INSIGHTS

 

 

Can human capital drive portfolio returns? Listen to Jason Mitchell discuss with Professor Dan Ariely, Duke University, about what a human capital factor looks like; how incentives and the basic idea of “feeling valued“ are fundamental drivers behind employee motivation; and why human capital can represent an overlooked source of alpha.

Recording date: 28 May 2024

Dan Ariely

Dan Ariely is the James B. Duke Professor of psychology and behavioural economics at Duke University. He is a serial entrepreneur, co-founding several companies implementing insights from behavioural science including BEwork, Genie, Irrational Labs, Timeful, and Irrational Capital. Dan has written many books, including three New York Times best-selling books: Predictably Irrational, The Upside of Irrationality, and The Honest Truth about Dishonesty. His most recent book is Misbelief: What Makes Rational People Believe Irrational Things. Irrational Capital applies workplace behavioural science, financial acumen, and deep data science to capture the powerful connection between human capital and stock performance. It is the first firm to quantitatively capture the lift that strong corporate culture has on a company’s stock price in an investable way.

 

Episode Transcript

Note: This transcription was generated using a combination of speech recognition software and human transcribers and may contain errors. As a part of this process, this transcript has also been edited for clarity.

Jason Mitchell:

Welcome to the podcast, Professor Dan Ariely. It’s great to have you here. And thank you for taking the time.

Dan Ariel:

Lovely to be here.

Jason Mitchell:

Great. Let’s jump in. So Dan, I want to start off with some scene setting. Why create the human capital factor. What’s the market ignoring or mispricing about the notion of human capital. And I guess what’s at stake in all of this?

Dan Ariely:

Yes. So you want it like the three hour answer or so. So let me say the following. So first of all, I’m a researcher and I’ve been studying lots of things about human nature and motivation. And it turns out that motivation is kind of mysterious. You know, it’s not as if you go to the person on the street and say, hey, what’s the secrets of human motivation? And people say, oh, it’s A, B, and C, you know, motivation is really kind of mysterious. We write poetry, we run marathons, we do all kinds of strange things. And on the research side, we found lots of little elements of human motivation that kind of don’t fit well with the rational framework.

So that’s kind of part one. There’s this, bucket of things that actually changes motivation, that don’t fit with what people generally think or know or expect. And by the way, just think to yourself about all the things that you find, in retrospect, meaningful and worthwhile doing in your life. How many of them fit the standard view of motivation? You did them because you got the bonus or promotion or something else? Not that many. So. So part one was to say, look, you really need an expertise in human motivation to, to understand it. And then the second part was that very few people are looking deep into companies to understand how they’re doing in terms of human motivation. So it’s not only difficult and you need some knowledge in social science but almost nobody is doing it. For example, I had a call with a wonderful fund that called themselves Fundamental Investors. And I ask them, how do you take into account, human motivation. And they said, we don’t. We’re fundamental investors. And I said, what could be more fundamental? And, you know, it’s kind of an interesting thing that if you imagine a company is like a machine.

You say this machine is producing output and the output is products and improved efficiency and innovation and so on. You have to think that either the the fuel or the lubricant is, human motivation, that it’s really, crucial but it’s hard to look into it. And maybe the final point I would say, is that I had a part in my career where I would do field experiments with one company at a time. I would go to a company X, and I would look at what they were doing, and I said, hey, I think, you know, doing A, B and C correctly, let’s fix it. And they would fix it and we would see improvements in motivation. We would see improvement in output. I was always happy to see that I could go in and make improvements. But I was also a little sad to see it because he told me that nobody’s really paying attention. And if you look at HR organizations, most of them are kind of at the bottom of the pyramid. They’re not innovating. They’re not taking care of, human motivation. They’re basically, you know, doing the the regulation parts, the ethics compliance module, something like that. So, so I think not everybody can do human motivation. that’s one you need to understand something about social science. And I think the second thing is that people don’t pay attention to it. And the third is that it’s it’s just not right. It’s just a shame. It’s something that it’s an opportunity thats lying on the floor to, to improve it. And I think we need to work hard to make people’s, work life better.

Jason Mitchell:

interesting. I kind of want to dig into this paradox because on one hand, there’s this saying we’re all familiar with people are our most important asset. That’s often used at the same time. And I’m thinking, Cam Harvey’s work. A colleague of yours at Duke University, he’s written in a paper called Corporate Culture Evidence from the field. And he says that 92% of the 1348 North American executives believe that improving corporate culture increases firm value, and 84% of executives believe their company needs to improve its culture. And, you know, obviously there’s a linkage between culture and productivity and motivation. But, you know, if if what I’m saying if that’s true, why has financial academia largely ignored efforts to quantify human capital as an asset? Up until now, in the work that you’ve done, why is there such a big gap between this notional recognition of culture and human capital and our inability to measure its impact?

Dan Ariely:

So first of all, I think it’s because people have very naive intuitions about motivation. And also in the language of motivation, we tend to distinguish between extrinsic motivation and intrinsic motivation. Extrinsic motivation is salary and bonuses and title and days off and retirement benefits and so on. And an intrinsic motivation is the fire that burns within you to do that. It’s about your connection with your direct manager. It’s your connection with your company. It’s the feeling of satisfaction. And in general, the rational world, which most academic finance comes from. doesn’t think that part is very important, right? It focuses on the extrinsic motivation that comes from economics. Right? If you think about economics, it’s all about the external incentives for people. So that’s the first reason. And then the second reason is that people are uncomfortable with subjective measures. So here is kind of a general statement. I go to somebody who is, you know, runs a big fund and I say, hey, you know, we look at measures that says, for example, how fair do you feel you’re being paid? And we find that this is important for predicting alpha. And that person says, what kind of question is this? Give me the real salary.

What does it mean? how fair do you feel you’re being compensated? People are uncomfortable with these subjective measures. But here’s the reality. Imagine I ask you and actually not don’t answer the question, but I’m saying, how much do you love your significant other? Now, Don’t give it to me. But think about the scale from from 1 to 10. How much do you love them now? Are you answering? Absolutely, precisely. Would you not change your mind tomorrow a little bit? Yes. It’s a subjective measure, but it’s still a much better measure than if I just looked at your email and counted how many times you say I love you, or I looked at how many gifts you buy, or how many kisses or whatever, whatever it is, right? So and by the way, the same thing is true about pain. And neuroscientists have not found a better way to ask about pain and to say, how much pain are you feeling right now? And in one of the arguments at Irrational Capital is that we’re saying that these subjective measures are not measurement until we get something better. They are the real measures. And I actually don’t care so much about objective salary. I care about subjectively. Do you feel you’re getting paid fairly? And that’s that’s the important thing. So I think the whole field needs to kind of come up to a realization that we like subjective measures, because that’s really what we’re trying to capture.

Jason Mitchell:

I’m going to come back to the efficacy of the surveys, which seemed pretty compelling. But let me ask you this. How generalizable is the human capital factor? I’m thinking about the human capital factor unconstrained strategy for instance ticker being happy happy at Harbor Capital which focuses essentially on large US i.e. S&P 500 companies, is the linkage between happy and engaged employees and stock performance. Is it a universal phenomenon? Does it work in all countries, all sectors, or does it resonate with specific industries and specific regions more than others?

Dan Ariely:

So let me answer it in 2 ways. First of all, let’s talk about sectors and then let’s talk about countries. So when we started with this adventure, I had the naive assumption that this would work better for some sectors and not others. So kind of my imagination was like a, you know, a Google, a programmer. And I could I could imagine how being more motivated would get them to, you know, be more excited, stay longer hours, read more things, help their friends more, eat less cookies. You know, I could I could imagine all kinds of things where like an engineering and IT would have a lot of leeway. Right. Because if you think about motivation, it’s really about what’s under the discretion of the individual. Right? and if you do, if you do a work like if somebody is layering bricks, you could say, okay, you could supervise the layering bricks. There’s not much to say about that. But if you’re sitting in front of the computer and your knowledge worker and everything you do is between your ears, I can’t really supervise you. You can sit in front of a computer and daydream about pokemons, and you really think very hard. It’s hard to tell the difference.

So I, I had the intuition that we would find a lot of activity in knowledge worker and not so much in manufacturing, for example. But thankfully we had data across many companies and we could look at different sectors and we didn’t find that different sectors deserve different equations in terms of the human capital. And I actually went and talked to some people in in manufacturing. And I think now I understand manufacturing better. But the reality is that what we’re thinking kind of in my intuition, I’m not blaming that other people have the same prejudice, but in my intuition, when I thought about it, I said, okay, a Google programmer has a lot of leeway and flexibility in how they do it. It turns out it’s true for lots of professions, and it turns out I heard heroic stories about people in manufacturing that are spending days and nights on their own time to find something that is destroying, manufacturing, or causing mistakes or doing things. I just recently heard a story, for example, a woman told me. About how a janitor in the hospital she was at was the person who ended up helping her the most in terms of her You know, not the way we think about it. first of all, I had the bias. I have to admit the bias.

I’m thankful that I corrected this bias with data. And I think that across all sectors, people have a tremendous flexibility to go above and beyond or to do the least amount they can, just not to get fired. And that makes a big difference in all sectors. And we don’t find difference across sectors. So I can’t tell you, oh, it’s mostly works for it. Not so much for manufacturing. You know, it looks like it’s very, very across all of these domains

Jason Mitchell:

that that’s interesting because again, I was looking at the happy portfolio of 75 companies. And again it’s broadly diversified certainly with many of the larger positions. There’s not a lot of variance in the sizing of the positions, but I found interesting that nine out of the holdings are in the tech sector, and I guess it made me sort of wondered, does tech play an outsized role in all your thinking? Is innovation, which often necessitates significant investment in human capital? is it essentially at the core of a strong culture, especially because of its ability to drive employee motivation through incentives, stock options, for instance?

Dan Ariely:

Yeah. So, you know, the data is in market just for a few years. And we have backtesting going to 96. so we have but you know backtesting is backtesting in in market is in market. we also have a few different implementation of this. Right. There’s a more concentrated implementation. There’s a less concentrated, implementation, if you look at the backtest and I’m happy to share data with you, there is a tech bias, but it changes over the years. it’s not always that concentrated in tech. It it changes across the you depends what happens then. Think about something like Facebook. How happy do you think are the people at Facebook right Right.

how proud do they feel when they go to visit their mother? And she asks, where do you work? Maybe not. Mother mothers are always proud, but you know something else. So I do think, tech is not just one field. it’s lots of fields and they vary up and down in terms of meaningfulness and so Now, I do think the tech in general, allows for more human capital And what do I mean by that? I think there’s more awareness of Like, you know, the things that one of the things we find is very important is how appreciated do you feel at the I don’t think it’s because it’s tech. I think it’s because it’s the culture of tech.

Like if you say, you know, is tech necessarily the place where people would feel more appreciated? No, but we have something about the culture of how tech companies treat their employees that have an improvement. So this is speculation because, you know, I can’t change the culture of all tech companies. But I think there is something about tech companies where and we can think about the sociology of it. How did it start? And that there’s actually deeper appreciation for the for the employees. And, you know, and maybe it comes because in some places it’s easy to to judge individual performance. I don’t know what exactly it is, but it is right now tech heavy But I don’t think it’s inherently about tech. And I’m certainly sure it’s not about the ability to compensate people.

Jason Mitchell:

It’s really interesting. I guess my question, I hadn’t intended it to be necessarily about tech, but more about the idea around innovation. And I guess I’m wondering, you know, is there an argument to say that we can anchor things like employee motivation and firm culture to something like innovation, you know, and how do we do that? Could we use metrics like research and development intensity or investment into H-1b visas as proxies of that investment into innovation, which has these sort of co-benefits, around motivation and culture?

Dan Ariely:

Yeah. So, you know, generally we can think about measuring process or measuring outcome Let’s take somebody with diabetes, and let’s say we want to motivate that person to do better. We can measure their A1, c we can measure their a1 c, which is kind of the measure of diabetes load over the last few months. And we can even give this person a bonus if they do better, and we can maybe take money away from them if they do worse. Not recommending it, but I’m just saying in principle and we can measure the outcome or we can measure the process. We can say no every day that you go for a walk after dinner, we give you a point, and every day you measure your blood sugar level. And every time you take insulin on time and we’re not worrying about a A1C The measure we’re wearing about the in general, when the world has a stochastic relationship, a random relationship between process and outcome, you’re better off rewarding the process than the Or here’s another example. Imagine you have two kids. And they have an exam. And one of them studies 90% of the material. But it ends up that the exam had a lot on the last 10%. And they don’t get such a good grade.

The second kid only study 10%, but they study only the things that were in the and they do better. Which kid do you want to And the answer is, of course, the first Right? now, a lot of times what we do is we say we understand that measuring the process is better, but we’re going to measure the outcome because it’s Right. So let’s go back to your question about creativity output in terms of patents.

Let’s say. I’m not saying it’s a bad idea, but I would much rather measure something internal in the company. For example, you know how many hours people are working on patterns. and how excited are people when somebody asks them if they want to to join in and help write a Are people looking for patents to to write. And the reason is that the writing patents is one outcome and it’s a stochastic outcome. But if you ask what is this engine that generates creativity? Not everything, by the way, not everything would be would be patents. People can do lots of creative things that improve things. Patents is one outcome. But in general we we prefer to measure outcome that process because it’s easier, but it’s not the right thing. By the way, this I think that’s one of the challenges that we have with measurement, is that we often measuring the thing that is easy rather than the thing that is

Jason Mitchell:

Yeah, it’s it’s really interesting because I would agree with you, the patents aren’t the only thing as sort of a proxy for innovation. I mean,

Dan Ariely:

Sorry to interrupt, but the problem is that if you if you start measuring patents, you would say, check the box. I’m already I’m already measuring creativity. I don’t need to do more on that. Right. So it’s not that it’s a bad measure, it’s just not a sufficient measure. And I don’t want people to stop there.

Jason Mitchell:

Yeah. And I think it would skew you towards industries that are very patent oriented and away from areas where innovation could be. I think you were saying sort of efficiency gains across systems and Let me ask you how well do the metrics in the human capital factor that you look at? How well did they travel And specifically I’m thinking Europe and Asia or across to small and medium sized companies or their cultural and normative, I guess, limitations, or is the relationship between employee motivation and equity of performance a universal phenomenon? For instance, the workplace culture is in Japan. South Korea and China can sometimes be very different from Western work cultures. In another example, stock options compensation tends to be more of a Western/ US incentive than an Asian or a European one.

Dan Ariely:

Yeah. So first of all, in general, we don’t find that compensation makes a big difference, right. so, you know, we find that the absolute level of salary doesn’t make a big difference. We find that fairness in salary does make a big difference. So so again, it’s not so much the objective things in terms of size of companies. It looks right now that smaller companies actually human capital is more even slightly more important. But but for sure not less important. And if you think about the mechanism, and I think that every time we think about those things, we should say what is the mechanism? let me ask you, what do you think is the biggest thing that companies do to kill employee motivation

Jason Mitchell:

I know the answer piece. I’ve read a lot

Dan Ariely:

about you. Bureaucracy. That’s why I have a new website out called the center for Advanced Bureaucracy, where I complain about bureaucracy and have a look at it if you get a chance. so I think that the small companies have less bureaucracy, sometimes more possibility for innovation and so on. So, small companies in terms of the mechanism that’s fine in terms of other cultures. So first of all, we haven’t tested it. you know, all of this testing is years in the making. We certainly want to get there. But we’re not there yet in terms of testing other countries, other regions of the world. But I will say the following thing from other research on on social There are some things that are very basic about human nature. I think we all want recognition we all get, a value from feeling fairness. You know, think about think about fairness. when you were a kid, I don’t know if you have siblings, but let’s assume for a second you have a brother or a sister.

If your mother poured a little bit more juice to your brother or your sister, you felt this was unfair. There’s something very basic about human nature and fairness. And, there’s lots of interesting evolutionary reasons for why fairness is important for humanity. Especially if we lived in small communities and worked with other people.

And so, so some of those things, I think, are so basic about human nature that I don’t suspect not I don’t have the data for this, but if you ask me, theoretically, I would say that some of the things that we find, for example, caring about fairness, I don’t think would matter, would change now. Would people in Japan care a little bit more, a little bit less about fairness? Could be, but with fairness still be a main issue? Absolutely, yes. Would the way like again, I said that one of the main thing we find is that people they how appreciated do you feel is really important? Now. How precious do you feel? I think it’s going to be important everywhere, but maybe the ways to get people to feel appreciated would be different. Or psychological safety. Psychological safety ends up being important because psychological safety is about our ability to express our opinions without being afraid that somebody would would take it the wrong way or accuse us of of something. Now, is psychological safety going to be slightly different in different places? Yes. But is psychological safety still going to be very important everywhere? Yes. So if you ask me, I would say that for first approximation, my guess is that other countries or the things that are about deep human psychology will stay very similar, but the surface characteristics might change.

Jason Mitchell:

It’s been a couple of years since Irrational Capital first burst on the scene, particularly with that JP Morgan report. And I’m wondering what are the lessons over the last two years you’ve seen these strategies launch? Can you talk about the balance of the signals between external data sources like Glassdoor and LinkedIn and your own proprietary surveys? Where have you noticed, I guess, shifts in what employees care about? Is it about health benefits, retirement benefits, salaries? You’ve you’ve already talked about, but maternity and paternity leave, are they shifting in some sense.

And if the things that matter the most for employee productivity are feeling valued and psychological safety, is there a way to measure that relative to something like what you’ve just talked about, corporate bureaucracy, which stifles motivation. Yeah. So so first of we’re very grateful for JP Morgan, for the for the reports they wrote about our data since then, they, they wrote a few more so that they keep on writing more and more reports about our data. And, and, you know, it’s it’s very nice that we love our data and our results, but they love it as well, right? It’s always nice when a third party looks at something objectively. And, and one of the things they say is that it’s not only there’s alpha in there, but it’s a, it’s a new investment factor, right? That it’s not correlated with the thing you would, expect. Now in terms of the last few years, we are getting better and getting more data sources. the world is amazing, right? The world is amazing. There are more data sources out there, and I think there will be more improvements on the way. There’s some algorithmic improvement, which is also which is also great. But from a human psychology perspective, and what we’ve seen since Covid is that the importance of intrinsic motivation has increased.

Dan Ariely:

And here’s a way to think about it. imagine a kid. This kid is in seventh grade. If the kid is in the classroom, the teacher can can control the kid’s behavior. The teacher can say, put your phone down. Don’t talk to Johnny. Sit straight, focus on your work, and so

Jason Mitchell:

When the kid is at home, the kid can turn the teacher off and the kid is on zoom. They can turn the teacher off. And and I’ve asked lots of people. I’ve asked lots of people. How many of during work at home, especially during Covid, pretended that the internet had problems and you turned off the camera, and actually paid less attention to the meeting than you were supposed to And most people admit that they’ve done it multiple times. And people say all kinds of things about about work from home. It’s a tempting environment. The workplace has been designed to, you know, get us to focus. And we don’t have our sofa and we don’t have our refrigerator and we don’t have our kids and so on. So, so the the challenges of working at home are substantial. I’m not saying they’re not also benefits, but there’s also temptations. And it’s a really mix between more temptations and more comfort and and because of that, people’s interest in the work is more important.

It’s actually becoming more polarizing, right? If somebody is a slacker and they get to work from home, what do you think happened to their output? On the other hand, if somebody is truly enthusiastic about what they work and they find it to be their personal passion, and now you save them two hours of commuting, what is their output? Right. So we have this thing is going both both directions. And now, can I answer a question you haven’t answered? You haven’t asked about about work from home? So lots of people ask me about about work from home back in the office. And some companies have policy to come back to the office, to come back fully, to come back partially. What do I think about this? So. So I’ll tell you a story about my life in hospital. So, as you know, I was badly burned 70% of my body. I was in hospital for about three years. but one of the things that that happened in the first almost four months was that I was fed by a tube, a tube going through my nose and going into my stomach, and they fed me 30 eggs a day and 7000 calories a day, just to try and get the body to build back some tissue. And oddly, I lost weight on that on that diet. but anyway, almost four months into my injury, they come to me and they say, oh, the day after tomorrow we’ll take the tube out. You’ll start eating by And what do you think was my response? I said, no, please keep the tubing. why? I said, who wants to chew? What a strange human activity. anyway, but they were the doctor. I was a patient. They took the tube out, I started eating, and of course, immediately I remembered that food really tastes well. Tastes good. It tastes amazing. I haven’t stopped eating since. And the thing is that four months without food is enough.

Like, I still remember that food had taste, but not really. Now, why am I telling you this? This strange story is that, you know, people think about back at work, but it’s really not back at work. It’s back at the place that we used to have social relationships. You know, if you if you go back to an office and you sit in your cubicle and you talk on zoom to everybody else, this is not really back at work. What do we mean by back at work? You know, when I was telling you this story about my food, I was thinking about efficiency. I was saying, who wants to chew who dat? But in fact food has taste. The same thing is true about people. when we meet people, it’s not about the functional thing. You know, functional thing. Everything on video conferencing is more functional. Meetings start on time. They end on time. We go through the whole agenda. But what we miss is the human connection. We don’t tell jokes. We don’t tell stories. We don’t say things about ourselves anymore.

We don’t know what people are struggling with in work. We don’t know what people are struggling out of work. we’re losing the texture of other people And there was a study I did a long time ago about under what conditions are people more likely to stay until 2 a.m. in the office to, to get to a deadline, if it was their deadline or it was somebody on their team, and it turns out that people were more likely to do it, if it was somebody on their team, they also felt more comfortable to call the significant other and tell them that they’re staying. the significant other was more likely to say, good that you’re doing it. we do lots of things that work for other people. We get a lot of our motivations from working with other people. And when we think about going back to work, we say, are we physically back at work? That’s not the question. The question we should ask is, have we recovered the social relationships? At work And until we do that, we’re not really back at work. Interesting.

Dan Ariely:

So. So I think that this question about human motivation, I think that the big element that is missing is that we have destroyed a lot of the social connections at work, and we haven’t really put enough attention to build them back. I think it’s not easy. It’s not as if, okay, just put people back into the office for three days a week and they will walk around and from time to time maybe have coffee together, and somehow they will start deeply caring about each other. I think lots of other things have happened in society in the US since then, that this is not enough, that we need to do much more to get that part of human capital back.

Jason Mitchell:

How much more employee sentiment can be mined across all levels of a firm? I guess in this respect, where’s the frontier that you’re looking at?

Dan Ariely:

Okay so. We have some evidence. Imagine, you have a normal distribution of employees on some productivity scale. And let’s say it’s goes between 0 and 100 and it’s a normal What do you think the company will be better if they took the top employees, the ones that are 90 to 100, and make them slightly better if they move the bottom employees from 0 to 10 slightly up, or if they take the average and move it everybody and move it slightly up. I guess you’d think the average. Yeah. So it’s the top employees that really And that level of nuances. This it looks like it it looks like it I would say you know, but but I think that’s one frontier. One frontier is to basically not treat all your employees is one lump. But to think about the potential for Right and to basically say what what companies need need to do. Like where would you invest your extra effort? so let’s go back to, feeling And imagine you’re a boss and you have some people working for you. and you want to show some people that they feel appreciated.

Who who would you spend more attention on? How would you do it? I think a there’s a question of do you do something blanket for everybody. Do you, do you talk to some people more specifically try to motivate them. So I think that’s that for me is one frontier. second frontier is that we have lots of measures that right now we are doing the best we can with the measures we But I would love to get more micro measurements. I would love to get more micro measurements. I would love to get measurements of much better measurements of bureaucratic I would love to get more measurements of trust. and then if I had to think about a third thing, there is, you know, this phenomena called sabotage.

Jason Mitchell:

I know I don’t.

Dan Ariely:

So sabotage is the bad side. So if we talked about this normal distribution, we said there are the unhappy people. it turns out that there are some people that are causing damage for the companies on purpose. I recently saw a paper that talked about security breaches, and that paper argued that many of the security breaches start with the deeply unhappy employee that is trying to hurt the company. Now, personally, I don’t like working on the negative side of of humanity. I prefer the improvement side. But I think that that’s also interesting. So if you ask me, what do I think is next is to understand the top employees and what would work best for them. It would get more micro measurements of Motivation and engagement and focusing. And it would also be to understand the very few bad apples, I think. We’re very lucky that we have very few bad apples. But to understand those bad apples and what can we do to turn them positive?

Jason Mitchell:

That’s super interesting. You mentioned Covid, and it sort of makes me think that over the last 4 to 5 years, particularly during Covid, a number of companies began to just increasingly define themselves as, quote, purpose driven organizations in some cases. thinking Unilever recently, I mean, some of these companies have retreated from this early rhetoric about being purpose driven. What value do you attach to being a purpose driven organization, and how does that sort of figure in into some of the other work that you’ve spent time on, where does the notion of purpose, I guess, rank relative to other firm cultural traits like fairness, equity, inclusiveness and feeling valued? I don’t know if you’ve run into this. It’s called the Purpose Power Index, but it talks about how purpose, job satisfaction, and employee engagement are all correlated. and so I wonder what’s the direction and influence between corporate culture and purpose?

Dan Ariely:

So again, I invite you to think about the mechanism. Right. So every time we hear about some new theory you say, okay, how exactly does it work. And if you think about an employee, you basically say how often do they think about that? Right. So imagine you have somebody imagine it’s me, I’m in my office at Duke, and let’s say it’s a purpose driven company. How often does that penetrate my mindset? You know, if I if I go and I talk to my dean and they say something nice to me, okay, I can understand how that works. And if I get an email that says, you know, you’re doing well, but how often do I, on my own accord saying, oh my goodness, we have a good purpose here, you know, not that often, right? By the way, the same thing is true about health benefits. You have to ask, okay, so health benefits are good when people are thinking about where to join. Maybe they look at it But when was the last time you thought about your health benefits and so on. So the first thing we want to understand is what are the things that actually play in people’s daily life? For example, fairness. If you feel that you’re being treated unfairly compared to the person who is sitting next to you in the cubicle.

Very hard to get over, right? It’s very hard not to not to think about it very frequently. If somebody was promoted instead of you and you think it’s unfair every time you meet them, it’s hard not to think about it. So when we talk about all of those things, the first thing we want to think about even before data is to just say, under what conditions would this penetrate people’s daily life. so I think that the idea of a purpose organization probably comes with lots of things in it, And I think, it can have an effect. But if you just declare a purpose and you leave it there, I don’t think it would do much Yes.

From time to time you would go to with friends to dinner and they say, where do you work? And you say, oh, I work at this company and say, oh my goodness, that’s amazing. Wonderful that you’re that you’re doing it and you feel proud for it. Maybe from time to time when you see the logo, maybe from time to time when you see some good news about your company and what they’re doing for starvation in Africa, and that that would be good. But I don’t think it’s the same. Category because I don’t think it would penetrate people’s mindset, very frequently. But by the way, I think that, we need to do more of this mechanistic thinking. Because when you say, oh, here’s, here’s an idea how it okay, how exactly would it work? Like think about corporate social responsibility. If the significant other of the CEO gets to pick a charity of their choice and they get to give it to them, like in what way? Our employee is going to feel more connected? Not very much. On the other hand, if you empower the employees and you say, hey, here’s 20 charities, which one do you want to help? That’s a big difference, right? So we really need to think about the mechanism by which we get people to think and be more motivated. Just because something is in the ether, it doesn’t mean it will actually change anything about their motivation.

Jason Mitchell:

What does your human capital factor work say about the value of employee diversity? I’ve had a recent conversation with Alex Edmonds in an earlier podcast, and by the way, he’s a strong supporter of diversity in all forms, but he’s been critical about the practitioner claims around performance tied to diversity. This goes for the McKinsey report, Blackrock study and an UK FRC research report. So I guess my question is, is diversity a weight in your human capital factor, and if so, how do you measure it and link it to firm performance? Yeah. So so first, Alex is really great. And I think his, contribution in this area are very valuable. And I think that one of the things that he’s pointing out is that, doing a check the box approach is doomed to failure. And it goes back to our discussion from earlier that often people do what’s, easy to measure rather than what’s right. he has other complaints that are all correct as well. But, I think in the domain for diversity, the important thing is that people feel that they are being treated fairly. If you ask about diversity, there are kind of two theories. One theory is to say, hey, let’s just have multiplicity of ideas in the room. That’s a that’s a reasonable assertion. I think the data on that is not very clear.

But but that’s one approach. I think the second approach is to say let’s make sure that people feel equally treated. And That’s incredibly important. And what Alex is showing is just doing the numbers, percentage of people and so on, makes people feel as if they are dealt with. you know, inequality, but it’s not really doing the work. And I’ll give you an example. There is something called the XI index sag. Do you know this index? Yes I do. Yeah. so, you know, you it’s basically built on counting, right? It’s percentage of women in top management, percentage of women, on the board level and so on. And the simple claim was let’s invest in companies that have higher percentage of women. And it’s top positions. Easy to measure. Seems reasonable. that that index doesn’t perform that well. To say the least. Now why doesn’t it perform very well? Is it because treating women equally is not a good idea? Of course, not treating women equally is a fantastic idea. But equal numbers of women, or percentage of women at top position does not mean treating equally. You can have lots of people, lots of women at the top and treat all of them badly, but all of them come out of a board meeting saying, I don’t feel like they they heard me. I don’t feel connected. People, women at a top management can feel there’s a lot of us and we all treated badly. So the first, the first fallacy is to think that percentage means equal treatment. It does not. The second fallacy is that just because you have women at the top, let’s say they were treated equally, that that will go down, trickle down to the rest of the company. Also doesn’t have to be.

But but this for me is kind of a representation of the of the worst thing. Somebody comes up with this idea. It’s a proxy measure. It’s a proxy measure that people like Right. It’s easier to measure percentage of women than to do the difficult thing of saying, do women feel like they’re being treated equally and not just at the top at across the organization? And then they say this is the measurement. now it’s really easy to check the box and say, oh, we’re not. Our culture is broken. Women don’t feel well treated in this company. What do we do? Let’s assign two more women to the board and three women to the top management, and we’ll solve everything. Of course, the answer is it’s not solving anything. In fact, when you assign women to high positions, you create the expectation that the company will do something. And then if the company doesn’t do something to change the culture in a deep way, people actually get more disappointed and more disheartened about the workplace. so I think in Alix is saying the same thing in general way is to say treating people fairly is incredibly important no matter where they come from. But it’s not about percentage. And we need to measure the difficult thing the the subjective thing. And if I can add one more thing, now that I remember this, you asked me, what do I think is the next frontier? We did a study on neurodiversity. We asked people in a big consulting company how many of them have an official diagnosis from a physician about neurodiversity, anywhere from ADHD to depression to autism. And so that was the first question. Then the second question we asked was, if you don’t have an official diagnosis, do you think if you went to a doctor to get a diagnosis, you would get one? And for what? Now the numbers surprised me. About 25% of the people said they have an official diagnosis

Dan Ariely:

that nobody at the workplace knows about it. And 27% said that if they went to a doctor, they would get a diagnosis. So that means it’s slightly more than half of the people feel that they have. a neurodiversity issue that the workplace is not taking into account. And they are less happy at work. So if you ask me about another frontier I think is understanding our neurodiversity and trying to think about accommodation. So, you know, when when somebody like me with a physical injury, accommodating me is quite easy. I can’t use my hands very well. It’s it’s quite obvious. you know, my my limitations are very easy. And I think if people saw me, they would have empathy. And they could quite quickly see what what kind of help, what kind of things? I can’t do that. Well, if somebody has depression. What kind of accommodation do they need? Very hard to think about it. But we certainly for all kinds of neurodiversity, we certainly don’t accommodate, people at the workplace. And I think that’s a really important frontier, because I think we could unleash lots of human potential if we understood the things that people with neurodiversity can do better and the things that are hard for them. And maybe I’ll end with this one story. I met a guy who has a bipolar disorder, and he used to work on the team. And it was it was very tough because when he was manic, he worked much, much faster than anybody. and it didn’t work. And when he was depressed, he held everybody back, and he had a tough incident at work. But then his boss basically said, you know what? You’re going to be a one man project group. you have these fluctuations. You’re an amazing person. You have this fluctuation. Nobody can really count on you or keep on your pace when you have this fluctuation.

Why don’t we give you projects that other people don’t depend on you and. And what an accommodation. And the guy has been unbelievably creative working in the way that that works for him. So, so I think I think we’re all you know, many of us are different in different ways And finding that way that would work for us. Like, this guy is so connected to his workplace, I think about the level of appreciation and commitment and changes. So of course, not everything is as simple to solve as is bipolar in this in this case. But I think that’s a huge a huge next direction for us in terms of human capital. That’s a really good point. I wanted to wrap it up with one final question. I really liked your recent blog post, In Defense of Mistakes, where you write about the fact that there is no reward without risk taking. How do you test and measure for a firm’s willingness to support risk taking? What does a I guess, a responsible form of risk taking even

Jason Mitchell:

look like within a firm? It seems all too often there’s this kind of compulsion to reduce risk taking down to a kind of a move fast and break things tech like culture that sometimes obviously ignores important systems of governance. I’m thinking companies like FTX and Theranos, for instance.

Dan Ariely:

Yeah. So so I think that there are many domains in which people should risk more but if you ask me, how would I measure it? I think the first thing I would measure is the level of fear about making mistakes. And, I recently talked to, to a lawyer. He’s a lawyer in the big company. He has 200 lawyers working for him. And he said they all think about each of their project as if the only project moving forward. And because of that, they don’t take any risk. He said he at his level wants people to take to take risk, but they are so afraid of anybody saying, oh, you are wrong in this contract that they don’t end up taking the same risk. And it’s kind of nice to think about it in the investment world, because in the investment world, we all we all know that it’s about portfolio. Nobody’s saying I’m smart enough to know exactly which company to invest in. I need a portfolio of multiple companies. And I think the same thing is true for companies.

We need a portfolio approach and we need to agree on the risk taking. I think a good measure in companies for bad behavior is probably bureaucracy. I think it’s probably the culture of what they do with mistakes. there was one company that I love. I really love that company that, Once a year they show all the projects that failed. And the CEO, actually, the chairman gives a price for the most spectacular failure. And they don’t give a price to the spectacular failure that people made. You know, the biggest mistakes. But people who had good intentions. And it just turns out that the project didn’t work out, people didn’t like it, whatever. It happened. And I think that’s for me is the right approach is to say, how do you deal with mistakes? Are you publicizing in a good way? Here’s something we learned, or you trying to blame the people. If I could measure it, that’s what I would measure. I would measure when mistakes happened. Are you blaming the people that did the mistake, or are you praising them for their effort and publishing it so that people don’t learn from this and don’t repeat this exact mistake?

Jason Mitchell:

Yeah. So so here’s to making better mistakes.

Dan Ariely:

Yes, absolutely. So

Jason Mitchell:

it’s been fascinating to discuss what a human capital factor can look like, how incentives and the basic idea of feeling valued are fundamental drivers behind employee motivation, and why human capital can represent an overlooked source of alpha. So I’d really like to thank you for your time and insights. I’m Jason Mitchell, head of responsible investment research at Man Group here today with Dan Ariely, James B Duke professor of psychology and behavioral economics at Duke University. Many thanks for joining us on a sustainable future, and I hope you’ll join us on our next podcast episode. Dan, thank you so much for your time today.

Dan Ariely:

Thank you.

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