KEY INSIGHTS FROM BEHAVIOURAL ECONOMICS AND IMPLICATIONS

FOR INNOVATION IN ORGANISATIONS

1
The following is a list of behavioural biases or cognitive shortcuts that have
been observed to influence peoples behaviour. The phenomena listed relate
to ways in which real peoples behaviour differs from neoclassical economics
assumptions of perfect rationality.
The last column is simply a thought experiment, hypothesising some ways in
which these insights could be used to encourage more innovation to take
place in organisations.
Phenomenon Expln!"on I#e
Bounded rationality
representativeness
!ecisions based on
historical outcomes even if
independent
"nsure evaluation of new
ideas includes totally
fresh people
Bounded rationality
mental availability
"asiest to remember #
access vivid or recent
events
Ban use of iconic
examples in idea
evaluation and goal setting
Bounded rationality
anchoring
$nitial reference point
affects subse%uent option
generation
Benchmark measurable
metrics of innovation with
other organisations
Bounded rationality
relativity
&hanges in states more
influential than mean state
'of happiness, wealth(
)ook at how you can
maximise your product
on dimensions that are
already good, not adding
new dimensions
Bounded rationality risk
aversion
*uch stronger motivation
to avoid loss than to work
for gain
+aint the painful picture of
competitors getting ahead
of your company every
day by tweaking their
product or process or
people, while engendering
confidence that your
company can do it, too
Bounded self,control &hanging behaviour
difficult even if motivation
is there
*ake innovation a
keystone habit with
immediate, fre%uent,
reliable and powerful
neurochemical rewards
maybe even in the form of
a game-
!ecoy price effects &hoices can be influenced
by comparing to inferior
alternatives
.e%uire managers to set
innovative problems for
staff to solve and to
allocate time to it with
the alternative being that
staff have to spend time
doing someone elses
admin
1
/ummary and last column '$dea( by Tera 0llas1 first two columns '+henomenon and "xplanation(
based on the 2overnment "conomic /ervice report Behavioural "conomics3 0 guide for "conomists in
2overnment, available on re%uest from tera4allas.net
Phenomenon Expln!"on I#e
+arabolic discounting
'myopia, short,termism(
/hort,term costs and
benefits dominate decision
making
$nvest in innovation at all
levels dont expect it to
emerge on its own1 it is not
necessarily a natural
process in organisations
5raming of information &hoices depend on how
information is presented
'e.g., emotive words,
distracters(
6se emotive language to
describe the positive
feelings and outcomes
from innovation for the
organisation
$nertia and procrastination
'habit(
!ecisions involving
complexity, self,doubt or
inconvenience put off
*ake innovation easy and
non,scary and lead every
person to a positive
innovation experience
$nformation and choice
overload
Too much choice can
lead to postponing
decision making
7ffer innovation space and
time in an easily
understood format that
everyone can get
*ental accounting +eople consume different
types of wealth or goods #
services at different rates
/et an expectation for the
8 of time people should
be problem,solving and
innovating
7ver,confidence and
salience
Tendency to over,estimate
probability of easily
imagined # vivid events
and under,estimate
fre%uency of more
mundane events
5ind ways of celebrating
small innovations every
day to make them more
front of mind
.eciprocity, altruism,
fairness and values
/elfish profit,maximisation
not accepted if perceived
as unfair1 and social
norms very influential
&ommunicate how
innovation will improve the
lives of the many
customers, workers,
investors, etc.
/ystem 9 and /ystem :3
intuitive vs. deliberative
behaviour
$ntuitive, reflexive
response may override
more rational decisions
/ee above3 make
innovation a keystone
habit so that the reflexive
behaviour is increasingly
innovative
Trust 6sed as a short,cut in
decision making 'e.g.,
reliance on word,of,mouth
and branding(
Build a culture of trust, not
fear