Gain segregation in management

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In the last few weeks I have been studying about Daniel Kahneman and Amos Tversky famous Prospect Theory. This theory has many applications and many interpretations. One of the most important of these interpretations is that losses loom larger than gains. Meaning, all else being equal losing something will hurt us more than winning the same amount (when I say amount it is not necessarily money. It could be joy, pain or anything that has value to us). If you look at the graph that represents this theory, you would notice how the graph is steep at the beginning in both directions, but steeper in the loss area.

One of the insights of this idea is that we need to aggregate pains but segregate gains. In other words, when we talk about gains, it is better to be closer to the zero point of the axis but in the case of loses it is better be as left as possible on the graph.

Imagine going to the dentist. You need to take a four-hour operation. Your dentist offers you to do it in two sessions of two hours or in one session of four hours. Prospect Theory suggests, maybe counter-intuitively, that it is better for you to have a 4 hour operation than a two hour one.

That got me thinking about how this idea is manifested in managerial environments.

Have you ever heard the advice to celebrate small victories? Prospect Theory suggests that this is very good advice. However, in many managerial setting we are so busy dealing with current issues that we forget to celebrate small successes. We wait to the end of the period and have a huge event celebrating the last year. However, celebrating frequently turns out to be a much better way to in recognizing people’s efforts. So, instead of giving them a week off at the end of the project, give them 5 days over the duration of the project, as a reward for good work. Instead of throwing a huge party that will cost you 100,000$ dollars at the end of the project, have ten parties with a cost of 10,000 every now and then. This approach also seems to coincide with Dan Pink’s advice in Drive, that rewards should follow a “now that” pattern instead of a “if then” pattern.

I know that these examples are to literal a translation of the theory and that in real life, things work a little differently. However, I do believe that by understanding the idea of gain segregation, we can make our efforts to engage and recognize employees much more effectively and allow them, without changing our cost structure or the total sum of what they are gaining, to enjoy more of what we are already giving them.

How do you think the ideas of loses aggregation and gains segregation play out in our managerial decisions?


7 Responses to “Gain segregation in management”

  1. Randy Zwitch Says:

    I think this theory makes perfect sense. Like a gambler who can only remember their bad losses, it’s the same in the workplace.

    Very rarely do we celebrate ‘incremental’ goals. The product either launches successfully, or it doesn’t. The fact that the team worked ‘really hard’ gets lost when earning for the quarter fell short.

    However, make a bad decision, and those have a way of following you around! I do marketing campaigns; if accounts come in way better than expected (+50%), people stop looking at the daily report. Miss by 50% to the downside, and you’ll hear about it *every day*.

    At the same time, as a budding manager, it’s hard not to continue the same ‘all at once’ pattern. How do you define ‘incremental’ success, especially when there aren’t necessarily clear breakpoints? I’m thinking like R&D, or product development, where usually you have a breakthrough or you don’t. You can’t reward people for having their behind in their seat…

  2. sherfelad Says:

    Thanks Randy,
    Your comment takes the post to a new level and raises many interesting questions.
    First, I would ask why can’t you reward people for having their behind in their seat. In some cases, that is not easy to do and when perseverance is connected to success, like in R&D, maybe it is worthwhile to reward it.
    Second, most success are incremental. We have this romantic picture of geniuses with an “HA-HA” moments, but as I read in some recent literature (outliers, linchpin) that is not the case.
    Third, maybe because it is so hard it is so worthwhile doing.
    Forth, maybe we should consider also rewarding for failure, as this has so many positive outcomes…
    Thanks for the comment.

  3. Randy Zwitch Says:

    “I would ask why can’t you reward people for having their behind in their seat. In some cases, that is not easy to do and when perseverance is connected to success, like in R&D, maybe it is worthwhile to reward it.”

    I guess to me, that’s like rewarding failure. Just like giving out bonuses when the company loses money, if you give people rewards for working on a project that ultimately doesn’t amount to anything, then the reward system becomes distorted.

  4. sherfelad Says:

    Randy, great point! What’s wrong with rewarding failure. This is exactly a point I so often try to make. Failure is an investment. If the process was done right and if people did the best they could, then failure is a good thing because we can learn from it and improve for the next time. This is true in many aspects of business, but no where it is true as in the R&D. Many of the great products and inventions we have today are not only a result of continuous failure, but are actually a by product of it. The famous post-it being the forefront of these examples. I think you will find the reading interesting:
    We need to know when to focus on the outcomes and when to focus on the process… and the rewards should reflect that. Some outcomes are better in the short-term. Great processes are always better in the long-term. Choose what is best for you!
    What do you think?

  5. sherfelad Says:

    Check this out. Many similarities to what I just wrote here but with data to support it.

  6. Randy Zwitch Says:

    That is a fantastic Wired article! So much so, that I’m inspired to blog about the article.

    The article does a great job with the idea that the result isn’t necessarily the failure, but rather the hypothesis could be the failure. And like the people they reference, I tend not to see that at work. Of course, that’s because I’m just like the chart graphic, surrounded by the same financial services type people, so we’re all coming from the same hypothesis!

    Incidentally, the ‘find people with different hypotheses’ is what I love about the idea of intelligent blogs (as opposed to vanity blogs!). That it’s so easy to find people who are the same as you, as well as coming from a different viewpoint. Your blog is definitely helping me to think differently about management issues!

  7. sherfelad Says:

    Thanks Randy.
    That last sentence is like fuel to my soul!
    Happy to have you comment here!

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