Behavioral Economics in Business Decision-Making
Behavioral economics is the modern approach of evaluating and updating business strategies to optimize them and choose the most appropriate solutions. The term can be defined as an exploration of people’s biases, personalities, traits, and action patterns applied to their buying and consumption priorities (Thaler, 2016). This paper aims to analyze behavioral economics’s role in the business decision-making process and describe the impact of a consultant’s job in utilizing that management approach.
The benefit of applying behavioral economics in business is that the approach relies on psychology and helps predict possible irrational consumer choices. In business, the decision-making process plays a vital role in determining the strategy and optimizing human and physical recourses. Economic models tend to fail in the modern world due to rapid technological progress, and companies that use traditional trading and management structures might not survive (Parnell, 2017). Behavioral economics allows businesses to create a solid strategy capable of dealing with changes due to its direct relation to a customer. Factors such as motivation, perception, cognition of an environment, and reasoning, affect an individual’s decision-making process and are necessary to consider in exploring behavioral patterns (Fernández-Huerga, 2008). The same can be applied to businesses: organizational goals, knowledge of market demands, and reasoning rationality play a crucial role in making optimal choices.
When a company’s growth strategies are based on the behavioral economics model, its priorities are determined by the target audience’s demands that drive a market’s niche trends. Indeed, deeply analyzed needs and wants, world perceptions, and reasoning capacities of potential customers help businesses make the right decisions (Fernández-Huerga, 2008). For example, a human recourses (HR) consultant who applies behavioral economics could include the clients’ expectations about service in a hiring process. Moreover, they can help develop a workplace environment where the employees know a customer’s portrait and can consider it while making decisions.
Behavioral economics implemented in the business decision-making process will profoundly affect a company’s management, financial literacy, marketing, and strategic decisions. Administrative operations must perform thoughtful, rational actions for any function, from establishing new departments to changing the company’s chief executive officer. Behavioral economics can help evaluate the choices by analyzing emotions, biases, cultural and socioeconomic backgrounds, and expectations of every involved person (Parnell, 2017). Management based on that approach can establish a profound workplace environment and consequently increase employees’ efficiency.
Financial literacy helps businesses maintain stable growth and avoid severe losses, and behavioral economics identifies the priorities in the decision-making process during a company’s accounting operations. Awareness of customer needs and a firm’s capabilities is crucial in developing internal billing intelligence (Berman & Knight, 2008). Moreover, behavioral economics can help companies train their employees’ financial literacy by defining their motivations and perception of work and considering these factors in the decision-making process for internal money-based operations (Berman & Knight, 2008). HR consultants play a significant role in exploring action patterns and reasonings of the employees and establishing the optimal program to increase their financial education based on a firm’s values.
Marketing is the sector where the behavioral economics model plays the most significant role due to its direct connection with customers. A company can use the strategy based on its audience’s wants and needs, perceptions, and choice capabilities to improve brand sustainability, add new products, and achieve growth goals (Aaker, 2001). Moreover, consumers’ behavioral patterns and choices determine the most desirable goods and features of a specific period. Aaker (2001) claims that “market trends will affect both the profitability of strategies and key success factors” (p. 94). To maintain growth and avoid unexpected losses, the marketing decision-making process should rely on a behavioral economics model that can predict people’s choices and help companies fulfill a market’s demand. The HR consultant’s role is to ensure that employees who directly connect to customers have sources to contact with those who influence the selling strategy.
Business decision-making applied to fundamental changes such as a company’s merger and acquisition can consider behavioral economics to make the optimal choice. From an external side, a firm needs to evaluate if its product will still be desirable under another brand and how it complies with customers’ choice capabilities (Shook & Roth, 2011). Moreover, behavioral economics can be combined with competitors’ analysis to assess the risks of losing customers. Internally, a company’s managers have to understand how, for example, the acquisition will affect employees’ motivation. An HR consultant can study if there are any biases about such changes and provide open communication channels to let executives provide staff with clear explanations and strategies.
Behavioral economics is the novel approach that makes the business decision-making process rational and allows companies to avoid damage due to unexpected market turnouts. The strategy can be implemented internally by studying employees’ motivations, values, and action patterns or externally by identifying customers’ demands’ root causes, and choice capabilities. Professionals such as HR consultants can promote behavioral economics in their firm by creating a proper workplace environment, establishing open communication, and applying knowledge of clients’ behavioral attitudes in the hiring-related decision-making process.
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Thaler, R. H. (2016). Behavioral economics: Past, present, and future. American Economic Review, 106(7), 1577-1600. Web.