Homo Economicus – the characterization of people as rationally guided wealth-maximizing missiles in their behavior — never really was more than a textbook stick figure characterization. This one-dimensional theoretical view, however, dominated economic and business thinking for the past century and remains strong even today.
The premise of this line of thought is simple: people are driven by self-interest to maximize their personal value defined in financial terms. The underlying assumptions are that only such behavior is rational, and that people are rational. It didn’t matter that even casual observation contradicted this world view. Contraindications were dismissed as examples of poor decision making by individuals, insufficient education, or market inefficiencies. Homo economicus was an eminently rational information processing machine making decisions to maximize personal economic gains.
Enter Behavioral Economics
Behavioral economics flipped homo economicus on its head. As far back as the 1950s Herbert Simon described human decision making as “satisficing,” the process of accepting the first satisfactory and sufficient choice someone found, as opposed to an exhaustive search for the best option. Simon also introduced the concept of “bounded rationality,” noting that there are various constraints on the ability of anyone to make purely rational decisions. More recently there has been an explosion of work on the limits of rational choice and the primacy of emotions in decision making.
Our thought processes are sharply limited by a number of constraints or “biases.” For example, people are
- Inherently more receptive to information that confirms what they think than anything that contradicts their beliefs
- More likely to quickly process, retain, share, and act on negative information than positive information
- Instinctively risk averse
- Prone to overestimate the probability of things they like, underestimate the likelihood of what they dislike
- More accepting of input from people with whom the identify, more skeptical of information from someone they perceive as different from them
- Heavily influenced by the order in which they receive information
And, of course, no one has unlimited access to information, nor the time and inclination to process it all anyway.
In the real world where all of us make decisions, I would suggest, moreover, that each of us have a subconscious cost/benefit calculator of sorts. This personal “calculator” is informal, unstructured, and highly individualized. Dollars and “sense” are not the only currency of our personal calculator. We take account of our time, effort, preferences, pressure, importance, and other non-standard items we value. The list varies for each individual. To make this calculation even more complex, everyone attaches a different, personal value to these items.
Researchers have long tried to understand human economics in terms of “utilities,” that is how much satisfaction each of us derive from something. While we don’t sit down with a spreadsheet and count “utilities”, we implicitly make decisions and tradeoffs based on our personal calculus of how much we value A vs B vs C and so on, but we do this within the decision-making constraints and biases we each have. This is being human.
This personal economics totally defies the rationality of traditional economics. I would argue, however, that this personal economics actually is perfectly reasonable in a human way. For example, in traditional economics if someone earns $30 per hour, their time is valued at that rate. The “rational” choice is to take any opportunity that earns (or saves) $30 or more for an hour of time and to turn down options with a lower rate of return. But our personal economics might say that a walk in the park, family time, a nap, or whatever is more important (AKA has more value or utility for us) than an opportunity with a payout of even $50 per hour. On the flip side, we might be willing to take $20/hour if bills are past due or we simply feel we have some spare time.
Enter Emotions and Memories
As if understanding human decision making wasn’t sufficiently complex already, emotions and memories play a central role. Emotions are a thumb on the scale and redefine our utilities. Emotions typically are treated as irrational or at best nonrational. I am reluctant to join that approach, however, and prefer to think of emotions as another factor in our personal accounting of utilities. Our individual utilities meter shoots upwards and assigns more value to things that enchant us and make us feel great; conversely, the meter goes deep red when it comes to things that we loathe or elicit feelings of disgust. Our feelings overshadow everything else and become the lens through which we then make our decisions.
To add one more wrinkle, our memories are like a prism through which we see the world, coloring our perspective. Our memories, however, are imperfect; that is, we misremember. What we remember, moreover, is a function of the emotional impact of an experience. Experiences that “touch” us leave an emotional imprint and are, as a result, more memorable. By contrast, experiences that are purely transactional and leave no emotional residue are eminently forgettable as if they never happened. Our emotions and the memories forge are our individual realities, even if they are not technically accurate, and are the core of the human experience.
The Human Experience
Trying to address the challenges of managing and improving CX and EX with traditional economic tools limits us exclusively to focusing on the price/value proposition. That is, the rational cost/benefit analysis of homo economicus. While the value prop is important, it completely misses the human dimension, the real-world situation in which each of us make decisions.
It’s messy, non-linear, oft times confusing, and certainly not “rational” in the traditional sense. At the same time, it encapsulates the beauty of the human mind with all its quirks and idiosyncrasies. Hence the complexity of the human experience and the challenge of understanding and shaping the customer and employee experience.
Terrific. Daniel Kahneman would be proud of you: https://customerthink.com/other-than-that-mrs-lincoln-how-was-the-play/ And linkage, the essential connection of employee and customer experience (and full integration into the fabric of the enterprise), is both critical and often missed or minimized.
Thanks, Michael. Always amazes me how people rail against organizational silos but continue down the path with blinders and ignore informational silos.