Leadership and behavior: Mastering the mechanics of reason and emotion
A Nobel Prize winner
and a leading behavioral economist offer common sense and counterintuitive
insights on performance, collaboration, and innovation.
The confluence of
economics, psychology, game
theory, and neuroscience has opened new vistas—not just on how people think and
behave, but also on how organizations function. Over the past two decades,
academic insight and real-world experience have demonstrated, beyond much
doubt, that when companies channel their competitive and collaborative
instincts, embrace diversity, and recognize the needs and emotions of their
employees, they can reap dividends in performance.1
The pioneering work of
Nobel laureate and Harvard professor Eric Maskin in mechanism design theory
represents one powerful application. Combining game theory, behavioral
economics, and engineering, his ideas help an organization’s leaders choose a
desired result and then design game-like rules that can realize it by taking
into account how different independently acting, intelligent people will
behave. The work of Hebrew University professor Eyal Winter challenges and
advances our understanding of what “intelligence” really means. In his latest
book, Feeling Smart: Why Our Emotions Are More Rational Than We
Think (PublicAffairs,
2014), Winter shows that although emotions are thought to be at odds with
rationality, they’re actually a key factor in rational decision making.2
In this discussion, led
by McKinsey partner Julia Sperling, a medical doctor and neuroscientist by
training, and McKinsey Publishing’s David Schwartz, Maskin and Winter explore
some of the implications of their work for leaders of all stripes.
The Quarterly: Should CEOs feel badly about
following their gut or at least listening to their intuition?
Eyal Winter: A CEO should be aware that
whenever we make an important decision, we invoke rationality and emotion at
the same time. For instance, when we are affected by empathy, we are more
capable of recognizing things that are hidden from us than if we try to use
pure rationality. And, of course, understanding the motives and the feelings of
other parties is crucial to engaging effectively in strategic and interactive
situations.
Eric Maskin: I fully agree with Eyal, but
I want to introduce a qualification: our emotions can be a powerful guide to
decision making, and in fact they evolved for that purpose. But it’s not always
the case that the situation that we find ourselves in is well matched to the
situation that our emotions have evolved for. For example, we may have a
negative emotional reaction on meeting people who, at least superficially, seem
very different from us—“fear of the other.” This emotion evolved for a good
purpose; in a tribal world, other tribes posed a threat. But that kind of
emotion can get in the way of interactions today. It introduces immediate
hostility when there shouldn’t be hostility.
The Quarterly: That really matters for
diversity.
Eyal Winter: One of the most important
aspects of this interaction is that rationality allows us to analyze our
emotions and gives us answers to the question of why we feel a certain way. And
it allows us to be critical when we’re judging our own emotions.
People have a
perception about decision making, as if we have two boxes in the brain. One is
telling the other that it’s irrational, these two boxes are fighting over time,
one is prevailing—and then we make decisions based on the prevailing side, or
we shut down one of these boxes and make decisions based on the other one only.
This is a very wrong way of describing how people make decisions. There is
hardly any decision that we take that does not involve the two things together.
Actually, there’s a lot of deliberation between rationality and emotion. And we
also know that the types of decisions that invoke perhaps the most intensive
collaboration between rationality and emotions are ethical or moral
considerations. As a neuroscientist, you know that one of the more important
pieces of scientific evidence for this is that much of this interaction takes
place in the part of the brain called the prefrontal cortex. When we confront
people with ethical issues, this part of the brain, the prefrontal cortex, is
doing a lot of work.
The Quarterly: Yes, and we can track this
with imaging techniques. Indeed, neuroscientists keep fighting back when people
try too quickly to take insights from their area of science into business, and
come up with this idea of a “left-” and “right-brain” person, and exactly the
boxes that you are mentioning. Given your earlier comments, do you believe we
are capable in a situation where we are emotional, to actually step back, look
at ourselves, realize that we are acting in an emotional way—and that this
behavior might be either appropriate or not appropriate?
Eyal Winter: I think we are capable of
doing it, and we are doing it to some extent. Some people do it better, some
people have more difficulty. But just imagine what would have happened if we
couldn’t have done it? We probably wouldn’t have managed, in terms of
evolution. I think that the mere fact that we still exist, you and me, shows
that we have some capability of controlling our emotions.
Eric Maskin: In fact, one interesting
empirical trend that we observe through the centuries is a decline of violence,
or at least violence on a per capita basis. The world is a much less dangerous
place now than it was 100 years ago. The contrast is even bigger when we go
back longer periods of time. And this is largely because of our ability over time
to develop, first, an awareness of our hostile inclinations, but more important
to build in mechanisms which protect us from those inclinations.
The Quarterly: Can you speak more about
mechanism design—how important it is that systems help the individual or groups
to act in ways that are desirable?
Eric Maskin: Mechanism design recognizes
the fact that there’s often a tension between what is good for the individual,
that is, an individual’s objectives, and what is good for society—society’s
objectives. And the point of mechanism design is to modify or create
institutions that help bring those conflicting objectives into line, even when
critical information about the situation is missing.
An example that I like
to use is the problem of cutting a cake. A cake is to be divided between two
children, Bob and Alice. Bob and Alice’s objectives are each to get as much
cake as possible. But you, as the parent—as “society”—are interested in making
sure that the division is fair, that Bob thinks his piece is at least as big as
Alice’s, and Alice thinks her piece is at least as big as Bob’s. Is there a
mechanism, a procedure, you can use that will result in a fair division, even
when you have no information about how the children themselves see the cake?
Well, it turns out that
there’s a very simple and well-known mechanism to solve this problem, called
the “divide and choose” procedure. You let one of the children, say, Bob, do
the cutting, but then allow the other, Alice, to choose which piece she takes
for herself. The reason why this works is that it exploits Bob’s objective to
get as much cake as possible. When he’s cutting the cake, he will make sure
that, from his point of view, the two pieces are exactly equal because he knows
that if they’re not, Alice will take the bigger one. The mechanism is an
example of how you can reconcile two seemingly conflicting objectives even when
you have no idea what the participants themselves consider to be equal pieces.
The Quarterly: How has mechanism theory been
applied by leaders or organizations?
Eric Maskin: It’s found applications in
many areas, including within companies. Say that you’re a CEO and you want to
motivate your employees to work hard for the company, but you’re missing some
critical information. In particular, you can’t actually observe directly what
the employees are doing. You can observe the outcomes of their actions—sales or
revenues—but the outcomes may not correlate perfectly with the inputs—their
efforts—because other factors besides employees’ efforts may be involved. The
problem for the CEO, then, is how do you reward your employees for performance
when you cannot observe inputs directly?
Eyal Winter: Here’s an example:
Continental Airlines was on the verge of bankruptcy in the mid-’90s. And an
important reason was very bad on-time performance—it caused passengers to leave
the company. Continental was thinking both about the incentives for the
individuals and, more importantly, about on-time performance. It’s a “weak
link” type of technology. If one worker stalls, the entire process is stopped
because it’s a sequential process, where everybody’s dependent on everybody
else.
What they came up with
was the “go forward” plan, which offered every employee in the company a $65
bonus for every month in which the company ranking on on-time performance was
in the top five. Just $65, from the cleaners up to the CEO. It sounds
ridiculous, because $65 a month seems not enough money to incentivize people to
work hard, but it worked perfectly.
The main reason was
that Continental recognized that there’s an aspect to incentives which is not
necessarily about money. In this case, shirking would mean that you lose your
own bonus of $65, but it would also mean that you will be in a situation in
which you will feel you are causing damage to thousands of employees that
didn’t receive a bonus that month because you stalled. It was the understanding
that incentives can be also social, emotional, and moral that made this
mechanism design work perfectly.
Eric Maskin: A related technique is to
make employees shareholders in the company. You might think that in a very
large company an individual employee’s effect on the share price might be
pretty small—but as Eyal said, there’s an emotional impact too. An employee’s
identity is tied to this company in a way that it wouldn’t be if she were
receiving a straight salary. And empirical studies by the labor economist
Richard Freeman and others show that even large companies making use of
employee ownership have higher productivity.
The Quarterly: How would you advise leaders
to facilitate group collaborations, especially in organizations where people
feel strong individual ownership?
Eyal Winter: It’s again very much about
incentives. One has to find the right balance between joint interest and
individual interest. For example, businesses can overemphasize the role of
individual bonuses. Bonuses can be counterproductive when they generate
aggressive competition in a way which is not healthy to the organization.
There are interesting
papers about team behavior, and we know that bonuses for combined individuals,
or bonus schemes that combine some individual points with some collective
points, or which depend on group behavior as a whole, often work much more
effectively than individual bonuses alone. The balance between competition and
cooperation is something that CEOs and managers have to think deeply about, by
opting for the right mechanism.
The Quarterly: Can mechanisms that encourage
collaboration also be used to foster innovation?
Eric Maskin: Collaboration is a powerful
tool for speeding up innovation, because innovation is all about ideas. If you
have an idea and I have an idea, then if we’re collaborating we can develop the
better idea and ignore the worse idea. But if we’re working alone, then the
worse idea doesn’t get discarded, and that slows down innovation.
Collaboration in
academic research shows an interesting trend. If you look at the list of papers
published in economics journals 30 years ago, you’ll find that most of them
were single-authored. Now the overwhelming majority of such papers, probably 80
percent or more, are multiauthored. And there’s a very good reason for that
trend: in collaborative research, the whole is more than the sum of the parts
because only the best ideas get used.
Eyal Winter: There’s another aspect in the
working environment which is conducive to innovation. And that is whether the
organization will be open to risk taking by employees. If you’re coming with an
innovative idea, not a standard idea, there is a much greater risk that nothing
will come out of it eventually. If people work in an environment which is not
open for taking risks, or alternatively in which they have to fight for
survival within their organization, they will be much less prone to take the
risks that will lead to innovation.
The Quarterly: What about innovation in a
world of vast amounts of data and advanced analytics at our fingertips? Is
there untapped potential here for behavioral economics?
Eric Maskin: One exciting direction is randomized
field experiments. Up until now, most experiments in behavioral economics have
been done in the lab. That is, you put people in an artificial setting, the
laboratory, and you see how they behave. But when you do that, you always worry
about whether your insights apply to the real world.
And this is where
randomized field experiments come in. Now you follow people in their actual
lives, rather than putting them in the lab. That gives you less control over
the factors influencing behavior than you have in the lab. But that’s where big
data help. If you have large enough data sets—millions or billions of pieces of
information—then the lack of control is no longer as important a concern. Big
data sets help compensate for the messiness of real-life behavior.
The Quarterly: Big data analytics is also
tapping into artificial intelligence. But can a computer be programmed to
reason morally, as people do—and how might that play out?
Eyal Winter: I think there will be a huge
advancement in AI. But I don’t believe that it will replace perfectly or
completely the interaction between human beings. People will still have to meet
and discuss things, even with machines.
Eric Maskin: Humans are instinctively
moral beings and I don’t see machines as ever entirely replacing those
instincts. Computers are powerful complements to moral reasoning, not
substitutes for it.
http://www.mckinsey.com/business-functions/organization/our-insights/leadership-and-behavior-mastering-the-mechanics-of-reason-and-emotion?cid=other-eml-alt-mkq-mck-oth-1610
No comments:
Post a Comment