The model of “economic man” is not only passé but also counterproductive
By Fred Kiel
In spite of the recent past turmoil in the world’s capital markets, I’m a big fan of capitalism. Still, there is a bad apple in the barrel of its foundational concepts. It’s called “homo economicus,” or “economic man.” This nineteenth-century concept, embedded in classic economic theory, rests on two assumptions about human nature. The first is that individuals are only motivated by self-interest; the second is that we’re all rational decision-makers.
Unfortunately these assumptions are both inaccurate and incomplete. Yet they’re routinely taught in our business schools and embraced by Wall Street – and business suffers accordingly.
That’s because erroneously believing that people are only motivated by self-interest and are totally rational leads to a number of unproductive management practices. Information is carefully guarded except on a “need to know” basis. Transparency is shunned. Expensive legions of “compliance police” continually monitor employees’ behavior, for fear these self-interested, untrustworthy people won’t act in shareholders’ best interests. And managers often view compassion for employees and other touchy-feely stuff as a waste of time, since everyone is supposed to be out for themselves.
Contrast this to REI, Costco Wholesale. Employee retention is a constant challenge for retailers. Frequent turnover means high staffing costs, additional training, and dependence on people who do not have a long-term commitment to the company or the skill level to serve customers well. A 50% retention rate is considered good in retail. But Costco retains an astounding 93% of its employees after one year.
I recently chatted with a hot dog server at a Costco lunch counter. He said he’d held several jobs at Costco during the past five years – since leaving his job as a high school teacher. So I asked the obvious question: “Why do you stay hereserving hot dogs?” “Because of the way I’m treated,” he said. “I actually make a bit more than I did teaching. Plus, I know that sooner or later, I’ll be given a bigger jobs – perhaps one with some management responsibility, and that’s exciting to me.”
Entrenched worldviews change slowly. It wasn’t until 1995 that Daniel Goleman’s groundbreaking book, Emotional Intelligence, finally brought legitimacy to the concept that emotional content is at the core of every business deal, no matter how “rational” the players believe they are being.
More recently, advances in brain science show that humans seem to be born with built-in neural wiring to be as concerned about each other, much as we are wired to be verbal. Given a relatively safe and nurturing environment, children grow up to be moral beings. And research on decision-making has revealed that nearly 95% of daily decisions aren’t made by a rational process, but by patterns fueled by emotion.
Whether you lead 1,000 or 100,00, it’s likely you wish for the same thing: a highly engaged workforce that is inspired by you and devotes all its energy to productive and innovative business practices. Viewing mankind as homo economicus won’t get you there.
Source: Outside Shot, BusinessWeek, October 6, 2008