What happens with our decisions when we are urged by a lack of time, money or information? How do we behave at work when we are worried for not been able to afford the bills? Behavioural economics can help us to start answering such question.  

By: Gabriela Vlasich*

Behavioural economics is the discipline that analyses how people make economic choices, which involve the assignation of resources, within contexts of uncertainty.

Advances on this discipline are being applied to different areas, such as finances, marketing and labour markets. The important thing about Behavioural Economics is their approach to different kinds of phenomenon from a fresh perspective, providing a critical view on the neoclassical concept of Rational Agent.

For example, Rational Agent’s Theory states that people make choices in an inclusive context, considering every relevant detail. Behavioural Economics show that people usually act following their intuition and that their decisions are affected by their emotional status, heuristics (simplifications) and biases, all of which reduce the complexity of the situation, making it mentally accessible. The application of these tools and concepts to organizations’ analysis can be very rewarding.

At this time, researchers, such as S. Mullainathan y E. Shafir, are studying how scarcity –of time, money, space, etc.-, shapes patterns of thought, making people focus their minds on the lack they are suffering at the moment. This causes a reduction on their “mental bandwidth”, which affects their cognitive capacity –processing information and making decisions- and their executive control –how impulsive they are when making decisions-.

In other words, it affects a portion of the mental capacity that should be used to make choices. The result is that people focus too much on the scarcity problem they are facing, reducing their attention and curiosity on broader issues.

If we analyse this phenomenon within a company, we may understand how scarcity affects the performance and productivity of employees. Workers are way more productive when they can give their full attention to their duties.

However, if their incomes are low, they find it hard to focus and be productive. The explanation is quite simple: people with lower incomes use a large deal of their mental capacity to solve personal financial issues. It is more likely for employees with lower incomes to pay less attention or even arrive late or miss work. These situations generate higher costs for their employers.

Researchers from Ideas 42 propose to create programs that help employees organise their personal finances and progressively lower their level of debt. The idea is to free up cognitive capacity so that the employees give their full attention to their responsibilities.

Pretty much the same happens when we think about workers facing scarcity of time to develop their tasks. It is important not to confuse this with working under pressure. When we have little time to develop and activity, our level of concentration may be extremely high but the decision making process will surely be affected as we are not able to analyse a broader scenery the same way we could have done if with had have more time.

When studying labour markets and vulnerable sectors, we can see how scarcity affects decision making processes. People in vulnerable contexts use a lot of cognitive capacity to solve their more urging needs in the short-term.

Scarcity effects are particularly dangerous when associated to monetary issues. Excessive worry about money leads to poor judgments, lower ability to make rational decisions by considering a broader scenery and, most importantly, they cause a decrease on the cognitive capacity and lower resistance to the temptation of enrolling on self-destructive behaviour.

Those who design public policies and programs to labour markets’ insertion, must consider this variable. Understanding the effects scarcity has on behaviour enables the development of more efficient programs that articulate the public and private sector, allowing people to free up mental bandwidth by satisfying there more urgent needs and dedicate themselves to tasks that improve their economic situation.

An example of such measures is described by Manuel Urquidi  from the Inter-American Development Bank for the case of Bolivia, where a program has been developed to grant opportunities for vulnerable groups, without any costs for organizations.

Behavioural economics give us the tools to start understanding behaviours and generating schemes to modify them without damaging organizations. Most of these programs are low cost and extremely effective as they go after the core problem, providing benefits not only for companies and States, but also for workers and their life quality.