smart”.
In the article he discusses the some of the important insights that he got from reading the 2011 book “Thinking, Fast and Slow” by renowned psychologist and Nobel laureate Daniel Kahneman
The book was an behavioral economics study on how people make decisions. The book describes how their research showed that the human brain is driven by two distinct systems:
- System 1 is fast, intuitive and emotional.
- System 2 is slower, more deliberative and more logical.
As Kalman points out:
The two systems shape our judgments in untold ways. More often than not, we overwhelmingly rely on System 1, our fast-thinking, emotional intuition. This leads us to become overconfident decision-makers, almost unknowingly making choices against our own self-interest.
I’m saying that, yes, most executives are not as smart as they think you are. No one is. And it’s time to start realizing the times when you’ve let your stupidity get the best of you, especially when you’re making “gut” decisions in the course of running your business.
Two concepts that Kalman references from the book are loss aversion and psychological framing.
Loss aversion describes how we are wired to more likely desire to avoid losses at the expense of potential gains. This essentially drives behavior that looks at avoiding any risks associated with losing versus thinking about what can be gained by taking a measured amount of risk. The example Kalman uses is investing behavior:
The pain of a dramatic stock market decline is likely to lead most System 1 thinkers to avoid the pain of further losses by liquidating their remaining holdings in defense. However, someone with a more logical and thoughtful understanding of the stock market might instead treat the broad price decline as a discounted buying opportunity for when the market recovers later. In other words, it’s better not to lose $5 than to find $5.
Psychological framing is where people will associate different risk profiles to decisions that will deliver the same potential outcomes given how the information they receive is presented.
The Kahneman and Tversky’s research showed that when subjects in an experiment were asked whether they would opt for surgery if the “survival” rate was 90 percent, while others were told that the “mortality” rate is 10 percent, the first framing received increased acceptance even though the options are exactly the same.
The message here is that the System 1 thinking that is fast moving and based on “gut” level decision making can lead us into making decisions that are not optimal. Knowledge as they say is power. Being self-aware that you can be overly influenced by this type of thinking will help you slow down, collect all of the data (both confirming and non-confirming) and make better decisions.
