While the field of behavioral economics has been around for some time — many important papers on the subject surfaced in the last century, including Nobel Prize winning Kahneman and Tversky’s Prospect Theory — the term has become more mainstream in the last decade, helped along by the 2008 release of the popular book Nudge.

Behavioral economics studies why people sometimes make decisions that seem to go against what seems economically rational or logical. The field leans on important neuroscience research on the way our brains process information to make decisions. In order to deal with large amounts of information quickly, we are wired to create mental shortcuts, called heuristics, to help us make judgements and decisions. For example, when we see someone frown, we’re swift to assume that they’re unhappy because we’ve associated frowns with unhappiness.

Usually, these mental shortcuts help us make rational decisions without much effort, but they can also lead to biases in decision making and even irrational decisions. Today, social scientists have identified many cognitive biases that influence our thinking on a daily basis. Here are a few common examples:

• Anchoring is the tendency to rely too heavily on the first thing you hear about something.
• Confirmation bias is the tendency to seek out and favor information that confirms our preexisting beliefs.
• Representativeness occurs when we judge the likelihood of an event by its resemblance to the “typical” event.
• Effort justification, also know as the IKEA effect, is the idea that people value something more when they’ve invested effort into it.

Companies and other institutions alike are recognizing the potential of applying behavioral economics to decision frameworks. For example, in 2010 the UK set up the Behavioral Insights Team, nicknamed the Nudge Unit, which aims to deliver better social services to the public. The team uses simple interventions, such as sending letters to encourage young people from low-income families to apply to college, to encourage people to make better choices for themselves and society — in this case, leading to 322 more students who accepted places at selective universities.

Used responsibly, behavioral economics can lead people and organizations to better decision outcomes. However, the idea of being guided, knowingly or unknowingly, to a certain outcome leaves some people uncomfortable. Knowing that decision-making environments can be intentionally designed to influence people in a certain direction, a technique called choice architecture, can feel paternalistic. The authors of Nudge, University of Chicago economist Richard Thaler and Harvard Law School Professor Cass Sunstein, recognized that nudges could also lead to negative outcomes, and later clarified that a nudge should be transparent and should not limit choice.

The potential to use behavioral economics to improve how organizations and workplaces work is immense and exciting. From hiring, to manager training, to rewarding people, thoughtfully designing the ways decisions are made can have a big impact for employees and organizations. We can significantly impact a person’s experience of work and help them make choices that are good for themselves and the organization.

Over the next few months, re:Work will publish several blogs on behavioral economics, nudges, and stories of how organizations are using them for good.

This blog is part of our re:Work series on behavioral economics. Read more:

• Hiring, honeybees, and human decision making
• Nudge employees to save more for retirement
• Avoiding loss to make big gains in employee wellness