Editorial: Behavioral insights – Putting Humans in the loop Deloitte Review Issue 18

Big data, automation, digital economies, the Internet of Things: Technological advances continue to reshape business and societal landscapes alike. Amidst the excitement is concern: Are people in charge of technology? Or is technology making the rules?

It is therefore helpful to remember that another signature issue of our time has human nature at its core. This is the explosion of psychological and behavioral insights arising from the work of Daniel Kahneman and others. Concepts of modern psychology and behavioral economics have made their way into strategic business and public policy discussions as well as everyday conversation. More recently, they have begun to offer tools enabling us to better shape programs, policies, and products—and ultimately to design our technological future—in a human-centric spirit.

A major discovery is that when making judgments and decisions, the human mind tends to rely on a collection of mental shortcuts (“heuristics”) that are systematically biased, often in surprising ways. We overgeneralize from personal experience, favor narratively coherent stories over logically coherent analyses, conflate familiarity with likely truth, and are generally overconfident in our judgments. The implications for economic, regulatory, and management theory are far-reaching.

For example, behavioral economics teaches that, contrary to what the Efficient Market Hypothesis predicts, financial markets often misprice assets. Markets for talent can be even less efficient: Over a decade after Moneyball popularized analytics, most hiring decisions are still heavily influenced by unstructured interviews that reinforce cognitive biases. And many organizations are reluctant to run experiments to scientifically evaluate the effectiveness of management decisions. Though experimentation and data science offer the means to drive better decisions and economic performance, it takes time, effort, and strong leadership to move from intuitive to evidence-based decisions.

An equally far-reaching set of implications follows from psychological insights about the rich variety of environmental, social, and ethical factors—beyond economic incentives—that predictably influence human behavior. We can prompt better decisions by designing choice environments to go with, rather than against, the grain of human psychology.

For example, employees are more likely to save for retirement if they are automatically enrolled in a savings program and allowed to opt out than if the default were reversed. People will eat better if their choices are arranged with human psychology in mind. Innovation and superior performance can be achieved by tapping into employees’ intrinsic motivation to excel on the job, and classical economic incentives can actually “crowd out” powerful intrinsic motivations. Analogously, citizens and customers can be “nudged” away from opportunistically fraudulent behavior by tapping into their intrinsic motivation to be honest actors. Programs based on cognitive behavioral therapy principles help injured workers to return to work sooner and keep at-risk youth out of gangs and in school. Varied as they are, these examples hardly scratch the surface of what is possible.

As the march of “smart” technologies seemingly takes on a life of its own, it is worth remembering that advances in the behavioral sciences can better enable the human-centric design of programs, technologies, and organizations.