This is the third in a series of four posts on insights for compliance officers from different fields of study.  The first post in the series was about lessons from psychology regarding motivation and choice, from prominent figures such as Viktor Frankl and Barry Schwartz.  Last week’s post discussed insights from self-development and coaching, including the works of people like Brene Brown and Byron Katie.  Today’s will be about insights from behavioral economics.  The fourth and final post in this series, on March 13, will focus on the application of theories of business management theories to corporate compliance programs.

Behavioral economics is a multi-disciplinary field of academic study which integrates themes from psychology, sociology, and neurology, among others, to analyze and predict economic decisions and markets behavior of individuals.  Given that behavioral economics shares so much theoretical inspiration with other areas and covers such a wide array of human behavior, it is naturally quite insightful for compliance officers.  Like compliance, behavioral economics focuses heavily on factors to decision-making and conduct.  Behavioral economics also takes great interest in risk tolerance and assessment, the management of which is also important for compliance.

• Dan Ariely – Dan Ariely is a professor of psychology and behavioral economics at Duke University who writes and speaks frequently about motivation, self-control, cheating, and dishonesty.  Because Ariely also has a PhD in business administration, his work often focuses on these themes in the workplace or corporate setting.  Ariely’s book The Honest Truth About Dishonesty is a deep study into the reasons why people cheat and lie and possible defense strategies against these.  Ariely’s investigations into dishonesty are very useful for compliance officers to study in hopes of encouraging moral conduct and values-based adherence to compliance policies and procedures.  Ariely concludes that moral warnings or reminders, accompanied by adequate supervision and timely attestations by individuals, are the most useful factors in discouraging cheating.  For more on Ariely’s040 work, check out this post, which collects some of his more popular TED and TEDx lectures with compliance commentary.  Check out this trailer for (Dis)Honesty: The Truth About Lies, a documentary film that delves into Ariely’s experimental work on how and why people lie:

• Richard Thaler – Richard Thaler was awarded the 2017 Novel Memorial Prize in Economic Sciences for his work in the field of behavioral economics, particularly as it pertains to bringing together economic and psychological factors to individual decision-making.  Thaler cut his teeth as an academic collaborating with Daniel Kahneman and Amos Tversky, who together are recognized as the pioneers of the field of behavioral economics.  One of Thaler’s most interesting books is Misbehaving, which provides a broad study of the origins of behavioral economics and Thaler’s own career in it.  Like Ariely, Thaler’s work covers rationality and irrationality of decision-makers and discusses the role of heuristics and biases in the people’s choices.  Self-control is an important topic for Thaler in all of his work but particularly Misbehaving; the individual’s self-control abilities presents both a conflict of interest and a motivation in the ethical decision-making process.  For more on Thaler’s work in this area, and an interesting crossover into psychology, check out this discussion between Thaler and Malcolm Galdwell at the 92^nd Street Y:

• Richard Thaler and Cass Sunstein – Building on his work which asserts that humans cannot always be expected to make rational decisions or rely on adequate frameworks in arriving at the best possible choice, Thaler has written with the legal scholar Cass Sunstein about nudge theory.  The book they cowrote, Nudge: Improving Decisions about Health, Wealth, and Happiness, integrates lessons from psychology and behavioral economics to suggest a system of intentional decision-making prompts and limitations, known as libertarian paternalism.  Nudge theory suggests that people are not always or even often properly prepared for and capable of making rational judgments and decisions.  Therefore, there is ethical merit in taking notice of how humans choose and building in defenses to the erronenous thought processes and powerful biases and routines that may disrupt or distort decision-making.  Check out this lector at Cambridge Forum from Sunstein which discusses how nudge theory research can suggest ways to direct human behavior to the benefit of both individuals and society:

• Daniel Kahneman – As mentioned above, Daniel Kahneman is one of the foremost thinkers of behavioral economics and along with his long-time partner, Amos Tversky, contributed tremendously to the basis of study for the field.  Kahneman’s book Thinking, Fast and Slow is one of the seminal works of behavioral economics.  This book summarizes many years of Kahneman’s work and creates a dichotomy for the human thought process.  In this view, people have two modes for thinking – “System 1,” the quick, intuitive judgments, and “System 2,” the slow, logical determinations.  The book makes a broad and rich survey through all the factors on and modes of decision-making, including prospect theory, bias, framing, rationality, and many others.  Studying systems of choice and thought can be very important for compliance officers in encouraging moral engagement and decision-making through integrity.  For more on this, check of Kahneman’s Google Talks presentation on the systems from Thinking, Fast and Slow:

• George Katona – George Katona was a Hungarian-born American experimental psychologist whose work contributed to the early foundations of behavioral economics.  Katona had the novel approach of applying psychological theory to macroeconomics due to his work during World War II to study the ability of psychology to mitigate the consumer impact of war from rising inflation.  Katona’s “economic psychology” focused heavily on the distinction between intentional decisions and those dictated by routines and instincts.  Katona referred to these as “genuine decisions” vs. “habitual behavior.”  Katona’s work examines the role of rationality and freedom of choice in making choices between these two modes.  For a comparison between the studies of behavioral economics and economic psychology, check out this video:

Check back next Tuesday, March 13, for a post on theories to apply from business management – including an overview of the works of Simon Sinek, Daniel Pink, and Carol Dworkin plus more – to use in corporate compliance programs.