Flaws in Understanding Psychology Lead to Flawed Management

Posted on October 21, 2008 by John Hunter

How Business Pays for its View of Human Nature by Fred Kiel makes some good points. I think he is a bit off in why the points are good, but…

This 19th-century concept, embedded in classic economic theory and still embraced today, rests on two assumptions about human nature. The first is that individuals are only motivated by self-interest; the second is that we’re all rational decision-makers.

I believe people are self interested and somewhat rational. However, self interest, is complex. People want to be liked, people want to be part of something good, people want to feel they are appreciated, people like having money to buy what they want… Some people like to feel better than others, some are insecure…

Thinking that people are guided by self interest and somewhat rational decision making is helpful, I believe. But that understanding is a simplification of a complex area; too often people seek over-simplified models to base their decisions upon (I now have 92 posts in the psychology category of this blog). And fearful, ill-informed, un-trained (in ways that build the capacity to make rational decisions) workers pursuing their self interest is often much more harmful than workers that are more secure, trusting, knowledgeable, committed workers pursuing their self interest. If you design your organization with what Dr. Deming called an understanding of psychology then you can make these traits work for the organization instead of against the organization.

REI‘s shrink rate is far below industry standards, and employees instead are allies in preventing customer theft. REI credits this to its culture, which is based on the view that most people can be trusted to act in the company’s interests. Many companies say “people are our greatest asset” but don’t behave that way. REI does, and it shows.
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A 50% retention rate is considered good in retail. But Costco retains an astounding 93% of its employees after one year.
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I recently chatted with a hot dog server at a Costco lunch counter. He said he’d held several jobs at Costco during the past five years—since leaving his job as a high school teacher. So I asked the obvious question: “Why do you stay here serving hot dogs?” “Because of the way I’m treated,” he said. “I actually make a bit more than I did teaching

People have not only rational needs but psychological desires. Those desires are part of the self interest they pursue. Many organizations fail to take such factors into account effectively.

Related: Respect for People and Understanding Psychology – The Importance of Management Improvement – Why Extrinsic Motivation Fails

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