Psychology of Outsourcing, Part 8: Thomas D. Gilovich, Decisions and Behavioral Economics

Many of the mistakes we make when outsourcing stem from a failure to recognize and account for the psychology that surrounds decision-making. Then businesses compound the problem by using poor judgment when reacting to the results of those decisions.

Psychologist Thomas D. Gilovich (born 1954) is a professor of psychology at Cornell University who has researched decision-making and behavioral economics. He has written popular books on those subjects, including perhaps his most famous, Why Smart People Make Big Money Mistakes.

Gilovich focuses on subjects such as “causal attribution,” prospect theory, judgment and decision making, which are part of the growing body of research based on behavioral economics.  It may seem like a mouthful, but in a nutshell Gilovich’s work provides insights that help individuals and businesses overcome the blind spots that can cloud financial decisions.

It’s said that economics is a science that tries to explain how money behaves if everyone is making rational financial decisions. Behavioral economics is a relatively new science that recognizes we don’t always make rational decisions. It helps explain how people and organizations behave around money, which in turn, can help avoid unwise financial and business moves.

I like Gilovich’s work because some 15 years ago he put his finger on the need for less self-interest and more cooperation in business and financial situations. His lessons are just as relevant today and are directly addressed with Vested Outsourcing.

The aptness of Gilovich’s thinking in terms of collaborative outsourcing is illustrated in an entertaining early article that he wrote with Robert H. Frank and Dennis T. Regan, “Do Economists Make Bad Citizens?” (in the Journal of Economic Perspectives, Vol. 10. No. 1, Winter 1996).  The answer to the question, while not necessarily a slam-dunk, leans to yes.

The article concludes: “Economics training encourages the view that people are motivated primarily by self-interest. Second, there is clear evidence that this view leads people to expect others to defect in social dilemmas…(and) third, there is also clear evidence that when people expect their partners to defect in social dilemmas, they are overwhelmingly likely to defect themselves.

“The logical implications of these three points appear to place a heavy burden of proof on those who insist that economics training does not inhibit cooperation.”

The Vested Outsourcing Manual notes that the study of behavioral economics is evolving more broadly into the concept of relational economics, which says that economic value can expand through positive, collaborative relationship—or win-win—thinking rather than adversarial relationships.

The Vested Outsourcing approach to outsource relationships is firmly grounded in the ideas and research of behavioral economics and Gilovich is a pioneer in the field.  His work is based on making informed, collaborative decisions that avoid what I call the Ten Ailments that drive perverse behaviors and that can disrupt or derail an outsource deal. You can see how psychologically reactive the ailments are and how they are based on bad individual or group decisions, such as “sandbagging,” (Ailment 6), “driving blind,” (Ailment 8) or “the power of not doing” (Ailment 10), to name only three.

 

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