A Study of Immoral Economic Intent
By Juhi Desai
Have you ever cheated on a test? Maybe just an unassuming glance at someone else’s paper, or a subtle peek at your own notes while your exam is being conducted online. Whether you regretted that decision, or were proud that you got away with it, there remains just one reason for why you did it in the first place: to get more marks. A simple justification for your behaviour would be that you cheated to get better grades, thereby securing your university admission and thereafter your job opportunities, et cetera. This scenario begs for the question- Is it truly your fault that you cheated, or were you merely a victim of an education system that ignores the quality of learning and which instead, focuses on numerical measurement?
Behavioural Economics, simply put, is the study of the psychological aspects of our economic decisions. It’s a science which focuses on the ‘Why’, rather than the ‘How’. Traditional economics is based on the theory that human beings always choose decisions that provide them with the ‘greatest benefit and optimal satisfaction’. It is an assumption that surmises individual decision-making to be rational and with the sole view of profit maximisation.
Behavioural economics, on the other hand, recognises that humans are flawed, irrational individuals who rarely use common sense, and gives greater importance to the psychological aspects of our decisions.
It is a field which we constantly encounter in every aspect of our lives. Chocolate bars are often found near the cashier’s counter in a grocery store because we are more likely to absent-mindedly grab it just before we leave rather than when we first enter the store. The reason behind this is that we are so exhausted from choosing from multiple options that, after a while, we engage in impulse buying (known as Decision Fatigue). We also experience behavioural economics when we initially intend to only buy coffee at a coffee shop, but after the barista offers us a pastry, we buy that as well. This is based on the theory
that positive reinforcement and suggestion can influence consumer behaviour. (known as Nudge Theory).
With a subject that is so diverse and multi-faceted, it is difficult to summarise its entirety in one article. This is why I’d like to bring your attention to the example mentioned above about measurements, which is derived from the economic theory propagated by Charles Goodhart. Goodhart’s theory, known simply as Goodhart’s Law, states, “When a measure becomes a target, it ceases to be a good measure.”
This means that when a particular target has been set, people will try to achieve that target regardless of consequences. It thus ceases to be a reliable measurement of performance. Examinations in general are seen as a reliable way of measuring the quality of education that a student has received. However, Goodhart’s Law shows that when there’s a target to achieve, people will try to achieve that target regardless of whether they use scrupulous means or not. A student would also experience the negative effects of Goodhart’s Law if they cram for an examination the night before, just to forget everything that they learned after the exam. This shows that they are only focusing on increasing quantity (i.e., their grades) rather than quality (i.e., their education). This example, therefore, simplifies the essence of Goodhart’s Law.
The question now remains, how does Goodhart’s Law relate to economic theory and principle, and how can you use it in an organisation? This is an answer best illustrated with this commonly used example:
In Soviet Russia, a factory had its performance judged on the number of nails that were made by it, and thus thousands of tiny nails that had no real utility were created. When the target shifted to how much the nails weighed, a miniscule number of nails that were extremely heavy were produced, which again had no real value.
The desired outcome was never achieved as a result of the implementation of quantitative targets, leading the employees to find ways to achieve those targets as quickly as possible and thereby reducing the quality of their performance.
Other examples would include when a manager of a call centre decides to pay wages to his employees according to the number of calls, they make, or a job-placement firm decides to measure an employee’s effectiveness by the number of interviews that they conduct in a day. This results in the call centre employees rushing through their calls and not really helping their customers, or the interviewer trying to fit in numerous interviews in a day without really focusing on the questions they ask and are thus not able to find jobs for their customers. Such actions would bring about the inevitable decline of customer satisfaction over time, and firms can start losing their customer base.
With the above stated detrimental effects of Goodhart’s Law, it seems like the setting up of targets could only lead to a firm’s untimely demise. However, the reason why Goodhart’s theory is so relevant can be traced to the fact that the setting up of targets caters to ‘extrinsically motivated factors.
Let’s take an example. Suppose you really love watching movies in your spare time. If someone tells you that you must watch 3 movies a day to get 2,000 rupees, chances are that you will be overjoyed at first, but your goal for watching movies has changed. Now, instead of watching movies because you love to, you’re watching movies because you want your money. Over many days or months, you might even start getting sick of watching movies. Extrinsic motivation is thus when external factors become our sole motivation for doing a job. In the cases mentioned above, people are extrinsically motivated to reach their targets as they want to be paid. The reason why reinforcing extrinsic motivation in an organisation can be potentially damaging is because it encourages employees to do the bare minimum to get their reward.
Therefore, it is essential to add in an intrinsic motivating factor as well. Intrinsic motivation is when you do something because you actually like doing it, and are not doing it just to receive some external reward.
To add this factor, certain methods would be required. One such method would be to allow more autonomy to the employees by perhaps giving them more flexibility with their schedules, or by giving them additional responsibilities to help challenge them and discourage monotony. A great example of a company utilising such motivational techniques
is Google, who not only allows its employees to have extremely flexible timings but also prefer their employees to pursue hobbies to help encourage creativity.
Other methods like encouraging socialisation and increasing interaction between employers and co-workers have also shown drastic increases in levels of productivity.
As we can see, behavioural economics is a very prominent part of our lives, even if we haven’t studied the subject before. By using its various principles and theories, a business can not only achieve success by attaining a deeper understanding of consumer behaviour, but also help boost customer and employee satisfaction in the long run