Behavioral Economics & Enterprise Architecture (2): Improve Decision Making

Behavioral Economics & Enterprise Architecture (2): Improve Decision Making

The promise of enterprise architecture is that it helps improve decision making. Typically, the role of the enterprise architect is to advise and enable other stakeholders to make better decisions. Therefore, Enterprise Architecture – more than anything else – is a social discipline, in that it demands social skills and interaction in order for practitioners to successfully engage with stakeholders and change their behavior.

Not surprisingly, enterprise architects are more effective in steering decisions when they consider that they are dealing with Humans. And Humans, as we’ve explained in our previous blog, can be irrational, naïve and impulsive. By taking these biases into consideration and making choices as easy as possible for decision makers, architects can dramatically increase the likelihood of getting their point across and ultimately help deliver better business outcomes for the organization. Here, we present some principles to get you started.

Econs & Humans

In their best-selling book Nudge (2008), Nobel prize-winner Richard Thaler and Cass Sunstein introduce the concept of ‘choice architecture’, and present two types of actors: Homo Economicus and Homo Sapiens, or “Econs” and “Humans”. Traditional economic theory is based on choices made by Econs, who are perfectly rational and think like Albert Einstein, have the memory of IBM’s Summit supercomputer, and the willpower of Mahatma Gandhi. Humans, on the other hand, can forget their mother’s birthday, snack when they know they shouldn’t, and drink too much at parties. This is where Behavioral Economics branches off from traditional economics, explicitly acknowledging and accounting for the existence of human biases and their influence on everyday life and the economy.

Humans do not adhere to the rational world of traditional economics. But by understanding these human biases, we can steer (or “nudge”) choices effectively in the real world – an important ability for enterprise architects. It is not just about the decision that needs to be made, it’s about how the decision is presented to the decision-maker. In other words, enterprise architects must design the choices they present with care. They are choice architects.

Choice architecture

Earlier in this blog series, we described two systems in decision making.

• System 1 for fast, automatic, frequent, emotional, stereotypic, and subconscious irrational decisions.
• System 2 for slow, effortful, infrequent, logical, conscious rational decisions. In engineering your choice architectures, you want to make sure the human System 1 does not produce a negative or sub-optimal decision.

To achieve this, we should structure the design to make the options as obvious as possible and the choice as easy as possible, based on how we know the Human Type 1 decision-making system works, using the following principles (Thaler et al., 2008):

1. Create better defaults
   Humans will choose whatever option requires the least effort, even if that is not the best option for them! This “path of least resistance” is called the default: it is the outcome if the chooser does nothing. Defaults are unavoidable. For any node of a choice architecture system, there must be an associated rule that determines what happens when the decision maker does nothing. There is huge power in defaults, just think about that auto-renewed subscription you still want to cancel…
   In terms of Enterprise Architecture, suppose you want to keep your infrastructure landscape up to date. When the operating system of a server is no longer supported by the vendor and the default option is to do nothing, the entire landscape – and everything that runs on it – will be out of date soon! Now imagine implementing a simple principle that all infrastructure will be updated as soon as a newer version is on the market. ‘Doing nothing’ will now result in an up-to-date landscape.
2. Expect error
   Humans, unlike Econs, make mistakes. A well-designed system expects its users to make mistakes and is as forgiving as possible. Foolproof, idiot proof, monkey proof – you get the idea.
3. Give feedback
   Well-designed systems tell people when they are doing well and when they are making mistakes. In the product design world, this is usually ‘hard-coded’ in the product (e.g. error messages in software). In Enterprise Architecture, the architect is the designated provider of the feedback to the designated decision makers. Social skills will help with timing and framing the feedback to be as effective as possible.
4. Improve the ability to ‘mapMapping Capability Contributions
   ‘Mapping’ is the relation between an option and the (expected) results of choosing that option. A good choice architecture helps decision makers to improve their ability to map and hence to select options that will make them better off. This can be done by making the information about the options more comprehensible, e.g. transforming complex information into units that translate more readily into actual use. For instance, you could show the impact of a set of new technologies on a capability using a spider chart, as illustrated below:
5. Structure complex choices – Drive Simplicity!  
   As the number and complexity of alternatives in a decision scenario grows, people are more likely to use simplifying strategies. When a choice is complex, choice architects have a much higher chance of steering decision makers towards the right choice. Structuring alternatives is an effective way of making choices easier (think about the categories and subcategories on your Netflix account).  By understanding the decision patterns of entire groups of decision-makers, a choice can be structured more effectively for a specific stakeholder. This is known as collaborative filtering, e.g. “Customers who bought this item also bought…”
6. Focus on incentives
   Choice architects should think about the right incentives for the right people, which is particularly important in the sometimes highly political enterprise environment. One way to do so, is to ask the following questions about a particular choice architecture:
   – Who uses?
   – Who chooses?
   – Who pays?
   – Who profits?

Structuring and steering choices

Salience of options and results can of course be manipulated, and good choice architects can take steps to direct people’s attention to incentives. Consider the rationalization of an application landscape. Applying the right filters to your decision-support visualizations helps focus attention on the ‘biggest bang for the buck.’ For example, see the BiZZdesign Horizzon visualization below.

E2E TIME analysis

We see a TIME analysis performed on an application landscape comprising over 100 applications. Since a bubble chart of 100+ applications is not easy to read – let alone make decisions on – we applied a filter to only show applications that are more expensive than $300,000. Without the clutter of the smaller applications, we can easily see which expensive applications are candidates for elimination (bottom left corner) and in which applications we should invest (top right corner). Structuring different options adequately makes every decision easier!

Next to making decisions easier, choice architects can also steer decisions when considering human bias in presenting the different options of a decision. A well-known example of human bias is loss aversion, or people’s tendency to prefer avoiding losses to getting equivalent gains: it is better to not lose $5 than to find $5. A well-known result of loss aversion is the sunk cost fallacy. After buying a non-refundable sporting event ticket, many people would feel obliged to go to the event despite not really wanting to, because doing otherwise would be wasting the ticket price. Or in a business context, “We’ve already spent so much on this SAP implementation, we just have to continue”. The recent SAP fiasco at Lidl (€500M down the drain) provides an excellent example. In bubble charts, these will be the really big bubbles on which all attention is focused. That may be another reason to filter your bubble charts in the right way.

The principles we discussed can help enterprise architects become effective choice architects and so play a big role in ensuring the organization meets its strategic goals. We believe that by accounting for human biases, they can significantly enhance management’s decision-making process and their overall performance. Therefore, we will dive into leveraging human biases in our next blog, with examples from Behavioral Economics literature. Stay tuned!