The Human Quirk

Can the “science of the irrational” help employees make better choices when it comes to benefits? That’s a key question for anyone involved in employee benefits.

And because the answer is yes, at least according to some practitioners, everyone involved in the benefits transaction gains from an embrace of the approach.

The “science of the irrational”—properly known as behavioral economics—abandons the assumption from classical economics that people are always rational. This nuanced difference allows behavioral economics to focus on and study the impact of unconscious drivers on people’s decision making.

The good news, says Jordan Birnbaum, vice president and chief behavioral economist at ADP, is that irrational doesn’t mean unpredictable.

“If we’re able to predict the likelihood of irrational decisions, we can create nudges or interventions in ways that will anticipate that irrationality and counter it, helping people make better decisions for themselves,” Birnbaum says. Behavioral economics “puts the ‘would’ ahead of the ‘should,’” he adds, noting that how people should behave is irrelevant to behavioral economists. “All we care about is how they would behave.”

Engaging Behavior

Behavioral economics (or BE) provides key insights into employee engagement, which is critical to a successful approach to benefits. Employee engagement refers to how committed an individual is to the organization’s success, and it can predict a great deal of the worker’s discretionary effort. Organizations whose employees are highly engaged have much better metrics than those whose employees are not.

According to a recent Gallup State of the American Workplace Report, organizations with high levels of employee engagement score much higher on the metrics that matter most: profitably is 21% higher, productivity is 17% higher, customer satisfaction is 10% higher, voluntary turnover is 59% lower, absenteeism is 41% lower, employee safety incidents are 70% lower, and engaged employees demonstrate 61% greater innovation as measured by new ideas provided to customers.

But, asks Birnbaum, in terms of success, “How are organizations doing in driving employee engagement? Terribly.” In fact, the same report found that two thirds of American workers are disengaged.

This is where behavioral economics can play an important role. “Unfortunately, a lot of organizations think about what should drive employee engagement instead of what would,” Birnbaum says. Organizations focusing on the “should” believe that factors such as salaries, vacation time, free lunches and even perceived Silicon Valley perks, such as workplace ping pong tables, would drive employee engagement.

But such items aren’t the key contributors to promoting employee engagement. Gallup has a measure called the Gallop Q12, which over the years has identified the 12 most important predictors of employee engagement. Guess what? Compensation is not there. Neither are perks. Instead, the overwhelming majority of factors driving employee engagement are relationships with bosses and/or colleagues. For benefits brokers, this means there is one important item on the Q12: “My supervisor, or someone at work, seems to care about me as a person.” To the extent that providing benefits can engender feelings of being cared for, benefits brokers play a crucial role in driving employee engagement.

In fact, studies have shown that, as employees engage with their benefits, their general employee engagement goes up. A 2017 survey by Optum and the National Business Group on Health found that, when employees use their benefits, the transactions yield positive returns for organizations in terms of both costs and employee engagement. The survey found that employees who frequently participate in programs are 267% more likely to say their employer makes healthy choices the path of least resistance and that employees who have seven to eight health and well-being program categories are 169% more likely to recommend their employer as a place to work. “Investment in clinical programs, pharmacy benefits and a work environment that supports healthy decisions can significantly drive employee engagement,” the survey found.

“So benefits can play a very meaningful role in terms of driving employee engagement,” Birnbaum says. “But employees have to be taking advantage of these benefits for there to be a positive impact on engagement. Therefore, it makes sense for organizations to spend a bit more time and focus knowing the different ways return on investment will follow.

“How can we start thinking about how we might use BE to understand how best to make that magic happen?” asks Birnbaum. “How can we get our employees to engage with the benefits we provide them so our costs will go down and our employee engagement will go up? What would help and what would hurt?”

To begin with—and it may seem counterintuitive—companies need to avoid choice overload. Too many choices can end up serving as a disincentive to engage, Birnbaum says. Having too many choices requires a lot more cognitive work, which is exhausting. As a result, people can end up avoiding making a choice at all. To get people to sign up for benefits, the process can’t take up too much time or be overwhelmingly complicated.

Is adjusting benefits by generations the answer? “The answer is no but yes,” Birnbaum says. “I say that because I don’t subscribe to the idea that generations have common characteristics across all members.

Where it becomes useful is about life stage. Someone in their 20s and someone in their 50s are likely to have very different priorities, very different needs and very different focuses.”

For example, while everyone should pay attention to retirement savings, people in their 20s might be more focused on flexible work hours. “If we can make the offers more salient to their life cycle, we’re minimizing the amount of choices and time they have to spend on things that aren’t terribly relevant to them,” Birnbaum says.

Psychological Levers

Another technique to consider is the use of cognitive heuristics. Many people know of heuristics as a way of learning, researching or problem-solving based on the empirical testing of things already known, rules of thumb so to speak. Cognitive heuristics describes mental shortcuts people take in order to expend less mental energy—a primary, if unconscious, motivator for people in most situations.

One particular cognitive heuristic is called the “availability heuristic,” which describes the tendency for people to be more influenced by thoughts and images that are more readily available. This is why it’s a good idea to advertise flood insurance right after a flood—the images are fresh in people’s mind, and the idea of buying flood insurance will be more appealing to them than five years after the flood, when the images are less “accessible.”

“Organizations can use this human quirk to make sure to highlight the importance of benefits close to the time that people have to start making choices about them,” Birnbaum says. “Demonstrating how benefits can positively affect people’s lives, and how the organization cares about people, becomes another lever by which you can prime employees to be more inclined to take advantage of those benefits when they cross their desk, and you can drive employee engagement through that process.”

Another technique is to leverage the power of pre-commitment. If people express an interest in taking advantage of benefits before an offer is tendered, Birnbaum says, they are far more likely to follow through.

People have a powerful psychological urge to remain consistent with past positions they have taken.

Loss aversion also plays an important role in human behavior. Humans are wired to be more motivated to avoid losses than to secure gains, Birnbaum says, pointing out that most research suggests it’s twice as strong. For example, the experience of losing $20 is twice as powerful as gaining $20, even though people are reacting to the same amount of money, albeit in different directions.

“We can talk about what people stand to gain by engaging in benefits or what they stand to lose by not engaging in benefits,” Birnbaum says. The latter is going to be twice as motivating. “You can say, ‘If you sign up for this package, you will achieve a level of wellness that will positively impact your family.’ Or you can say, ‘Not signing up for this package means you will lose the opportunity to achieve a level of wellness to positively impact your family.’”

Another idea is social norming. Birnbaum explains that people become more motivated to engage with benefits when they see other people benefiting from them. Therefore, providing images and examples of the improvements that others are enjoying through the use of benefits can support greater engagement.

“We can also look at incentives that would make people more likely to engage,” he says. This might include providing wearables, like a wristband that counts steps, to encourage employees to walk more.

“There are all these different psychological levers that we can pull to make engaging in benefits more likely,” Birnbaum says. “When you do that, the employees become healthier. For the organization, costs will go down, and employee engagement will go up. There’s good reason for benefits administrators to spend a lot of time thinking about how they can leverage behavioral economics, including how these benefits are offered and how the sign-up processes are structured to maximize the likelihood that employees take advantage of them.

“Hopefully the art and science of behavioral economics brings a new and important strategy set to the table,” he says. “We have to remember that, when it comes to predicting how employees will respond, ‘should’ is irrelevant and ‘would’ is all that matters.”