
Last few months I have been fascinated by the world of Behavioral Economics. When I studied economics back at the university, behavioral economics was still in infancy stage and not as evolved as it currently is.
But over the years it gained momentum when economists realized that a lot of economic behavior cannot be explained by the foundational principle in economics which is “All men/humans are rational.” Though the world would have been easier if that were the case, decision making in individuals and in turn society is a much more complex phenomenon. It is influenced by a lot of nuances of which we are not aware. One specific such example of decision making which applies to the professional world is what I wanted to talk about in this blog. It is from a book called “Predictably Irrational” written by a renowned Nobel Prize winner Dan Ariely.
Market Norms Vs. Social Norms
In one of the chapters in that book he talks about us living in two worlds – one that is characterized by social exchanges and the other that is characterized by market exchanges. A distinct set of rules applies to both these worlds and the problem happens when we mix the two.
Introducing market norms into social exchanges can hurt the relationship and then recovering from that can get difficult. In the business world companies often market themselves as “social companions” but then introduce market norms into this social exchange. Businesses were different before – It was more industrial in nature, and it was all about market driven exchange. The work often involved people working from nine to five, a clock in and clock out mentality and the business would pay you by the hour. In the book he says “When they factory whistle blew or the corporate equivalent took place, the transaction finishes for the employee. This was a clear market exchange and it worked for both sides.”
The Changing Nature of Business and the Importance of Social Norms

However, the nature of business has changed over the years. Economies have moved from an industrial economy into a knowledge economy where we are the makers of intangibles. In such kind of work what matters is creativity and the partition lines between work and leisure has blurred. It is no longer about work-life balance but work-life harmony. Organizations often want their employees to think about work even outside of their work hours. Pay by the hour has given way to monthly pay. In this twenty-four by seven work environment, social norms become important because they want their employees enthusiastic, hardworking, flexible, and involved. And to do that companies have realized that social norms are what builds loyalty.
Though some companies have been successful in creating the social exchange, for most it is hard because businesses focus on profits which sometimes lead to cost side pressures that undermine the social exchange. How it works in a social exchange is employees believe that if something goes wrong the company will protect them. It is not part of any employer-employee contract, but employees assume that they are general obligations.
When companies want to take the advantages of social exchange, they also need to focus on cultivating the social norms. Rather than focusing on short term profits, companies now need to make investments in better benefits for their employees. Companies should also behave in a way that makes this social exchange stronger. This is where most companies are failing today. It could be something as simple as giving an employee a personalized gift worth $100 vs an extra $100 in cash. Though most employees may prefer the cash, a gift can boost the social relationship between the employer and the employee.
Learnings from the Great Resignation
In the last year of “Great resignation”, companies have realized that Salary alone will not motivate an employee to stay and work in a company. Survey after survey has pointed out the limitations of financial rewards on employee motivation. It is not the salary alone but the combination of social norms such as building something together, pride in the profession and a sense of duty in conjunction with financial rewards that will make them give their best to an organization.
Businesses resort to Market exchange because unlike social norms it is easier to create market norms. Social norms take time to build and maybe even longer to show visible results. It requires the alignment in behavior of entire leadership team, and company policies e.g., appraisal policy, your career development plan and even rewards and recognition must align to that. Aligning the culture and your policies and your behavior is a challenging thing to do, much harder than merely increasing salaries. However, it is not impossible especially if we learn from organizations that have been able to create this social exchange successfully.
As Dan Ariely says “Money, as it turns out, if often the most expensive way to motivate people. Social norms are not only cheaper but often more effective as well.” Money is important to all of us, but it can also remove the best in human interactions – Could there be some aspects of our life that can be made better without it?
It is a question that should make us uncomfortable, and it will take some getting used to, but one cannot deny the importance of creating social norms in today’s business environment for long term benefits.