Is behavioral economics important to innovation?
As a study so far popularized by books like Steven D. Levitt and Stephen J. Dubner’s bestseller, Freakonomics, could closer attention to behavioral economics be beneficial when attempting to build an innovation ecosystem?
The key element to the study is examining why people act in the way they do. An action taken by a person can be explained as a response to a motivation or incentive. The limits of these are not financial, but include the likes of social, health and moral incentives as well, or even a combination of them, either positive or negative. For example, a person may choose not to take drugs for the fourfold incentive that they are expensive to buy, they know it can be damaging to their health, there is a chance that they may be looked down upon by their peers in social groups, and lastly there is a strong risk of heavy punishment if they are caught by the authorities.
Similarly an entrepreneur may build a startup not just for the monetary returns, but for the opportunity of enhanced reputation, the enjoyment and thrill of launching a business, and most of all for the opportunity to make a positive difference to society. The last motivation is one that has been shared by many entrepreneurs in the past, and was articulated famously by Jamsetji Tata, founder of Indian conglomerate Tata, when he said:
‘In a free enterprise, the community is not just another stakeholder in business. But is in fact the very purpose of its existence.’
These extra rational motivations are also referenced in Victor Hwang and Greg Horowitt’s book, the Rainforest, as well as in the Global Innovation Summit they had organized in July, as important in outweighing the various barriers to communication and collaboration. Hwang and Horowitt argue that in existing innovation ecosystems, there are unwritten societal incentives and motivations in place that encourage cooperation and trust among people, and prevent people playing ‘zero-sum games’ i.e. seeking personal advantage over the long term success of a business. These pave the way towards a collaborative culture that sustains the life of such ecosystems.
Consequently, the question may then arise, as to whether governments or other institutions looking to foster entrepreneurship should look beyond financial benefits to aspiring startups, to ways in which incentives and motivations can be embedded into societies to increase innovative output. Arguably, whilst financial aid is a factor governments can provide relatively easily (supposedly), creating a societal opinion and influencing the way in which people think is a factor far beyond their control. However, this is something governments have looked into before, with degrees of success, though for different ends.
The Economist recently published an article about the success of the ‘nudge Olympics’ in London, where the organizers looked at subtle ways in which they could coax people into doing things. For example, supporters were pushed out of using cars to use public transport through free London Tube Travelcards supplied with tickets for the games, as well as encouragement to do so from a heavily marketed website. This builds on some of the work previously done in Britain, namely the behavioral insight unit set up in 2010 by the Coalition government which looked at how to steer people’s decisions.
To be sure, controlling people’s transports decisions and changing people’s attitudes towards business and communication are totally different things. But governments are beginning to have the right tools in place to start dealing with other things. And creating the collaborative culture may not be as difficult as it seems. A policy change, such as a relaxing on immigration law, opening up countries to diversity could increase knowledge, methods and markets to new businesses, whilst lowering people’s reluctance to transact with foreigners. There are other small approaches that can be taken, such as the idolization of successful entrepreneurs who embody the values that it is hoped individuals will adopt, and networking events that are attended by such ‘keystones’.
Although it is just a concept, governments who have poured millions or even billions of dollars into encouraging entrepreneurship and innovation in vain, may stand to benefit from a closer look at a study so far ill-exploited on the whole. Behavioral economics, and behavioral insight units may hold the key to unlocking a culture in society upon which an innovation ecosystem can be built.
By Nishant Dahad
For the Next Silicon Valley