IIM Indore speech – Part 2

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

3rd October 2012                                                      by Nadathur S Raghavan


Part -2

Ladies and Gentlemen,

As one intimately involved with Human Capital Management strategies for more than three decades, I would like to take up the findings from Neuroscience on the critical issue of Talent Management.

We are all familiar with bonuses and incentives that are extensively used in the corporate world as powerful tools for motivating staff for superior performance. Behavioral Economists are criticizing this overemphasis on financial incentives and are in fact questioning the effectiveness of these incentives in the absence of Intrinsic motivation which they advocate is lot more critical to deliver results.

Social scientists talk about two types of motivation, the intrinsic motivation, which makes us indulge in activities for their own inherent satisfaction and then the extrinsic motivation that makes us do things for some external incentives including financial rewards, promotions and performance recognitions.

The interplay between the extrinsic inducements that are expected to influence an individual’s behavior in the right direction and the intrinsic motivation that is inherent in human nature is the territory of Self-Determination Theory.

Research indicates that certain types of extrinsic motivation tools like financial rewards, deadlines, and the threat of punishment may actually turn out to be counter productive as the following case will illustrate.

An Israeli daycare company with two centers tried to evaluate the effect on behavior induced by punishment and comparing it with the behavior that is generated by implicit motivation. Both their daycare centers had a rule that parents must pick up their children well before four pm in the evening. This was to avoid the necessity, for one teacher to stay back late till the last child was picked up. To improve compliance by parents, they tried an experiment, just in one location, of imposing a fine of $3 for each time the child was picked up late. At the end of three weeks, strangely, the center with the $3 fine for late pick up, saw a doubling of the parents who came late. It was as though the fine removed the implicit moral motivation or a certain feeling of guilt associated with making a teacher stay late. Instead the penalty felt like a service payment for the extra time spent by the teacher.

Similarly, researchers found that employees showed the least improvement in the areas that were criticized during performance feedback, indicating that criticism actually had a negative effect on their performance.

This behavior is explained by the compelling need that all people feel for maintaining a certain positive self-image.  When their self-image is threatened by any negative feedback, people simply ignore, discount, or rationalize it away.

At a macro level, the same logic holds good when evaluating effectiveness of regulatory versus voluntary compliance. According to studies published in Journal of Economic Behavior & Organization, the threat of penalties tends to crowd out the honest behaviors that most people, most of the time, try to display. Research suggests that heavily regulated economies are more likely to have higher levels of moral violations and India is a prime example.

It is, some times, very amusing that all of us, without exception, can be so irrational in our decision-making and I will illustrate this using the ‘anchoring bias’ as an example.

Anchoring Bias refers to the tendency of relying too heavily on one reference anchor or piece of information when making decisions.

All experienced salesmen effectively leverage this weakness by showing you a higher-priced item first, anchoring that price point in your mind.

Let me explain this using a scenario.

Imagine that you walk into a clothing store and instantly get attracted to a leather jacket. You try it on, look in the mirror and decide that you must have it. You imagine yourself in that jacket attracting a lot of attention. Then you lift the sleeve to check the price and it shows $800.

Well, that’s too much to pay. You start to head back to the hanger when a sales person stops you. “Do you like it?” he asks.

“I love it, but the price is just too much” is your comment.

“Not really, that jacket is on sale right now for just $400.”

If you analyze, the jacket is still expensive, and you don’t need it really. But a great jacket from a well known brand at half the regular price seems like a steal.

You walk to the payment counter, make the payment thru your credit card, unaware that you’ve been tricked by the oldest retail con game in the business.

Here is another fascinating experiment.

We are all familiar with auctions. Let me take the example where people enter an auction for several items, such as cordless phones, books, chocolates, bottles of wine etc.  The bidders write down for each of the items, the maximum amount of money that they are willing to pay.  Whoever submits the highest bid for an item, wins that item and pays the amount. People who are keen to buy a specific item are expected to enter higher bids than others, because they place higher value for the item at that point of time.

But here’s the ingenious twist introduced by Behavioral Economist Dan Ariely.  Before people entered their bids for each item, he asked them first to write down the last two digits of their Social Security number and then write down their bids for various items.

Ariely’s experiment threw up surprising positive correlation between the last two digits of the Social Security numbers and the bids that people entered. In other words, bidders whose last two digits of the Social Security numbers were larger in numerical value, for some reason, were driven to enter higher bids for a given item. For example, those whose last two digits were between 00-19 were willing to pay $8.64 for a cordless trackball on an average.  In sharp contrast, those whose last two digits of the Social Security number were between 80-99 were willing to pay $26.18 for the same item, more than three times as much. The question to ask is, how the last two digits of bidders’ Social Security numbers, by any stretch of imagination, can possibly affect how much they are actually willing to pay for a whole host of items?

Daniel Kahneman, considered the “father” of behavioral economics, has an explanation. He says, that when people are thinking about quantities, the first number that gets their full attention has enormous impact in all future numbers.

Ladies and Gentlemen,

Much of our behavior is strongly influenced by other people’s behavior and it therefore becomes imperative that all leaders demonstrate good behavior all the time. Neuroscience strongly endorses the need for leaders to lead by example.

Researcher Michelle vanDellen has shown that picking social influences that are positive can improve ones own self-control and more importantly, by exhibiting self-control, they are also helping others around them to do the same.

While it is generally known that people do tend to mimic the behavior of those around them, what vanDellen’s study showed for the first time was that self-control is contagious across all behaviors.

What this signifies is that thinking about someone who exhibits good self-control by regularly exercising, for example, can make you improve your own self-control in many other areas like sticking to your financial goals, or attending to your self-improvement programs, or cutting out those unnecessary calories etc.

The effect is so powerful, that seeing the name of someone with good or bad self-control flashing on a screen for just 10 milliseconds had direct impact on the self-control behavior of volunteers in an experiment.

Similarly, the theory that bad behavior begets bad behavior was well proven by a series of field experiments in Groningen in the Netherlands designed to test this “broken window” theory. The theory posits that If someone sees, say, graffiti scrawled on a building, he or she will be tempted to do the same or commit some other illegal or mischievous act.

In fact, sociologists often cite this theory as a possible reason that petty or small crimes in New York City dropped substantially in the 1990s after the city scrubbed its buildings, trains, buses, walls etc. clean of graffiti.

From the organization perspective, it is found that merely observing a leader publicly blaming an individual for a problem, greatly increases the odds that the practice of blaming others will spread with the tenacity of an epidemic, according to research from the USC Marshall School of Business and Stanford University.

Nathanael J. Fast and Larissa Tiedens conducted four different experiments and found that publicly blaming others dramatically increases the likelihood that the practice will become viral. The reason they cite for this behavior is that blame spreads quickly since it triggers the perception that one’s self-image is under assault and must be protected.

On the positive side, researchers have found that kindness is equally contagious and good acts by a handful of individuals can really make a big difference.

Professor James Fowler of Harvard claims that co-operative behavior is contagious and will spread quickly from person to person to person. When people benefit from kindness from some one, they tend to “pay it forward” by helping others who were not originally involved, and this creates a cascading effect of co-operation that positively influences many more in the social network.

Ladies and Gentlemen,

Without our explicit awareness, our brains are being primed all the time.

To bring out the unconscious priming effect, psychologist Aaron Kay of Stanford University had students take part in a one-on-one investment game with another unseen player.

One half of the students played the game while sitting at a large table, at the other end of which was a briefcase and a black leather portfolio. The other half of students sat at a table that had a backpack placed at the end.

It was found that the students at the table with the briefcase and leather portfolio were far stingier with their money than the students at the other table.

The mere presence of the briefcase, noticed but not consciously registered, generated business-related associations and expectations leading their brains to get into a competitive mode of playing the game.

In another experiment, Dutch psychologist Henk Aarts made the undergraduates sit in a cubicle to fill out a questionnaire. Out of sight, he placed a bucket of water in the room with a splash of citrus-scented cleaning fluid that gave off a faint smell. He also arranged snacks in the next room, for consumption after the test. After completing the answers to the questionnaire the young men and women were provided crumbly biscuits as snack.

The researchers covertly filmed the snack time and found that the students who had smelled the cleaning fluid went on to clear away biscuit crumbs three times more often than the comparison group, who had taken the same questionnaire in a room with no cleaning scent.

Dr. Schaller at Northwestern University asked undergraduates in an experiment to recall either an unethical action from their past, like betraying a friend, or a virtuous deed, like returning a lost property. After completing this task the students were asked to choose one of two gifts, an antiseptic wipe or a pencil. It was found that those who had recalled bad behavior in the experiment preferred the antiseptic wipe twice as much as the others. They were primed to psychologically “cleanse” their consciences.

In another interesting experiment, psychologists at Yale managed to alter people’s judgments of a stranger by simply handing them a cup of coffee.

The study participants were college students who had no idea that their social instincts were being deliberately manipulated. On the way to their laboratory, the students had bumped into a laboratory assistant, who was carrying textbooks, a clipboard and some papers. He was also holding a cup of either hot coffee or iced coffee for which he requested students to give a hand in holding the cup.

That was all it took to prime their brains. When asked to rate a hypothetical person that they later read about, all those students who held a cup of iced coffee rated the person as being much colder, much less social and lot more selfish compared to their fellow students, who had momentarily held a cup of hot java.

Findings like this one, as improbable as they seem, have been pouring forth in psychological research over the last few years.

One area that is attracting lot of attention in the recent years is Neuro-marketing.

Neuromarketers study and analyze the brain activity of consumers while subjecting them to various stimuli, as opposed to market researchers who depend on conscious responses to survey questionnaires. Neuromarketers use leading-edge technologies to measure brain activity of consumers using fMRI, EEG, galvanic skin response, eye-tracking sensors and other biometric approaches.

Advertisers have known for a long time now, that it is the unconscious mind and not the conscious mind that drives people’s response to advertisements, brands and products. Research now confirms that, by and large, customers do not really know what drives their decision to buy a product or service.  This is exactly the reason why traditional market research fails to provide meaningful and reliable results most of the time.

Neuro-marketing on the other hand claims to possess effective tools to better understand the customer minds.  Well-known brands like Google, Facebook and ITV are commissioning neuro-marketing companies to help them create more impactful advertisements for their products and services.

US company NeuroFocus founded by Dr. A.K. Pradeep, now part of The Nielsen Company, is pioneering the concept of neuro-marketing by using brain scanners to probe emotional responses of customers.

Significantly, Citi, Google, HP, and Microsoft, as well as soda companies, brewers, retailers, manufacturers, and media companies have all become clients of NeuroFocus in the past six years.

Barry Herstein who left American Express to join PayPal is one who successfully leveraged Neurofocus tools to accurately identify brand attributes of PayPal that people really liked.

When conventional online survey threw up attributes very different from those of Neurofocus, he trusted the findings of NeuroFocus and set out to create a coherent global branding for the company, based on these attributes.

Herstein said that his boss, PayPal president Scott Thompson was extremely skeptical about this new technology, but Herstein staked his reputation on the new approach.

His gamble paid off and in the world of direct marketing, where going from 1.2% to 1.3% improvement in response rates was itself considered significant, his campaign managed unheard of improvement from 4% to 16%.

Gemma Calvert, a former Oxford University neurologist, founded rival company Neurosense and claims that her advanced neuro-marketing techniques that monitor blood flow levels in various parts of brain can predict with high degree of accuracy how customers respond to various advertisements.

Neurosense also has an impressive list of clients including McDonald’s, Unilever, Procter & Gamble, and GlaxoSmithKline.

Let me quickly touch upon the role of Instinct that experts rely upon while taking decisions.

Let me first define who an “Expert” is.  Niels Bohr, the physicist, defined expert as one who has made all the mistakes that can be made in a very narrow field. Brain research supports this perspective.  Research indicates that when an expert evaluates any situation or an idea, contrary to popular expectation, he does not follow the process of systematic comparison of all options available. He also does not do extensive analysis of data or use complex spreadsheets or ‘what if’ analysis tools. The expert, in fact, depends on the emotions naturally generated by his dopamine neurons.  The reason why the expert’s advice still turns out to be good is because of his rich knowledge base. All of his previous prediction errors have been converted into useful knowledge and is stored away in his brain and this stored knowledge generates a set of accurate feelings while evaluating a situation. For instance, Gary Kasparov, the grand master of chess, obsessively studies and analyses his past matches and stores away all the slightest imperfections in his past games. However, when he sits down to play his game, he simply plays by instinct or feelings.

It should be clear by now, ladies and gentlemen, that I can keep talking about the fascinating findings of brain research, if only there was no time constraint.

I would have, for example, loved to explain why our memories are wrong at least as often as they are right and how false memories are the primary cause for mistaken eyewitness identifications contributing to approximately 75% of the 297 wrongful convictions in the United States.  These convictions were later overturned by post-conviction DNA evidence and very unfortunately, these wrongly convicted people served on an average 13 years in prison according to “Innocence Project”.

I would have liked to talk about Self-Serving Bias that causes an individual to attribute all positive outcomes to personal and internal factors while completely blaming external factors for all negative outcomes.

I would have also liked to show you that we are all without exception unaware of what “we are unaware of” and that all of us who are more than six years old operate from unconscious levels of mind almost 95% of the time.

I would have liked to show that our minds have evolved over the years to maintain the status quo and this comfortable status quo bias keeps away many senior leaders from taking bold initiatives and new strategies that are so critically needed for the growth of their organizations.

There are so many interesting topics.

However I will stop here before you ask me to.

It is my fervent hope that I have kindled enough interest in all of you to think seriously of incorporating in your MBA curriculum, some of the more critical insights from brain research.

I have even a better suggestion. Create a short Senior Management Program with emphasis on Neuroeconomics and Behavioral Economics. The title of such a course could be “Unleashing Human Potential keeping the Brain in Mind”.

Such a course should address the issue raised by Prof Robert Grant of Bocconi University in a recent interview with DNA. Prof Grant rightly feels that the critical role of any CEO is not really decision-making, but to build and manage robust organization culture and enable initiatives that will develop the skills, knowledge and intrinsic motivation of his mangers. He points out that CEOs of large companies are aware of just about 2% of what is going on in their organizations. They should, therefore delegate most of the decision-making responsibilities to the enabled and empowered managers at various levels of hierarchy.

Let me stop here and once again thank the organizers for giving me this wonderful opportunity.

Thank you all for your patient hearing


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