IIM Indore speech – Part 1

13th Foundation Day Speech at Indian Institute of Management, Indore

3rd October 2012                                                      by Nadathur S Raghavan


Part – 1

Distinguished members on the dais and dear friends,

It is a matter of great pleasure and privilege for me to speak on the occasion of the13th Foundation day of IIM Indore. I am particularly happy that I have been given this wonderful opportunity to address such an august audience as this.

The subject I have chosen to talk about, may be some-what unusual, but I feel that it is a subject that deserves in-depth understanding, much better appreciation and lot more emphasis, especially in the management education circles in India.

What I am referring-to, is the amazing insights that brain research has been throwing up in the last three decades and its extreme relevance to the understanding of the current challenging environment.

There is a tidal wave of new information pouring out of research labs on how our brains control our behavior in a variety of situations. Let me give you an idea of the magnitude of the work that is being done in this domain. There are more than ten thousand Neuroscience researchers in the US alone, according to a recent estimate.

The increasing importance that this discipline is receiving can be gauged from the fact that Cass Sunstein, Harvard Law Professor and one of the authors of the best selling Behavioral Economics book called “Nudge”, runs the Office of Information and Regulatory Affairs for Barack Obama, and his co-author Richard Thaler, Behavioral Science and Economics professor at the University of Chicago Booth School, has been advising the Behavioral Insight Team in the Cabinet Office of Britain’s Prime Minister David Cameron.

Neuroscience not only challenges many of our long-held assumptions of human behavior but more importantly, it compels us to question the very nature of reality.

For instance, it is now well accepted in the scientific circles, that the “external world”, as we refer to it, is simply a collection of perceptions and beliefs that is created by our brains.

Take vision as an example. The commonly held view is that light bounces off an object and enters the eye, causing the neurons on the retina to fire and send a mirror image of the object to the optic nerve in the brain.

But that’s not how vision actually works. The image reflected on the retina is digitized and travels through the optic nerve as 125 million bits of information and then gets processed by over one billion neurons in the two dozen areas of the visual cortex. As this processed information travels to the seat of consciousness in the prefrontal cortex, it receives inputs from several areas of the brain that are linked to memory, emotion, and even our desires. What we perceive, therefore, is not the direct image, but the creation of the mind based on what we remember, how we feel, and even what we want. Thus when ten people look at the same scenario their brains will interpret and encode ten different versions based on their own previous experiences and perceptions.

Michael Shermer in his very interesting book “Believing Brain” explains that reality exists independent of human minds, but our understanding of this reality depends on the beliefs that we hold at any given point of time. He, in fact, calls this process, wherein our perceptions about reality are dependent on the beliefs that we hold, as belief-dependent realism.

You may all be still wondering what Neuroscience has got to do with management education. Let me simply say that Neuroscience insights on human behavior has the power to change our fundamental approach to running organizations.

Experts in fact believe that the organizations that we strive to build can be effective and sustainable only when they are designed and run, keeping the brain in mind.

Ladies and Gentlemen,

Before I take you through the amazing and, some times, amusing manifestations of irrational behavior in humans, I would like to salute Bertrand Russel who had the wisdom to appreciate this behavioral underpinning in human beings, when he remarked “It has been said that man is a rational animal. All my life I have been searching for evidence which could support this”.

All of us, as human beings, are inherently biased and this has been firmly established over the past 50 years by literally hundreds of empirical studies. Psychologist Daniel Kahneman received the 2002 Nobel Prize in Economics for his work in this area. The conclusion reached by Kahneman and his colleagues is that people use unconscious shortcuts, termed as heuristics while taking decisions.

Our unconscious biases make us behave irrationally most of the time and I will try to highlight some of these biases and their insidious effects in our decision-making.

Human Beings, ladies and gentlemen, are social animals. As social animals we have evolved over the years to depend on our tribes, literally, for our safety and survival.

The idea that humans have a need to belong to social groups is so fundamental in psychology that one of the seminal papers on this topic has been cited almost 3000 times since its publication in 1995.

It’s a well-known principle in social psychology that people define themselves in terms of social groupings and express their loyalty to their own groups by denigrating others not belonging to their groups.

The theory of Cultural Cognition, in fact, postulates that we shape our opinions to conform to the views of the groups with which we most strongly identify.

There is some survival mechanism at work, in creating and supporting in-group and out-group distinctions. In our desire to feel safe, we bond together with all those who look more like us and then build virtual fences to keep outsiders away.

It is only when we look thru the lens of tribalism at work, that we can make sense of extremely irrational behaviors including large scale genocides, uncontrollable religious terrorism and wide scale regional extremism, to cite a few.

Psychologists Henri Tajfel and John Turner have demonstrated the strong bias that people show in favor of ‘in-group’ members, even when the groups are arbitrarily formed. In an interesting experiment when people were randomly assigned into groups and everyone was well aware of this random assignment, volunteers still showed a marked preference for members of their group. They even went on to give rational arguments on how unpleasant and immoral the ‘out-group’ people were.

Organization Leaders have therefore the challenging task of evolving strategies to manage group dynamics in their own organizations such that it channelizes the energies of its people towards fruitful endeavors instead of getting dissipated in fissiparous tendencies.

David Rock, Co-Founder of Neuro Leadership Institute says that the brain experiences the workplace, first and foremost, as a social system. Once leaders learn to manage the social dynamics of a workplace, they can effectively engage their employees by forming collaborative teams that work in harmony.  David Rock goes on to say that the ability to intentionally address the social brain in the service of optimal performance will be the distinguishing leadership capability in the future.

Let us now look into the all-pervasive Optimism Bias.

The belief that the future will be far better than either the past or the present is the core of optimism bias. Both neuroscience and social science suggest that we tend to be more optimistic than realistic most of the time.

This Optimism Bias severely impacts both microeconomic and macroeconomic activities. For example, Optimism Bias influences high-stake financial decision-making, such as startup investments and merger decisions. It was found that 68 percent of startup entrepreneurs believe that their company is more likely to succeed than similar companies, even when they were fully aware that in reality only 50 percent of startup companies even survive beyond the first three years of activity.

Research also finds that 65% of CEOs are so over-optimistic about the future that they overpay when acquiring target companies and also undertake value-destroying mergers.

On the macroeconomic level, Robert Shiller in his book “Irrational Exuberance” makes the case that irrational exuberance is the prime contributor for generating bubbles in the financial markets.

An example closer home is that this very same bias makes second-year students of MBA, overestimate not only the number of job offers that they expect to receive but also the magnitude of their starting salaries.

The question we need to answer is what makes people maintain this rosy bias even when information challenging such forecasts is readily available.

Neuroscientists tried to find the answer by scanning the brains of people as they processed both positive and negative information about the future. The findings are striking.  When people received inputs that enhanced their beliefs, it was found that their neurons faithfully encoded the desirable information. On the other hand, when pessimistic information was passed on to their brains, they completely ignored them.

Ladies and Gentlemen,

Many of the problems that the world faces today can be attributed to the issues related to perceived fairness.

Brain science has offered some remarkable insights into how fundamental the need for fairness is, for all humans. Prof Golnaz Tabibnia of Carnegie Mellon University, who has done extensive research on fairness, says that the tendency to resist and fight against unfair outcomes is some thing that is deeply rooted in all human beings.

Scientists claim that there is a specific area in the brain that processes “fairness issues”.  A study at the California Institute of Technology pinpointed the insular cortex, a region of the brain that is the seat of emotional responses, as the location where issues concerning equity are processed.

Fortunately for us, we can increase feeling of fairness in the work place by making people believe that their voices and opinions are considered important and by recognizing their contributions as having positive impact on results.

Fairness, it turns out, activates the same network in the brain that monitors physical pain and pleasure.

Managers need to appreciate that any work environment that is perceived as unfair has far reaching consequences. People in such environment will experience an increase in the levels of the stress chemical cortisol, impacting not only their health and wellbeing but also their motivation levels for any type of work. It should therefore come as no surprise that employees tend to leave their well-paid jobs when they feel that their organizations have been unfair towards their workers, towards their customers or towards the community at large.

We all suffer from “Status Anxiety” even though we may not be aware of it, most of the time.

Status is our place in the social pecking order, relative to others. Our brains constantly monitor our status and send signals of threat or reward based on their assessment of changes in our ranking. Much of this happens subconsciously. Our status is easily threatened when at any time we feel belittled or subordinated by the words or actions of another. At that time we literally feel smaller and less worthy.

Not surprisingly, improvement in status is considered by most people as lot more valuable than financial rewards.

Ironically, status also generates vicarious satisfaction in people when they meet others who are worse off than themselves, the German concept of “Schadenfreude”. Status even explains why people love to win arguments, even pointless ones.

The importance that people attach to social ranking was clearly demonstrated by researchers in an experiment. The volunteers were asked to select one of two programs, the first option being a plan that will earn them a sum of $50,000 a year in a scenario where other people in the same plan earned only $25,000 or half the amount. The second option was for the volunteers to earn a higher amount of $100,000 a year, but in this scenario others in this plan earned a whopping $250,000 or two and half times.

Surprisingly, the majority of people selected the first option, clearly indicating that they are willing to give up the opportunity to earn $100,000 as opposed to $50,000 just to make sure that others in the group earned less than them.

This result is one among thousands of experiments in behavioral economics, neuro-economics and evolutionary economics conclusively demonstrating the importance that people attach to relative social ranking in preference to financial gains.

Naomi Eisenberger, a leading social neuroscience researcher at UCLA, wanted to understand what goes on in the brain when people feel rejected by others. She designed an experiment that used Functional Magnetic Resonance Imaging to scan the brains of participants as they played a computer game called “Cyberball.”

Cyberball was designed as a ball tossing game over the Internet with two other people. The ball got tossed between the volunteers and two others represented as avatars on the computer. In the experiment, half way through the game, the volunteers stopped receiving the ball while the other two players continued throwing the ball to each other. The researchers found that this experience generated intense emotions in the participating volunteers.  What Eisenberger found was that when people were excluded, their brains showed activity in the dorsal portion of the anterior cingulate cortex, which is the neural region that is involved with pain thus demonstrating that exclusion and rejection was physiologically painful.

This has tremendous implications in workplace dynamics since there are any number of activities and situations that can engender such feelings.

Fortunately, it is not that difficult to build among employees the feeling of improved status. People experience an increase in status when they are acknowledged for their efforts or recognized for their expertise, or simply compared favorably with others. Interestingly, such feelings are also generated when people are actively involved in addressing issues that are normally reserved for the senior leaders in the organization.

Demonstrating ones value to the group that they belong to, has also been found to improve the status.

In terms of brain chemistry, when an increase in status level is experienced, dopamine and serotonin levels go up in the affected people making them feel happier, and cortisol levels go down reducing their stress levels. Testosterone levels go up increasing their focus and making them feel strong and confident. With more dopamine and other happy neurochemicals, an improvement in status increases the number of new brain connections that are made every hour. A feeling of high status, therefore, enables people to process lot more information and subtle ideas with much less effort.

Let me now draw your attention to the stranglehold that our internal beliefs have on us.

It is well established that we are all driven by our beliefs. We form our beliefs for a variety of subjective, emotional and psychological reasons that are based on our interactions with family members, friends and colleagues and also influenced by our culture and society. Once we form our beliefs, we defend, justify and rationalize them with a great degree of passion, making use of variety of tools including cogent arguments and rational explanations. It is now well proven that our beliefs come first and all explanations then follow to justify these beliefs, however irrational some of these beliefs may appear to others.

Interestingly, neuroimaging studies have shown that, at the level of the brain, superstitious beliefs like existence of ghosts or religious belief that ten-headed king Ravana was vanquished by Lord Rama are no different from the beliefs that two plus two equals four or Taj Mahal is located in Agra.

This is the reason why we live most of our lives as though our beliefs were really facts. Beliefs become amazingly resilient because they form strong neural connections in the brain and these well-entrenched memories and emotions play out as behaviors without our explicit awareness.

This leads me to the theory of Cognitive Dissonance by Leon Festinger, an American social psychologist who claimed that when people are persuaded to behave in ways that are inconsistent with their beliefs, an uncomfortable psychological tension is aroused in their brains. This tension, he suggested, will compel people to change their beliefs so that they fit their actual behavior.

Cognitive dissonance occurs in the world of investing too. Very often, investors buy a stock based on certain analysis and criteria. However, subsequently, when they receive information that contradicts their original hypothesis, they distort, manipulate or completely ignore this new information so as to relieve the discomfort caused by the conflicting views in their heads.

We confront, on a daily basis, any number of situations in which people resolve cognitive dissonance through rationalizations. The criminal who justifies his crimes blaming his difficult living conditions, the person who feels he got fired simply because his boss did not like his looks, or the self-made billionaire who keeps away from meeting people from his past since he is convinced that all they want is his money – are all examples of rationalizations to manage cognitive dissonance.

Nearer home, this bias is present in academic circles, where a researcher will deliberately choose to overlook all data that contradicts his theory in an attempt to increase the credibility of his study.

What we need to introspect seriously is how we can prevent ourselves from falling prey to “Believing our own Lies”, which is the dangerous consequence of cognitive dissonance.

The potential tools at our disposal are some meditation training practice that will improve our awareness of this tendency and lot more of self-introspection questioning our own points of view.

Psychologists Daniel Kahneman of Princeton and Amos Tversky of Stanford University published in 1979 a breakthrough paper called “Prospect Theory: An Analysis of Decision under Risk,” on how people think about and handle uncertain rewards and corresponding risks.

In the ensuing decades, this seminal paper in Behavioral Economics became one of the most widely cited papers in Economics. The authors argued that the ways in which alternatives are framed had strong influence on the decisions that people made.

Edward Russo and Paul Shoemaker provide an amusing story to illustrate the power of framing. A Jesuit and a Franciscan were seeking permission from their superiors to be allowed to smoke while they prayed. The Franciscan simply requested for permission to smoke while he prayed. His request, as to be expected, was straight away denied. The Jesuit, on the other hand, framed the question in a different way: “In moments of human weakness when I smoke, may I also pray?’’ He got the approval.

Similarly the “loss aversion” theory posits that the pleasure people derive from gains is less intense than the pain from equivalent losses. In fact people prefer the option that avoids losses even when the alternative option of gains is twice as much. Marketers fully understand this and frame the expected results of their products or services in terms of  “gains” and “successes” and avoiding words that connote “losses” and “failures.”

Aldert Vrij in his book “Detecting Lies and Deceit” gives an interesting example on effects of framing. Participants in the experiment were shown a film of a traffic accident involving several cars. Among various questions about the accident, one particular question was differently framed for various groups. In the question “How fast were the cars going when they contacted each other?” the verb ‘contacted’ was replaced by ‘hit’, ‘bumped’, ‘collided’ or ‘smashed’ for various groups. While the question with the verb ‘contacted’ elicited the lowest speed of 31 miles per hour, the verb ‘smashed’ got the response of highest speed of 41 miles per hour.

One week later, the participants were asked whether they had noticed in the video broken glass at the accident site. Although the correct answer was ‘no,’ 32% of the participants who got the ‘smashed’ verb in their question responded that they did see the broken glass. This shows that the framing of the question can even influence the memory of the incident.

The strategic implication of all this for organizations is that when managers are pitching a proposition to their employees or to their customers or to any other stakeholders for that matter, they need to take special care to frame the proposal using appropriate words that will influence the recipients in the right direction.

End of Part-1

Link to Part 2 of the speech.