• 06 Jul 2009
  • What Do You Think?

Are You Ready to Manage in an Irrational World?

 
 
It is becoming clear that human behavior is much less rational than we assumed, says HBS professor Jim Heskett. Judging from replies to this month's question, there are many nuances to managing in an irrational world. (Online forum now closed. Next forum begins August 7.)
 
 
by Jim Heskett

Summing Up

What's rational in the world of management? Judging from replies to the question, "Are you ready to manage in an irrational world?," respondents to this column are ready. But they also conclude that the question is much more complex and subtle than this. Some questions raised were:

What part of the job demands rationality? Yaron Kaufman suggested that "Managers must be rational when it comes to planning, financing, operating and measuring business performance…. Irrational thinking is needed when you think about the question, 'What's next?' "

Who demands rationality? Marco Lalama pointed out that "Some people are more rational than others…. What do we do about that?" Phil Clark went even further, saying, "We were never created to be rational."

Are we objective in assessing rationality? Narendar Singh reminded us that "History has proved that each generation perceives its actions as rational but to (the) next it may appear irrational. This is the path to growth and development of civilization." Frances Pratt said, "What is normal and rational is framed by our view of reality." Rebecca Mott added, "If I have a me-centric view of life, then what seems rational to me as an individual may appear irrational in the context of social norms."

Michael Linz asked to what extent a response to the question relies on how we frame the problem? As Jim Geisman put it, "We've seen people and companies reject new technology …. Is (it) irrational … (to) place a higher value on their current solution than they do on a future uncertain benefit(?)"

What about the impact on management? Nicola Stevens concluded that "It (irrational behavior) makes suspect much of what we do as managers." In Deb Seidman's words, "Workers will become increasingly self-managed and the manager's role will require the ability to facilitate dialogue, clarify roles and responsibilities, gain alignment, drive to consensus, and enable peer coaching and feedback." Gerald Nanninga added, "Learn the (personal and individual) biases and all becomes 'rational' again for management purposes." Ron Palmer observed that the discussion "adds weight to the ideas that we need new and better tools for managing complexity …." Tony Eckel observed that "… accepting ignorance is the first step to managing successfully in an environment of uncertainty."

As for what this means for educators, Joseph Holt believes that "economics and management … will be taught even more effectively the more accurately they reflect a human reality that is more complex and imperfect than the traditional approach has supposed." Marie Taillard adds, "we are shifting away from thinking that we can predict or control the behavior of others …." Because economics is a study of value, Deepak Alse comments that "what we need to change is not the approach to value but (emphasis on study of) the perception of value." What do you think?

Original Article

Have you noticed that we are being bombarded by a flood of work by neuroscientists and behavioral economists, aided by such things as clever research design, the use of improved technologies for measuring brain activity, and the admission by Alan Greenspan that markets acted in ways he had not anticipated? The work shares several common counter-intuitive conclusions that: (1) human behavior is much less rational than has been assumed, (2) this renders much of conventional teaching in fields such as economics and management obsolete, and (3) it makes suspect much of what we do as managers.

Consider two examples that came to my attention this past week. One is a book by Charles Jacobs titled Management Rewired, which concludes that many conventional beliefs about management run counter to the findings of neuroscientists. The other is an article in this month's Harvard Business Review, "The End of Rational Economics," by Dan Ariely. It argues that theories, strategies, and actions based on assumptions of irrational behavior on the part of employees, customers, and competitors are likely to be more effective than those that assume rationality. These are just two more of a number of recent writings that both contribute to and seem in part to have been inspired by the surge of popularity of the writing of authors like Charles Handy and those (such as Malcolm Gladwell, Steven Levitt, Stephen Dubner, and James Surowiecki) he may have influenced.

In his book, Jacobs begins by asserting that, because each of us harbors our own perceptions of reality, "It turns out that most of what we thought we knew about management is probably wrong." Reactions to our efforts as managers reflect what each individual receives in relation to what he or she perceives and expects. Because this is highly subjective, the argument goes, generalizations (many of them currently taught in conventional courses) about how to manage are practically useless. Instead, managers should encourage employees to set their own goals, appraise their own achievements, and reach their own conclusions about how to improve. Managers should also spend more of their time inspiring (through stories) and devising engaging activities from which employees may, to some extent, choose.

Things become much more complex in the world of irrationality. Much of traditional economics becomes outmoded when complex relationships based on often counter-intuitive behaviors are taken into account. Instead of a management philosophy centered around the manager as the play-caller, assigning tasks and motivating people to carry them out, we are told by the neuroscientists that the new management job is one of facilitating more of a customized, do-it-yourself process centered around each newly-energized employee, one centered on questions (often leading) rather than direction.

This raises a number of questions. Is conventional wisdom in areas such as economics and management truly threatened? Is it too early to tell? To what extent should the findings of neuroscientists and behavioral economists be incorporated into the business school curriculum? How do we avoid creating a generation gap between those in management whose learning assumed that markets and people behave rationally vs. irrationally? Is it time to place more emphasis on educating students to manage in a world of irrational behavior? What do you think?

To read more:

Dan Ariely, "The End of Rational Economics," Harvard Business Review, July-August, 2009, pp. 78-84.

Malcolm Gladwell, Blink: The Power of Thinking Without Thinking (New York: Little Brown and Company, 2005)

Charles Handy, The Age of Unreason (Boston: HBS Press, 1989)

Charles S. Jacobs, Management Rewired: Why Feedback Doesn't Work and Other Surprising Lessons from the Latest Brain Science (New York: Portfolio, 2009).

Steven D. Levitt and Stephen J. Dubner, Freakonomics: A Rogue Economist Explores the Hidden Side of Everything (New York: HarperCollins, 2005)

James Surowiecki, The Wisdom of Crowds: Why the Many Are Smarter than the Few and How Collective Wisdom Shapes Business, Economics, Societies, and Nations (New York: Doubleday, 2004)