Humans are constrained by what psychologist, Herbert Simon, called “bounded rationality”. This states that humans will make decisions based on the limited knowledge they can accumulate, instead of making the most efficient decision. Behavioural biases refer to irrational beliefs that unconsciously influence decision making.
Why Should HR Managers Care?
HR managers should care about behavioural biases as they impact their employees’ ability to make effective decisions, based on a variety of information and factors available to them. Behavioural biases occur subconsciously and therefore can mean team members do not notice them.
This article will outline some key behavioural biases that could be detrimental to organisational work culture. Furthermore, behavioural biases can have impacts in relation to money, which can impact employee wellbeing. It is important to ensure employees are making good decisions when it comes to their finances.
General Behavioural Biases
Confirmation bias is when one seeks information in support of something they believe already. This is a critical flaw in human reasoning – people will play into things of importance to them and dismiss things that are not, leading to the “ostrich effect”. Humans want to avoid cognitive dissonance. This is mental discomfort that occurs when information conflicts with beliefs or disproves their point.
In a work environment, this is not the kind of behaviour managers want to facilitate and could create implications for the company. In the absence of all available information, one could make an uninformed decision and miss a good opportunity.
Status Quo Bias
Instead of responding to new circumstances, people do nothing. Individuals are generally more comfortable keeping things as they are. Again, this could prevent making necessary changes where beneficial and further results in the difficulty to accept or process change
Self-serving bias is the assumption that good things happen when the right courses of action have been pursued. However, when bad things happen it is due to factors outside of our control. This results in the tendency to blame external circumstances for bad outcomes as opposed to taking accountability and responsibility for our actions. In an organisational context, employers want their employees to be responsible for their decisions, thus such bias can impact their ability to do so.
Availability bias refers to the tendency to use information that is quickly recalled when evaluating a situation or idea, even if that information does not reflect the full picture. This mental shortcut ignores alternative perspectives and deems the most available ones as valid. Again, this limits the information included when making an important decision at work.
Anchoring refers to placing value on the initial piece of information you receive, too much so that it can impact subsequent judgements. For example, if you bought an asset (e.g. house) at £500,000, you would not want to sell said asset for below this amount. Investment decisions are sensitive to anchoring bias as they require multiple complex judgements.
Back to the house example, if house prices have declined then this means one might be reluctant to sell their home for less than they paid, despite its intrinsic value now being lower. But one might think house prices rise, they don’t decrease! Take a look at 2008. Research and make a decision, be open to new information even if it does not match what you previously have learnt.
Behavioural Biases in Finance
Specifically relating to finance, behavioural biases influence judgement about how investors spend money and invest (Lewis, 2021). In understanding such biases and mental shortcuts individuals might take, it can yield better financial decision making, consequently enhancing financial literacy within your organisation.
Let’s look at an example. Say you found £100 on the floor, would you invest it or would you spend it?
Most people would spend the money. Let’s look at some biases within finance and investing.
Mental accounting is when people put their money in different cognitive boxes according to where it came from. For example, an individual might have separate accounts for money with different uses, such as savings and salary income. As such, this influences how you spend that money. For the above example, we might assume that the money was spent because the individual didn’t account for it and it went into the ‘gains’ box, not the ‘earnings’ box.
What’s the issue? Categorising money is good, almost like budgeting. In this sense, not quite. It has pitfalls and let’s take a look at why.
Say you have a credit card charging you 6% interest each month and you also have a savings account for your child’s university, which might be years from now. You might be keen to keep saving the money and not pay off your credit card. What’s wrong with this? If you used the savings to pay off your credit card you wouldn’t be paying 6% interest every month you have a credit balance. You could use that money you were paying on interest to rebuild the university fund for your child. Even better, it could be invested and you could make money on your money. Check out our Savings Club to see how you can make money on your savings.
Create a full plan and determine when to save vs spend. Budget with structure, not just in your mental accounts.
Loss aversion refers to bias towards avoiding losses over seeking gains. Simply put, people are more sensitive to losses than gains, and losses loom larger than gains. Financial mistakes ultimately come down to taking too little risk as opposed to too much risk.
Avoiding a small risk when it is probably worth it can mean people would rather save than invest. What is wrong with this? Saving money over time means you actually lose money. Inflation will erode the value of your savings. However, that investment you weren’t sure if to make, probably would have paid off.
How to overcome Behavioural Biases
Don’t worry. If you’ve read some of the above biases and think they’re present in your organisation, there are some key things you can do to overcome them. You’ve already taken the first step, which is to identify bias when it’s present.
Nudges can draw on mental shortcuts, cognitive and emotional biases that impact behaviour. For example “Save More Tomorrow” has worked because it asked people to make a savings commitment in the future. In relation to financial decisions, overspending today can have drastic implications in reducing savings for the future. For example, at the start of your career saving for retirement might come second to holidays and luxury purchases. But, the longer you wait to start saving, the harder it will be to meet your goals. The lack of long-term planning will impact your retirement readiness.
Your organisation can help with this. It was found that few people will opt in to do something when asked (maybe they fear they are going against the group or they are conforming to status quo bias). However, when automatically enrolled, few will opt-out. This can be applied to pension plans within organisations.
This is explained by ‘the paradox of choice’. When individuals encounter too many options, they become confused and hesitant, resulting in no action being taken.
Do not leave your finances to chance. Check out our Wellbeing Hub that has areas you can navigate your financial wellbeing (as well as other wellbeing). Moreover, don’t leave your money to emotion. Have a strategy and stick to it.
To find out more about how Each Person can help you identify behavioural biases in your workplace, visit eachperson.com or contact us at firstname.lastname@example.org.
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