behavioral economics, cloud erp

Behavioral economics combines the study of psychology with the analysis of the decision-making behind an economic outcome, such as the factors that play a role in a consumer’s decision to buy one product over another. Just over a year ago, Richard Thaler won the Nobel prize for his work in the field of Behavioral Economics. He posited that while traditional economists believe humans behave rationally, humans actually exhibit a number of logical fallacies in their behavior and decision making. It doesn’t take a genius to see that people are irrational, but Richard Thaler was a genius for identifying and defining many fallacies, allowing us to find ways to combat them by “nudging” people in the right direction.

Thaler’s “nudge theory” has contributed to improvements in public policies around the globe.  One of the most well-known examples is that of organ donation. In the US, which has an “opt-in” organ donation system, there’s a vast shortage of organ donors. Spain, in contrast, has an “opt-out” system and is the world leader in organ donation. The “opt-out” system works because of status quo bias; people tend not to change default options.

Sometimes our default behaviors and thinking habits can get in the way of achieving the best possible outcomes. Here are four fallacies that could be affecting your decisions when it comes to ERP selection.

The Ikea Effect

Are you reticent to move off of current solutions because your team made them? You might be experiencing the Ikea Effect. Investing labor into something leads to inflated valuation. Experiments show that value assigned to self-made goods is on par to value assigned to expert creations. Some believe it’s attributed to the positive feelings from completing a project.

Sunk Cost Fallacy

You’ve spent 10 minutes in line at the grocery store, when another register opens. You stay in your current line because you’ve already put in the time, but going to the new register would have been faster. The essence of this fallacy is that people will continue doing something they have invested in, even when there are better solutions, because they’ve already invested so much. If this sounds familiar to you, you might be guilty of the Sunk Cost Fallacy.

Status Quo Bias

People prefer for things to stay the same by doing nothing, even when transition costs are small and the importance of the decision is great. The problem with the status-quo is that while a person or company can choose to stay the same, the world changes more and more rapidly, especially in our age of rampant innovation. It’s not a winning strategy. Is your status-quo really working, or are you guilty of Status Quo Bias?

Ambiguity Aversion

People tend to favor the known over the unknown. When choosing between two bets, we are more likely to choose the bet for which we know the odds (even if the odds are poor) than the one for which we don’t know the odds. We’ve all heard the phrase “Better the devil you know than the devil you don’t.” That might be a wise strategy in some aspects of life, but when it comes to an ERP strategy, your solution should never be “the devil.” If this sounds familiar, you may be experiencing Ambiguity Aversion.

Whether just one of these sounds familiar or all five, you’ll want to make the best decision possible when selecting a cloud ERP solution. Good isn’t good enough! If you recognize any of these fallacies on your team, please leave a comment below. We’d love to hear from you!