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Did you know that our decisions get riskier the closer we get to Friday? Or that you’re more likely to buy a product if it’s on a shelf at eye level?
Behavioural science is all about understanding what influences our decision-making and using that to predict or change how we might act.
Our guest this episode is Michael Tracey, Director of Behavioural Science in Global Compliance at Scotiabank. He’ll explain this fascinating field and how it can be used to shape the way we take risks (good or bad) on any team or workplace.
Stephen Meurice: Do you know what “Behavioural Science” is?
Even if you haven’t heard of it - you’ve definitely experienced it.
Every time you go grocery shopping.
[grocery store ambience and upbeat music]
Michael Tracey: Yeah, the grocery store is an absolute behavioural science laboratory.
SM: That’s behavioural scientist, Michael Tracey.
MT: So, for example why is the produce upfront? Well, the produce is upfront because fruit and vegetables are quite healthy and if you go into the produce section and you make, maybe your first couple decisions in the grocery store and they’re good conscious decisions. Or you say I’m gonna buy some healthy fruits, you then give yourself a little bit of license for the rest of your trip through the grocery store to maybe make some less healthy decisions. You know, maybe you get some candy or chips or something like that because you already feel like you’ve done a good job when you bought that lettuce and carrots at the beginning of your trip.
SM: Behavioural science is all about understanding what influences our behaviour and using that to predict or change how we might act. And — back to the grocery store — that can be something as subtle as how high or low a product is placed on a shelf.
MT: If you look at any grocery store, the name brand products are going to be at your eye level because those are the ones you’re more likely to buy, then maybe the no name options that are gonna be lower down on the shelf.
SM: But behavioural science isn’t just for selling cereal. It can be used in public policy or even to help us understand how we perceive risk in the workplace.
And our guest today does just that.
Michael Tracey — who you just heard there — is the Director of Behavioural Science. He works with the Global Compliance department here at Scotiabank. Their job is to make sure people at the Bank are doing the right thing. This episode he’s here to tell us what behavioural science is all about. And how it can be applied to banking — or any team or workplace for that matter.
I’m Stephen Meurice and this is Perspectives. Let’s get started.
Thanks for joining us today, Michael. Welcome to Perspectives.
MT: Thank you, Stephen. It’s great to be here. Really excited to have a chat with you today.
SM: So, let’s get right into it. What is behavioural science? I feel like it covers a pretty broad range of stuff.
MT: Yeah, by design it does. So behavioural science is really the science of understanding, predicting and changing human behaviour. As a result of those lofty goals, it draws from a lot of different disciplines. So, the biggest two really are economics and psychology, but it also draws in a little bit of neuroscience, biology, sociology, anthropology. And really what it tries to do is cherry pick the best elements of all those different disciplines to come up with a really comprehensive way of understanding behaviour.
SM: Okay, how did it emerge out of those different fields?
MT: I mean it’s really been a slow burn since probably the 70s, but it really took off sort of after the global financial crisis. And the big cause of this really was some of the failings of traditional economic modeling to predict some of the things that occurred during the financial crisis. Economic modeling is great and very powerful. Some of the limitations that are built into it are that human beings are incredibly complex and when things are going right, they work really well, but the second things start to go wrong, the second people stop behaving in the way that we expect them to behave — the models can break quite quickly.
SM: So behavioural science factors in those human elements to predict and change behaviour. Is that right?
MT: Yeah. So, I think if you look at an economist’s toolkit, the primary way in which they think you can change behaviour is through manipulating incentives. So that’s kind of, you know, carrots and sticks essentially as the key drivers of human behaviour. What behavioural science brings in are all the other factors that do shape behaviour. So, we think not just of the incentives, but the actual context in which decisions are being made. So, I think the key thing to remember is that we are, you know, living in a modern world on very ancient hardware. Making decisions very slowly could lead to your demise back in our days on the Savannah. So as a result, our decisions are being made essentially for us by the more primitive parts of our brain most of the time. There’s literally thousands of ways in which your behaviour can be influenced. If you’re making a decision in dim lighting versus bright lighting that will change your perceptions of ethics. If you’re making a decision where there’s something priming you to think about money, you become more like an economist. All of these things can shape behaviours and if you’re trying to really effectively understand predict and change behaviour, you need to consider all of the factors at play, not just the incentives. Although incentives are very powerful.
SM: Okay, those observations that you just made around how people make decisions, how are those used to direct human behaviour? For instance, we heard in the intro the grocery store example. But are there ways behavioural science is used to promote a social good say of some kind.
MT: Yeah. So, governments really jumped on the behavioural science bandwagon during the global financial crisis. And behavioural science, there’s one kind of core tenet that I think is really important and it’s really positive for governments, is that it preserves freedom of choice. So, if you’re using behavioural science correctly, you’re not being manipulative. When people are making quick and impulsive decisions, you need to kind of give them a little bit of what they would call a nudge in behavioural science. But you of course don’t want to limit that decision-making. So, in the let’s call it public policy domain, there’s been a lot of use of behavioural science and a couple of the great examples are definitely in the world of financial decision-making. So, if you look at retirement savings, it’s a very complex decision to make. You have to decide how much of your spending you want to basically delay into the future. And that’s really not something that human beings were particularly well designed to do. So as a result, many people struggle with these decisions. Behavioural science has been used to really increase and influence people to make sure that they’re making good investment decisions for their pension savings. So, there’s a great example out of the UK where they’ve switched from an opt-in system where you have to sign up to be part of a pension, to an opt out system, where you’re by default assumed to be in the pension and if you don’t want to be – again, preserving that choice — people can opt out. But there were tremendous increases. I think the participation rate jumped 40%, so massive increases in pension contributions, hopefully setting people up for successful futures. And again, this is a very low-cost intervention because all they had to do was change a form.
SM: So having a solid understanding of how people make the decisions that they make can help nudge them, as you say, in the right direction to make decisions that will be better for them or better for society.
MT: Yeah, exactly. Another great example here is paying your taxes. Of course, we should all pay our taxes, but not everyone is always paying their taxes and certainly not paying their taxes on time. So, another way in which behavioural science has been used is to help people get to the point where they’re actually consciously choosing to pay their taxes. So, one of the ways in which this is done is they’ve done very targeted data analysis of people’s individual regions. So, they could say to you, ‘Stephen, not just 90% of Canadians have already paid their taxes,’ but they can say, you know, ‘95% of people in your neighbourhood have paid their taxes.’ Because people are really driven to comply with social norms, right? You don’t want to be seen as an outlier. Sometimes referred to as the herd effect or herding. So that very targeted messaging can dramatically increase the likelihood that you’ll pay your taxes and pay them on time. It’s funny, there’s always parts of the world where you’ll see this issue emerge. And I mean, obviously as a global firm, Scotiabank needs to consider the differences in these norms. Where there’s certain regions — even within a single country — where paying taxes isn’t as is commonly done as it is and others. So, things that work in one place don’t always work in another place. That’s kind of another core tenet of behavioural science is that really the context in which the decisions are made matters. And that context can be influenced by many things — culture, being one of them. But even ultimately from team to team, right? Within Scotiabank, people working in the same office may have very different experiences based on the culture of their team.
SM: Well, that’s a great segue into our next question, which is about what you do at Scotiabank. You are Director of Behavioural Science. What is your role and how does behavioural science fit into that?
MT: Yeah, I mentioned that, you know, it’s become quite strong in the public policy domain. The use of behavioural science, it’s quite a bit newer for financial institutions. Scotiabank is certainly one of the ones at the forefront. I think the group and the stakeholders that have the greatest interest in this are really regulators. So, I myself come from the Ontario Securities Commission before joining Scotiabank. I’m really working through with our global compliance partners to figure out the best ways of using behavioural science. And again, the goal here is to better understand behaviour, to better predict behaviour. And then, ultimately, if people are doing things we don’t want them to do — of course, that is an issue in compliance — we want to find ways of changing that behaviour.
SM: What is compliance exactly, for people who, you know, are not familiar with the inner workings of a bank?
MT: Yeah, it’s a, it’s a complicated question. Ultimately, compliance really is about making sure that people are doing the right thing. Scotiabank operates in many different countries, many different jurisdictions. They all have different laws, they have different regulations. We of course then turn those into our own policies and procedures for how we do things here at Scotiabank. Compliance is about making sure that people are following those rules, laws, regulations, policies and procedures. Of course, not doing that exposes us to tremendous risk. So that’s really our job is to try and eliminate that risk as much as possible and manage it when that isn’t possible.
SM: So maybe you can talk a little bit about risk. How good are people at —generally speaking, not even necessarily within the bank context — but how good are people at assessing the risks around them?
MT: The one thing I would say about risk is that it’s often considered to be a very fixed variable. Like, people have a set of risk preferences and it’s fixed over time. And behavioural science has really shown that that’s not true. People vary tremendously, people can be very risk averse, or they can be risk-seeking.
But it’s also not just between people, but within a single person you’ll often see great changes in their risk preferences. So, even things as simple as the day of the week have been shown to impact people’s risk preferences. Where they become more risk-seeking the further away from Monday you get, essentially.
And by Friday people are very risk-seeking. So, from a standpoint of the Bank, you know, understanding the ways in which our employees perceive risk is very important. And the ways in which they’re taking risk is very important. And the ways in which they can change. Because ultimately, there are parts of the Bank in which we should be taking risks of course. And that’s just not just financial risks, nonfinancial risks as well. We need people to take risks, try new things, speak up. That’s a big one. You know, if you’re in a meeting and you have an idea, but it’s novel, it’s a risk for you to speak up and your brain certainly interprets it that way. So, we need to make sure that people are comfortable to take those risks. But at the same time, we of course don’t want people taking excessive risks that put the Bank in potential danger or create a chance for harm.
SM: So, what kind of tools or methods can you use to help people understand risk, understand risk tolerance and make the right decisions around risk.
MT: Yeah, I mean, there’s lots of people at the Bank certainly more qualified than me to discuss risk and risk management. The thing that I think I can bring to the table is really the additional insight into how human beings understand and perceive risk, right? Because there’s real risks that are manifest in the world and our beliefs about risk or how we actually view them. One of the things you can do is really work to update people’s beliefs about the risks and certainly data can help with that. But also, we talked earlier about the importance of social norms, right? You’ll see it happen where someone may think something is very risky. You know, if you’re at a swimming pool and there’s a high diving board, right? If no one’s jumping off the high diving board, then no one will do it for the first time. But if everyone is jumping off the high dive and making it to the bottom safely, then maybe you’ll feel comfortable to do it, right? That’s going to update your beliefs around the likelihood that something bad is gonna happen to you if you jump off the diving board. Doesn’t eliminate the risk, it just changes your perception about how risky the behaviour is. The same thing can be done here at Scotiabank. And you’ll certainly see that emerge on teams, right? And that’s where team norms become really important for setting what is the risk you can take and what is the risk that you shouldn’t be taking.
SM: Well, that’s fascinating. I think we’ll leave it there. I just wanted to ask, did you use any behavioural science on me over the course of this conversation?
MT: Everything is behavioural science, Stephen.
SM: Michael, thank you so much for joining us today. We really appreciate you coming on. It’s been a really interesting conversation.
MT: Thanks, Stephen.
SM: I’ve been speaking with Michael Tracey, the Director of Behavioural Science in Scotiabank’s Global Compliance Department.