Copyright © 2014 by The Segal Group, Inc. All rights reserved.

Leveraging Behavioral Economics in Human Resources Management

J. David Johnson, MBAVice President, Senior Consultantdjohnson@sibson.com; 202.833.6482

Dulles Society for Human Resource Management

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Business Case for Changing Employee Behaviors

Models for Understanding Behavior Change

What We Can Learn from Behavioral Economics

Sample Employer Strategies

For More Information on Behavior Change…

Agenda

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Business Case for Changing Employee Behaviors

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Continued Rise in Healthcare Costs

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Estimated Cost of Poor Health to US Economy─$576 Billion

Annual Cost (Billions)

Percent of Total

Wage Replacement Incidental absence due to illness, workers’ compensation, short-term disability, long-term disability

$117 20.3%

Medical and Pharmacy Workers’ compensation, employee group health medical treatments, employee group health pharmacy treatments

$232 40.3%

Lost Productivity Absence due to illness, presenteeism

$227 39.4%

Total $576 100%

Source: Integrated Benefits Institute 2012 Analysis

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Increasing Obesity Rates in US (CDC Data)

No Data <10% 10%–14% 15%–19% 20%–24% 25%–29% ≥30%

1990 Obesity Rates

2010 Obesity Rates

2000 Obesity Rates

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31% of non-retired Americans reported having no retirement savings or pension· Alarmingly, among those ages 55 to 64, the number is 19%

Almost half of adults were not actively thinking about financial planning for retirement· 24% had given only a little thought to financial planning for their retirement· 25% had done no planning at all

American’s Are Not Saving for Retirement

Source: “Report on the Economic Well-Being of U.S. Households, the Federal Reserve Board, August, 2014

· Of those who have given at least some thought to retirement planning, 25% didn't know how they will pay their expenses in retirement

The Great Recession pushed back the planned date of retirement for two-fifths of those ages 45 and over who had not yet retired

8Source: Rand Corporation – 2013 Workplace Wellness Programs Study

51% of US employers with 50+ employees have a wellness program

Sample Efforts to Change Employee Behaviors

Among employers offering wellness programs:56% provide Disease Management

programs; among these:· 85% target diabetes· 60% focus on asthma· 59% target coronary artery disease· 54% focus on heart failure

44% regularly evaluate wellness program; only 2% measure financial impact

80% screen employees for health risks

77% offer lifestyle management interventions; among these:· 79% provide nutrition/weight management

programs· 77% offer smoking cessation· 72% provide fitness resources· 52% offer stress management programs

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Despite Employer Efforts - Limited Engagement

Source: Rand Corporation – 2013 Workplace Wellness Programs Study

Fitness

Smoking Cessation

Weight / Obesity

Disease Management

21%

10%

16%

Participation Rates for Employees Identified through Screenings or Claims Data

7%

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Biggest Challenge for Employers

Behavior change is tough,particularly sustained change

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Typical Employers Frustrations

“We offer great wellness programs and a generous 401(k) match —people just don’t participate”

“People went back to their old ways after completing the wellness initiative”

“We can’t force people to change—they have to want to do it”

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Models for Understanding Behavior Change

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Integrative Model of Behavior Change*C

ult

ure

/Gen

der

/Oth

er F

acto

rs Attitude

Perceived Norms

Self-Efficacy

Intention

Environment

Skills

Behavior

* Martin Fishbein, Icek Ajzen

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Fogg Behavioral Model*

* B.J. Fogg, PhD

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Consciousness Raising

Social Liberation

Emotional Arousal

Self Evaluation

Commitment

Transtheoretical Model of Behavior Change*

Sustained behavior change usually requires progression through five stages of change, enabled by nine key processes.

KeyInsight

Pre-contemplation

Contemplation Preparation Action Maintenance

Reward

Countering

Environmental Control

Helping Relationships

* Carlo DiClemente, PhD; James Prochaska, PhD; John Norcross, PhD

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Application of the Transtheoretical Model

Change Process Goal ExamplesConsciousness Raising

Increasing information about problem and self

Better nutrition information in cafeteria

Social Liberation Increasing social alternatives for behaviors that are not problematic

Healthy snack machines, healthy meeting policies

Commitment Committing to change Signing-up for weight-loss program

Environmental Control Avoiding stimuli that elicit problem behavior

Avoiding restaurants with fewer healthy choices

Rewards Rewarding self, or being rewarded by others, for making changes

Health insurance premium reductions, gift cards

Helping Relationships Enlisting help of others Healthy-eating support groups

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Habitual behaviors, or routines, are driven by the basal ganglia, the oldest part of the human brain

Brain-damaged patients can continue to demonstrate old habits, and form new ones, even after near complete memory loss

Takeaway # 1:Habits Drive Behaviors

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Understanding the Habit Loop

Cue

Routine

Reward

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Enabling Bad Habits for Employees…

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What We Can Learn from Behavioral Economics

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System 1: Fast

Automatic; requires little effort

Examples:· Eat the doughnut in front of you

· Answer that text that just arrived

Why Is Behavior Change So Tough?Understanding Two Systems at Work in Our Brain*

System 2: Slow

Reflective; involves choice and concentration

Examples:· Determine the benefits of quitting smoking

· Make a plan to exercise more, or to get more sleep

* Thinking, Fast and Slow by Daniel Kahneman, 2011

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Potential Strategies to Target the Two Systems

System 1(Automatic)

Make the healthy choice the easy choice

System 2(Reflective)

Provide the knowledge, motivation and resources to sustain healthy behaviors

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What is Behavioral Economics?

“Behavioral economics is the study of how real people actually make financial choices; it draws on insights from both psychology and economics.”1

Research based critique of rational decision theory

The science of trying to understand how and why individuals make suboptimal and optimal consumer choices

Leveraging Behavioral Economics

1 The Marketplace of Perceptions: Behavioral economics explains why we procrastinate, buy, borrow, and grab chocolate on the spur of the moment. Craig Lambert, Harvard Magazine. March – April 2006

Stockholm’s Piano Subway Staircase makes musical soundsImpact: 66% increase in people choosing stairs.

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Strategy – Offer financial reward for joining walking club

Idea #1 – Use Financial Incentives to Drive Behavior

Just be Careful (Reward Undermining)

Pick-up Time at Daycare Center* Paying for Creativity**

* Source: Uri Gneezy and Aldo Rustichini

** Source: Lepper, M. P., & Greene, D., & Nisbett, R. E

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Strategy – Offer lots of healthy choices in cafeteria

Idea #2 – Expand Number of Healthy Choices

Just be careful (Choice Overload)

Shoppers who

stopped40% 60%

6kinds of jams

24kinds of jams

Shoppers who bought

jam30% 3%

Source: Iyengar & Lepper (2000)

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Be intentional about the choice architecture used to ensure it recognizes the employees’ mental shortcuts and shapes the desired behaviors.

Leveraging Behavioral Economics

Choice ArchitectureFramingNamingOrderingDefault OptionsPrimingAnchoringFoot in the DoorBehavioral Messaging

Heuristics are mental shortcuts every person uses every day in decision-making. It is intuitive thinking; it’s very easy, very fast and automatic.

HeuristicsEndowment EffectLoss AversionStatus Quo BiasClue Seeking BiasExpert’s Certainty BiasPreference for Now vs. FutureSentinel Event SensitivityOptimism Bias

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Think about how Americans die from Heart Disease each year. Is it more or less than 5 million?

How many Americans die of heart disease annually?

Example 1

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A father and daughter have simultaneously decided to replace their existing vehicles with more efficient models• Father increases his MPG from 16.5 to 20 with his purchase

• Daughter increases her MPG from 33 to 50 with her purchase

Who will save the most gas over 10,000 miles?

Example 2

Both will save about 100 gallons over 10,000 miles. Source: Based upon The MPG Illusion, Rick Larrick and Jack Soll (http://www.mpgillusion.com/)

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How much benefit do you get from using sunscreen with higher SPF?

Example 3

Graph courtesy of remixyourhealth.com

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At one sitting, how many would you eat?

Example 4

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Which is more compelling?

Example 5

Option B

Click here to complete your HRA by March 12th and immediately win a $50 gift card from Amazon.com

Option A

Sometime this year, go to our health plan website to complete your HRA and we’ll reduce your 2016 medical contributions by $50

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Would you consider yourself to be at least as good of a driver as everyone else in the room?

Example 6

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Example 7

Between 1992-2012, did fatal workplace accidents in US:1. Increase by over 5%2. Stay about the same3. Decrease by about 10%4. Decrease by roughly 25%

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Which is more compelling?

Example 8

Option B

Quick smoking to reduce your risk of COPD or

cancer later in life

Option A

Quick smoking and start feeling better this year

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How many of you set the clock on your new DVD player?

Example 9

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What’s Going On When Employees Make Bad Decisions: Human Nature!

My former boss chose the annuity at retirement and died young. I won’t make the same mistake—give me the lump sum!

Sentinel Event Bias

Look at all of these investment options. Well, the Company must have put the Money Market Fund at the top of the list for a good reason. I will choose it.

Complexity Aversion and Clue Seeking Bias

Mental Shortcuts asBARRIERS TO CHANGE Examples with Retirement Plans

I can spend that 3% of salary on vacation in Orlando or put it away in the 401(k). What is the big deal anyway about compound interest?

Hyperbolic Discounting

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Bringing It All Together...

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What Prompted a Healthy Behavior Today?

Healthy Choice Was the Easy Choice

It’s a Habit

Intrinsic Motivation

Extrinsic Motivation

Healthy Behavior:

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Examples

Healthy Choice Was the Easy Choice

It’s a Habit

Intrinsic Motivation

Extrinsic Motivation

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Sample Employer Strategies

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Individual Drivers

1. Proper nutrition 2. Physical activity/rest3. Avoidance of risky behaviors4. Stress reduction5. Getting appropriate medical care

Target Organizational/Individual Drivers of Health

Organizational Drivers

1. Culture 2. Programs and design3. Environment4. Resources leveraged5. Communication methods

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How you configure choices impacts decisions:

Opt-In: Do you want to be reminded to receive a flu shot?

Opt-Out: We will remind you to get a flu shot unless if you ask us not to

Active Choice: Do you want to be reminded? Yes or No

Enhanced Active Choice: Do you want to be reminded? Yes or No? If you say “No,” chances are you will forget to get the flu shot and your likelihood of getting sick is much higher

Enhanced Active Choice with Preventive Health

Keller et al. (2011), Enhanced active choice: A new method to motivate behavior change, Journal of Consumer Psychology

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How do we help a 30 year old view what their life will be like at age 70?

Countering Hyperbolic Discounting (Encouraging People to Save)

Participants who saw their future selves contributed 6.2% toward retirement

Participants who saw their current selves contributed 4.4% toward retirement

Source of Data: “Increasing Saving Behavior Through Age-Progressed Renderings of the Future Self,” Hal E. Hershfield, et al, Journal of Marketing Research Vol. XLVIII, S23–S37, November 2011

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Employees are Savvy Consumers; not Great Investors

Eat steak and lobster; live the good life!

Eat hamburger. Eat processed bologna for the rest of your life.

Travel to exotic locations; live the good life!

Travel to a nearby resort. Vacation at your local community center.

Save 9% of pay Save 6% of pay Save 2% of pay

1. Construct a bridge between life today and in retirement!

2. Focus as much on consumption as asset accumulation

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Countering Complexity Bias

Typical Retirement PlanElection Language

Simplified RetirementElection Language

· If you are married when your benefit begins, your benefit will be paid to you as a Qualified Joint and Survivor Annuity. A Qualified Joint and Survivor Annuity provides reduced, equal monthly payments to you during your lifetime and, if your spouse lives longer than you, to your spouse for your spouse's lifetime. Although your monthly benefit payments are reduced, the payments to you and the survivor benefit for your spouse have the same actuarial value as the Single Life Annuity described above. If you are married and your spouse consents, you may elect to receive one of the optional forms of payment described below. All of the optional forms of payment have the same actuarial value as the Single Life Annuity.

· Single Life Annuity: Monthly Benefit = $1,000

· Joint and Survivor Annuity = $667, reducing to a $500 survivor benefit

Choose one of the following monthly income streams for your retirement benefit:

$667 monthly income while you and your spouse are both living.

$500 monthly income for your spouse after you pass away.

$1,000 monthly income while you and your spouse are both living.

$0 monthly income for your spouse after you pass away.

Under this option, your spouse must sign a notarized consent form.

TWO APPROACHES TO CONFIGURING DISTRIBUTION OPTIONS

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For More Information on Behavior Change…

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Some Good Reading on Behavior Change

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Behavioral Economics Resource Centerhttp://www.sibson.com/services/behavioral-economics/

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Thank you

J. David Johnson Vice President, Senior Consultantdjohnson@sibson.com 202.833.6482www.sibson.com

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As management consultants, Sibson Consulting helps clients excel by having the talent and culture required to delight customers and deliver strong financial performance.

Sibson Consulting is a member of The Segal Group (Segal), an employee-owned human resources, employee benefits and actuarial consulting firm headquartered in New York. The firm has 23 offices throughout the United States and Canada and is currently the fourth largest employee benefits consulting firm in the nation (Business Insurance, June, 2014).

Since its founding in 1939, the firm has experienced steady growth by remaining focused on client satisfaction, professionalism, superior quality and innovation.

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