x Abu Dhabi, UAESunday 23 July 2017

Psychology is off the couch and into the boardroom

Psychology may have strong associations with the therapist's couch - but the field is becoming increasingly popular around the boardroom table.

Psychology may have strong associations with the therapist's couch - but the field is becoming increasingly popular around the boardroom table.

The study of human behaviour, once a subject for tweed-wearing lecturers, has caught the attention of big business, and its effect is being felt in sectors ranging from retail to finance.

Some hedge funds, for example, now run trading strategies driven by psychology research - which means bankers' salaries for a few lucky academics.

"There is a bunch of psychology professors who were making miserable salaries for 20 years who are now being paid kings' ransoms to work for some hedge funds," says Miguel Lobo, an associate professor of decision sciences at Insead Abu Dhabi. "It's about trading against the psychological biases of other traders."

Decision sciences - which coverrisk management, decision making and forecasting - are increasingly being used to shape the corporate world.

The related field of behavioural economics, the science of how human behaviour influences decisions, started in the early 1970s.

Initially focused on how people choose between alternatives that involve risk, the first behavioural economics experiments won one of the creators, Daniel Kahneman, a Nobel Prize.

"The beauty of gambles is economists have very strong theories about how people should behave," says Dan Ariely, one of the world's most well-known behavioural economists, and the author of numerous books on the subject, including Predictably Irrational.

"Very convincingly [Mr Kahneman and fellow founder academic, Amos Tversky] showed that those assumptions do not work and people make assumptions about gambles in very different ways."

Since that early work, behavioural economics has changed. Most importantly, according to Mr Ariely, it left the lab and entered the marketplace, and is now applied to a number of areas such as financial savings, regulation and retail.

It is particularly useful in retail, he said, because the industry is all about influencing decisions of consumers. If retailers understand how shoppers think, they might be able to get them to buy more.

 

gduncan@thenational.ae