A new book, Secrets of The Moneylab, chronicles experiments that companies are using to guide decision-making and boost their bottom lines.
Most companies of any size are well-versed in market research techniques. Perhaps they’ve held focus groups to get participants’ input on a proposed new product or conducted a phone survey to determine consumers’ thoughts on a particular firm’s reputation. However, far fewer test how people actually behave when money is involved. Conventional wisdom long has held that humans act logically to better their own interests and pocketbooks – the rational man theory of economics.
Of course, the past few years have shown that humans often act anything but rationally. A case in point: Companies that made loans to individuals who were likely to default. Go back earlier, to the late 1990s, and you’ve got Internet firms with no revenue and flimsy business plans attracting millions in funding.
These and other, often lower-profile examples, such as sales incentives that fail to properly motivate, cost companies money — often, lots of of it. With this in mind, a handful of businesses are conducting laboratory tests to examine how individuals and groups tend to respond to various business propositions. They’re using the findings of these experiments, rather than just relying on assumptions embedded in forecasts, to guide decision-making. The results show promise in areas ranging from contract negotiation to sales and inventory planning to new product launches. A number of these tests and their applications in business are chronicled in the recently released Secrets of the Moneylab: How Behavioral Economics can Improve Your Business, by Kay-Yut Chen, lead economist with Hewlett-Packard’s labs, and science writer Marina Krakovsky (Portfolio Penguin, 2010). more