Behavioral Economics and Benefits

Why do so many employees fail to exercise in spite of the well-known benefits of doing so? Why do employees skip medications that could prevent serious illness and improve their quality of life?

Behavioral economists rely on psychology to explain human behavior and they have a few theories.

One is "loss aversion" --- that is, the tendency to care more about the possibility of loss than the possibility of gain. This is important in explaining why it’s so difficult to encourage healthy lifestyles. There’s immediate loss when people switch their habits to eating less or exercising more. Let’s face it --- junk food tastes good and exercise is hard. The long-term gain --- better health --- doesn’t seem like a gain because it’s not immediate.

That may be why the wellness programs some employers offer have not produced the best results. Example: The promise of charging lower medical premiums if employees quit smoking (a future gain) and charging higher premiums to employees if they don’t quit (a future pain). According to a recent RAND study offering rewards after the fact has led to only modest behavior changes and limited cost savings.

By using the principle of “loss aversion” employers might be better off providing upfront rewards such as immediately charging lower medical premiums to people who commit to quit smoking. For employees who don’t live up to their commitment and quit, premiums are raised. This has proved to work in other situations.

Another theory is Kevin Volpp’s “automated hovering”. It’s a cost effective way to monitor patients and give feedback. Studies show that patients don’t always take their medication as prescribed following a serious illness. Even making it free may not be enough to motivate them.

Researchers are now using telemedicine tools to monitor patient behavior and encourage compliance with prescribed treatment. In experiments, patients who take their medication are eligible to win daily cash prizes. This practice recognizes the importance of immediate rewards.

A third theory is Thaler’s “choice architecture”. Thaler describes “choice architects” as those who help shape situations where people have to choose. They can be “nudged” to make decisions that are good for them. Example: At a cafeteria, the first thing in the line is the salad bar. That’s a good thing --- it’s healthy. If mac and cheese and French fries were placed at the beginning of the line, people might load up on them and not take any salad.

Back to employee benefits. Employees are being asked to become more involved in their own healthcare. Behavioral economics can offer insights into employee behavior which can be useful for Benefits professionals in designing benefit communications. Employee choice is important, but the need for help in understanding those choices is more important.

Marketing has long used choice architecture to nudge customers towards specific brand or product decisions. Consider a supermarket that puts certain brands or products on shelves at eye level versus on the lower shelves. Customers are nudged to take the ones on eye level. This technique is good for the company that wants more of its products sold.

There are, however, ethical questions to be considered when attempting to influence employee behavior. It’s one thing to nudge customers toward a certain brand of spaghetti sauce and quite another to nudge employees toward a specific medical plan.

To what extent should people be nudged into doing things that are good for them? In a free society, shouldn’t people be allowed to be obese, smoke, skip their medications, or choose questionable medical treatments?

Here’s the bottom line: We are all for employee rights to make their own benefit decisions. At the same time, we also want employees to make choices that are in their best interests. Behavioral economists say that as long as employees are allowed free choice --- both good and bad  --- then it’s OK to help them make decisions that for their long term good. In other words, it’s OK to nudge.

Behavioral economics has intuitive appeal --- it seeks to work with human limitations instead of fighting against them. But there needs to be more research before employers launch into full-scale practice.

When all is said and done though, I still have a problem with nudging.

Jacque Vilet, President of Vilet International, has over 25 years’ experience in Human Resources. In her current role she works with start-ups and multinationals on both domestic and international HR issues. Jacque has an M.S. in Psychology and an MBA from Southern Methodist University. She speaks at conferences in the U.S. and overseas, contributes to various HR and talent management publications and conducts frequent webinars. 

Comments

[Jay Schuster]

What is the saying? "You can lead a horse to water . . . . " When 'cafeteria compensation' started considerable research was done of workforce choice-making. Initially, 'cash' was to be one of the choices and the original idea was to offer a 'cafeteria' of choices as an alternative to cash. However cash turned out to not work because the IRS said that if cash is an option every other benefit pick would be taxed as cash. So the initial idea of choice-making options died. However, the research on choice-making had predicted that most members of the workforce would pick cash over whatever else was offered.

One tech company that had invested in a substantial 'employee fitness program' including an 'on-site gym' was concerned about usage. To improve gym usage they provided strawberry shortcake one day a week for those that visited the gym. Not suprisingly gym visitation increased on 'strawberry shortcake day'.

We buy a lot of toys for our two cats mostly because we think the toys are 'cute'. However, the cats most often ignore the new toys and sleep all day. Is there a message in that somewhere?

[E. James (Jim) Brennan]

If you have a problem with nudging, Jacque, then how can you stand operating in HR and participating in compensation management? Trying to influence human behavior is the bedrock foundation of our profession. Don't tell me you don't care what kind of work output results come from employees! Would be hard to design programs to produce desirable outcomes that lack any "nudging." A carrot is a nudge (inducement) to a horse, isn't it?

I'm overjoyed to see the behavioral economics topic covered, being a big fan of the practical writings of Dan Ariely, PhD ("Predictably Irrational", etc.).

[Ross]

The book, Nudge, referenced here gives some employee benefit applications of the nudge idea:

https://nudges.wordpress.com/tag/401k/

[Jacque Vilet]

Thanks for the comments all. The book Nudges is good and thanks for sharing Ross. Google has done some of this stuff but didn't go into it for lack of space. Read Lazlo Bock's book Work Rules or google (LOL!) "Google and behavior economics" to see some examples.

Jim --- what I mean is that it seems to me that using nudges can become a slippery slope if the "wrong" people use them. Since we are in an election year --- need I say more? :-)

[Jacque Vilet]

Jay agree that it takes work to find just the right motivator.

I've read recently that when AI becomes really advanced/human people will be "shaped" by it. Example: Someone wants to do something entertaining one night. AI will give him/her specific options. If the person wants to do something not listed AI just keeps presenting those same options. At some point the person gives up and chooses one. Not what he/she wants to do -- but tired of hassling.

Can you see where this might be done on a
"grander" scale? I.e. people will be shaped by whatever AI wants. And what if AI is giving you options that are not in your/humanity's best interests?

Excuse me --- in a previous life I was a conspiracy theorist!

[E. James (Jim) Brennan]

The "wrong people" are always the ones most eager to influence (nudge) you, it seems. Watch out for the Prime Programmer, Jacque! GIGO is a very ancient acronym.

[Jacque Vilet]

At the time I'm talking about people won't be programming computers. They will be programming themselves.

Read what Stephen Hawkins has to say on the subject of AI.
http://www.abc.net.au/news/2014-12-03/stephen-hawking-warns-artificial-intelligence-could-end-humanity/5935772

[Kevin Garrett]

I completely agree. While it's of benefit to a company to have healthier workers (lower benefit costs, less obvious loss of productivity in sick days, etc.), forcing them to do so is invasive. When did it become the company's job to push a certain lifestyle anyway (beneficial or not)?

I guess it always comes down to a very basic question - what business is the company in? Is it doing whatever they do to make money or pushing certain benefit programs?

[Jacque Vilet]

Thanks for your comment Kevin.

[E. K. Torkornoo]

Great post, Jacque! It's good to see more research and evidence from more fields of study applied in Rewards, beyond the 'usual suspects.' The integrative nature of rewards requires keeping up to date, reading extensively, maintaining an open mind, debating, discussing, designing, and discovering new solutions, etc. These are reasons I come to this cafe. Otherwise, it can be intensely stultifying when dealing with the state of practice in regions/locations still largely stuck in compliance- and copycat- modes of practice, where few are willing to change, where pushing the envelope is hazardous, stark, and lonely work. Thank you again.

[Jacque Vilet]

Thank you! The world is moving so fast now that it is difficult to keep up, much less think ahead. But as Compensation professionals we owe it to our "customers" to be agile and push the envelope.

[Dave Rook]

Here's a blog post I'd love to share with everyone about some great TED Talks that I think have relevance to employee benefits:

http://www.griffinbenefits.com/employeebenefitsblog/3-great-ted-talks-in-the-era-of-choice-and-consumer-driven-healthcare-cdhc

- Dave

[Ross]

Thanks, Dave. Excellent resource!

[Jacque Vilet]

Thanks Dave. I have written a post here about the choice issue: http://www.compensationcafe.com/2015/10/the-paradox-of-choice.html