Recent literature has made me think about whether human behaviour is much less rational than has been assumed. In his book Management Rewired, Charles Jacob asserts that most of what we thought we knew about management is probably wrong. According to Jacob, each person harbours his own perception of reality and that has implications on how human beings—be they shareholders, customers or employees—behave in different situations. The work of many neuroscientists and behavioural economists also points in that direction. Therefore, understanding what each member in various stakeholder groups thinks, what he feels and what he is likely to do becomes important, instead of assuming that each one of these members thinks the way the manager thinks and/or has the same reason to think in that manner. Many managers may call this behaviour of stakeholders irrational, without often recognising that they expect everyone to respond the same way to a given stimulus. Probably, managers do this because it is easier to say that some or many stakeholder group members are irrational, than trying to find out the reasons behind their behaviour and beliefs. According to laws of science, anything that happens must have a reason. When we understand what happens, we call it rational. Whatever we fail to understand, we find it convenient to term as ‘irrational’.
Perhaps it is time to recognise that ‘rational’ is a theoretical concept that cannot be used across the board. Therefore, instead of using the concept to understand the so-called average individual, we need to recognise that every individual behaves in the manner he does in order to meet his own individual needs. This means one has to understand the behaviour of persons on an individual basis, not on an average basis. Also, we must appreciate that individually, everyone behaves in a rational manner given his priorities and motivations. It is we who use simplistic yardsticks to predict human behaviour. And, when we go wrong, we call the other person’s behaviour ‘irrational’, instead of looking at our own so-called ‘rational’ act. If being irrational is considered being emotional, then one wonders whether anyone in this world is really rational. What is more, rationality and irrationality are both context-specific. How people behave is dependent on how situations, objects, etcetera occur to them and how they opinionate, imbibe and reject. Hence, Alan Greenspan’s ‘irrational exuberance’ was irrational only in the macroeconomic context, not at the level of the individual investor’s social context.
That brings before us a bigger question, one arising out of what economic theory says. According to economic theory, man behaves rationally while making decisions. Economic theory assumes so because it tries to find optional solutions to the problem for which man should make a decision. Many management theories were developed on this very premise, even as behavioural theorists talked about ‘bounded rationality’, and some others raised serious questions about ‘whether management has any theory at all’. If the purpose of theory is to enable prediction and control, then this question assumes significance. B-school students know only too well how their teachers respond to various questions during a case discussion. The proverbial response of the teacher, ‘It depends’, says it all. Someone observed that to assume everything is rational or can be forced into becoming rational through study and research is nothing but complacency in disguise.
Should managers then move away from the model of pure rationality to form a more realistic picture of individuals? The answer is both yes and no. It is ‘yes’ when it comes to understanding the behaviour of various stakeholders; and ‘no’ when it comes to measuring business performance, planning, financing, etcetera. However, we need to figure out how to go about doing the former. If economics is a study of value, then what we need to change is not the approach to value, but the perception of value. While the experimental approach has been the backbone of fundamental sciences, management is built around experiential models. This would mean that from definitive approaches to thinking, we need to go into context-specific and systems-oriented integrative approaches to thinking, as the economic world is never static and not everyone necessarily sees everything through an economic lens. In short, the need is to shift away from the belief that we can predict and control the behaviour of others. Instead, we should be able to control our own behaviour based on some deeper understanding of the true nature of human behaviour. Managers, therefore, need the skills to recognise, nurture and facilitate patterns of behaviour that could jointly meet their stakeholders’ needs and agendas as well as their own. After all, what is normal or rational is framed by our view of reality.
Having noted the above, let me come back for a moment to classical economics, which says that ‘humans act rationally to optimise their utility’. In my view, this observation remains perfectly valid. The only thing that requires rethinking and possibly a change is the assumptions we make in deciding our actions as managers. Distinctions must be drawn between knowledge and the decision-making process. We will do well by not forgetting that human emotions will remain as long as human beings exist. Also, emotions will always play a part in the choice a person makes, irrespective of how irrational the act may appear in someone else’s eyes. The holy grail of management that predicts behaviour in all situations does not exist, nor, for that matter, has it ever existed. It is our mistaken belief that gave credence to such attempts. There have been many such instances over the years, the latest being the financial tsunami that brought before us the reality out there.
Therefore, whether we like it or not, we need to learn to let go of the mindset of predicting and controlling things in the manner Newtonian physics does. Obviously, this will create a great deal of discomfort as most managers will begin to realise that they are not the real play-callers. Someone said business happens outside, it is only the costs that are incurred inside. Perhaps this statement is related to certain stakeholder groups, most notably the customers. Be that as it may, clearly an ‘outside-in’ perspective as opposed to an ‘inside-out’ one and, that too, treating every customer as an individual, becomes the need of the hour. How we prepare our B-schools students to imbibe these is then the question. We ought to develop students’ confidence to trust their own instincts.
Indeed, many may opine that if instincts are the only thing needed, what is the use of management education? But that may also appear irrational to a lot of people, as they may see this as an act of throwing away the baby with the bathwater. In the opinion of this writer, orientation must be provided to students so that they are able to appreciate that intuition is a far wider channel of information if properly tuned into, than rational constructs. Second, efficiency-based models in management fail to assess the outcomes we seek based on collaboration and cooperation in an interdependent world. Third, in today’s uncertain world, innovation is the only thing that can sustain you as you try to reconfigure your path on an everyday basis. And, innovation calls for out-of-the-box thinking—which again, in many ways, is the product of intuitive instincts. Fourth, anyone facing a situation in which no previous experience or expertise has helped, needs to essentially fall back on intuitive logic—howsoever unscientific or irrational it may seem. Therefore, traditional approaches to economics and management can be made more meaningful the more accurately they reflect human reality. All said and done, things can happen in a perfectly rational manner, and according to the laws of physics, only if there is no life on earth. But when life is brought into the equation, irrationality inevitably comes with it.
Therefore, if rational management meant expecting people to respond the same way to a given stimulus, it is time to develop an understanding of the specific stimulus that will get an individual to respond as desired.
Subrata Chakraborty is Director, Jaipuria Institute of Management, and former Dean at IIM, Lucknow