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Human Resources Ile Ilgili
Human Resources Ile Ilgili
Human Resources Ile Ilgili
Abstract
Strategic human resource management (SHRM) aims to leverage a firm’s human resource base to cre-
ate economic value for an organisation. In order to create economic value, firms must understand the
actual behaviour of economic agents. Behavioural economics aim to understand the real, as distinct
from theoretical, behaviour of humans when making economic choices. Hence, behavioural econom-
ics is central to a firm’s implementation of SHRM. However, despite the strong theoretical relationship
between SHRM and behavioural economics, the actual research on the use of behavioural economics is
fragmentary and inadequate.
This article traces the roots of behavioural economics to prospect theory and identifies the basic
concepts—comparison to a reference point, risk aversion and loss aversion—underlying prospect the-
ory. The applications of these basic concepts in HRM are elucidated and the current research linking
behavioural economics to HRM is presented.With respect to HRM, the current research on behavioural
economics is most relevant to compensation management. Based on the discussion regarding applica-
tion of behavioural economics in HRM, the article concludes by identifying future areas of research
in the application of behavioural economics to HRM and scope for mutual exchange of knowledge
between researchers and practitioners.
Keywords
Behavioural economics, strategic human resource management (SHRM), prospect theory, loss aversion,
compensation management
In their comprehensive definition of human resource management (HRM), Bratton and Gold (2017)
focused on the ability of HRM to achieve competitive advantages for an organisation by formulating and
deploying a comprehensive and internally coherent set of employee policies, practices and programmes.
However, in actual practice, the human resource (HR) departments of many organisations are mired in
day-to-day operational practices such as recruitment, selection, appraisal, compensation and benefits
management and are unable to completely integrate these practices with each other or with the broader
1
IIM Rohtak, Sunaria, Rohtak, Haryana, India.
Corresponding author:
Sanket Sunand Dash, IIM Rohtak, Sunaria, Rohtak, Haryana 124010, India.
E-mail: sanket.dash@iimrohtak.ac.in
2 NHRD Network Journal
objectives of the organisation. This article posits that organisations can leverage the insights of
behavioural economics to better align HR strategy with organisational strategy.
Behavioural economics, as a term, lacks a precise and comprehensive definition. Broadly speaking, it
grew from the use of psychological experiments to describe actual economic behaviour (Pete, 2014).
Behavioural economics helps understand the actual behaviour of economic agents, especially when it
differs from predicted theoretical behaviour. The core insight of behavioural economics is that actual
human beings are not purely rational, utility-maximising entities (caricaturised as homo economicus)
and, hence, behave in ways that are deemed irrational by economists. Moreover, the deviations from
rational behaviour are not random but systematic and universal and, hence, can be generalised across
cultures. Some of the most well-known diversions from rational choice include loss aversion, mental
accounting and bounded rationality.
The key insight of behavioural economics that human beings cannot be reduced to purely utility-
maximising agents has been at the heart of most progressive HRM initiatives. Early organisational
scholars like Elton Mayo realised the need to look at employees from a more holistic perspective and
have recommended the use of non-monetary benefits such as recognition, skill enhancement and
interesting work. However, for some inexplicable reasons, most HR managers have not managed to
translate the multiple insights of behavioural economics that have emerged since the publication of
Tversky and Kahnemann’s (1974) seminal piece on behavioural economics titled ‘Judgment under
Uncertainty: Heuristics and biases’.
The article aims to inform practising HR managers about the core concepts in behavioural economics
and translate those insights into actionable behaviours for practising managers. After identifying the
insights and actionable behaviours, the article suggest ways to align those behaviours with organisational
strategy in order to maximise the organisation’s competitive advantages. The article relies on a mix of
literature review and case studies of successful implementation to communicate its objective.
These threats have increased in the current business and economic milieu where pay-for-performance
plans have become more widespread and achievement of predetermined targets has become more
difficult due to depressed economic conditions arising from the current pandemic. When confronted with
potential losses, risk-seeking behaviour may also partly explain the failure of pay-for-performance plans
in both the private and public sectors (see Langbein, 2010).
The third assumption of prospect theory is that people in general are loss-aversive and, hence, exhibit
greater sensitivity to losses as compared to equivalent gains (Tom et al., 2007). Loss aversion explains
why formally risk-less choices are considered risky by the decision-maker (Tversky & Kahnemann,
1991). An example of loss aversion in risk-less choices is the endowment effect that describes how
people ascribe a higher than market value to goods they have acquired randomly (Kahneman et al.,
1991). Although loss aversion as a concept has been extensively researched and validated (Tom et al.,
2007), the implications of loss aversion on HR practices have sadly been ignored. One immediate
consequence of loss aversion is the need to use suitable language while framing policies as logically
equivalent statements do not have similar valence in the readers’ mind. Specifically, HR personnel
should avoid framing policies that create the illusion of ownership in employee minds as they would be
unwilling to relinquish them for objects of comparable market value.
of the identified organisation (Englmaier & Schüßler, 2015). When individuals feel that the organisational
behaviour towards them is fair and just, they reciprocate with actions that reduce their personal pay-off
but lead to better organisational outcomes. Similarly, behavioural economics helps provide the framework
to identify which benefits are good substitutes for monetary benefits. From an organisational perspective,
a good benefit is one that provides equivalent utility compared to direct monetary compensation, but the
costs of providing them are less. The rest of the section discusses specific areas of human resource
management that can be improved by adopting insights from behavioural economics. The specific
insights derived from behavioural economics can not only help improve HRM practices but also create
a more systemic way of thinking that uses universal principles of human behaviour to understand the
impact of their decisions across functions. Compensation management is the branch of HRM most likely
to use economic analysis to create optimum compensation packages and, hence, insights in behavioural
economics are applicable in this area
for organisations because promotions also represent tournaments with multiple candidates and limited
number of advancement opportunities (Backes-Gellner et al., 2008). The low probability of promotions
can hamper the effort levels of personnel in extremely flat organisations and, hence, HR personnel may
need to create multiple advancement paths in these organisations rather than stick to a single corporate
ladder. HR personnel may also need to revisit their compensation packages and policies for promoted
employees to ensure that while the promoted employees are better compensated then before, the gap in
compensation between the promoted employees and other eligible employees is not large enough to
dissuade others.
Traditionally, women have been assumed to be more cooperative and less competitive than men.
Behavioural economics has helped us better understand the phenomena. Experiments conducted by
Gneezy et al. (2003) indicated that females were quite competitive in an all-female task but much less
competitive when asked to compete with males. Other studies (see Niederle & Yestrumskas, 2008)
indicate that females in general are less confident than males and, hence, high-performing females are
more likely to self-select into easier tasks in the absence of reliable feedback about their performance.
These studies indicate that firms can tweak their compensation packages based on the demographic
composition of their workforce and give potential candidates, especially female candidates, reliable
feedback about their ability in order to better attract females to their organisations.
found that output of academicians increases just prior to a significant promotion event and falls in the
immediate aftermath of the event in both the USA and Germany. However, this pattern is not noticed for
less significant pay rises. In the USA, there are two significant promotion events for academicians, while
there is only a single significant promotion event for German academicians, and the pattern is repeated
twice in case of US academicians. This suggests that organisational structures with a few significant
promotion events are better able to induce effort among employees than multiple promotions with low
significance of each. HR professionals can use this design to limit the number of promotions for each
career path. However, care must be taken to ensure that the number of prospective candidates per vacant
role does not become too high for a promotion event as it can lead to reduced effort (Moldovanu &
Sena, 2001).
distinctiveness from mainstream economics on parameters such as narrowness, rigidity and individualism
(Tomer, 2007). Both bounded rationality and prospect theory identified universal deviations from
standard economic theory and, hence, the usefulness of their inputs is universally applicable. However,
the same is not true for all strands. Hence, one possible future direction for the discipline is the movement
towards greater formalisation. A more formalised presentation of behavioural economics would also
help practitioners identify the appropriateness of the base insights and ascertain the relevance of the
discipline to their working lives.
The lack of formalisation of behavioural economics is perhaps reflected in the paucity of studies that
focus on its implications on the working of commercial organisations, arguably the most important actor
in today’s world. One exception to the above is Bewley’s (2007) work on the rigidity of wages during
recessions. Bewley (2007) surveyed the wage levels in Northeastern parts of the USA that was facing
recessionary conditions in the early 1990s, leading to high unemployment. Classical economic theory
suggests that wages will move downwards during this period to match the increased supply of eligible
workers. However, in reality, there was negligible downward movement of wages, and this rigidity was
enforced not by employees but the top management, which is supposed to act in the interests of the
shareholders and reduce cost of operations to the bare minimum possible. This phenomenon happened
due to top management’s internalisation of the importance of fostering identity, providing conditions that
will generate positive reciprocity in future and maintaining a positive mood in the organisations.
Bewley’s (2007) study suggests that many practising managers have tacitly incorporated the insights
of behavioural economics in their working lives. Multiple studies conducted in Europe have validated
the conclusion of Bewley (2007) (e.g., Babecky et al., 2010). Thus, there is a scope for research work
that aims to analyse the actual practices of managers in light of the central assumptions and insights of
behavioural economics. Such studies would help convert the tacit knowledge of managers into explicit
knowledge and potentially improve the productivity and morale of employees as a whole by allowing
less experienced managers to imitate the working styles of their more sagacious peers.
Conclusion
The article identified the key concepts and insights of behavioural economics and surveyed the existing
literature for identifying the impact of behavioural economics on HRM. Despite the influence of
behavioural economics on social science research and the rapid development, there were only a few
papers that talked about the application of the insights of behavioural economics on the HR department.
Furthermore, many of the insights were extrapolated from studies conducted in non-commercial
organisations like academia and, hence, the applicability of these insights is questionable. Geographically,
the studies on the applicability of behavioural economics in HRM are concentrated in Germany, and a
greater dispersal of studies is required to ensure generalisability of the results.
In terms of HR functional areas, the focus of the studies has, unsurprisingly, been on compensation
management. Other functional areas of HR areas where insights of behavioural economics are applicable
include recruiting, training and development and organisational structure. A survey of literature also
indicates that many working managers have tacitly internalised the insights of behavioural economics
and, hence, there is a scope for research that translates these tacit insights into a more explicit form.
Funding
The author received no financial support for the research, authorship and/or publication of this article.
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Bio-sketch
Sanket Sunand Dash is a faculty in the area of Organisational Behavior & Human Resource Management
(OB & HRM) at Indian Institute of Management Rohtak. He has completed Fellow Program in
Management (FPM) from Indian Institute of Management Ahmedabad. He worked as a senior analyst
with Deloitte US India for four years before joining the FPM program in IIM Ahmedabad. Before joining
IIM Rohtak, he was a faculty at Xavier School of Human Resources (XAHR), Xavier University
Bhubaneswar.