How can leaders strategically manage human heterogeneity?
The long-standing dominance of the neoclassical paradigm within the economic sciences has shaped the development of knowledge in many research domains. In particular, by simplifying human complexity and seeking a sort of homogeneity in individual preferences, neoclassical theory traces all behaviors back to the homo oeconomicus utopian archetype.
Nevertheless, a growing corpus of scholars recognizes that, in order to better understand how people make decisions and interact with each other, it is necessary to challenge the neoclassical paradigm. From this perspective, the Nobel Prize winner Herbert Simon has been one of the leading exponents to question the validity of the selfish, perfectly rational behavior. Behavioral economists, in fact, attempt to expand standard economic theory by building alternative models that better fit human behavior in the real world. For example, by integrating the logic of self-interest with assumptions more related to concrete human behaviors, the social preferences approach has been instrumental in advancing the notion of “we-rationality” – thereby acknowledging that fairness and reciprocity motivations are able to affect individual actions within the strategic interaction field.
It goes without saying that the integration between psychology and economics in scientific research provides a deeper understanding of strategic decision-making processes, impacting not only at the managerial, but also at the socio-political level. Not surprisingly, for my doctoral dissertation in Business Management I chose to investigate the relational social constructionist view of leadership; according to this view, leadership processes – along with motivational dynamics – are likely to be shaped by the strategic interaction among heterogeneous individuals.
Among the practical implications of my research, three takeaways can merit further discussion.
1. Developing strategic behavior when motivating followers
According to the neoclassical paradigm, to maximize the surplus arising from productive activities and avoid the free-riding phenomenon, leaders should establish punishment-based incentive systems by implementing highly complete contracts. In fact, on the one hand, selfish leaders are not willing to pay productivity bonuses; on the other hand, in the absence of explicit and enforceable material incentives, selfish followers tend to minimize their engagement in business activities.
Hence, in organizational environments populated by selfish agents, leaders limit followers’ decision-making proactivity through commands, written rules, and punishments (e.g., pay cuts); leaders behave in this way in order to maximize productivity and avoid followers’ opportunistic behaviors. As a result, the emergence of autocratic leadership styles is predictable. However…
2. Reciprocal fairness matters
… Reciprocal fairness matters! Indeed, experimental evidence tends to contradict the predictions of the neoclassical model, showing that the presence of individuals interested in reciprocal fairness significantly affects the strategic interaction between leaders and followers. In particular, the promise of rewards on the part of fair-minded leaders is able to stimulate not only the commitment of fair followers, but especially the commitment of selfish followers – leading to higher productivity compared to the application of fixed, contractually enforceable penalties. Basically, this is because leaders concerned about reciprocal fairness tend to calculate productivity bonuses in proportion to the followers’ effort, thus fostering proactive and collaborative behaviors.
In these organizational environments, therefore, leaders are willing to sacrifice a share of the surplus in order to reward followers who make extra efforts in performing activities. As a result, the emergence of participative or even free-rain leadership styles is predictable.
3. Assessing the distribution of preferences
Related to the above, to design organizational structures that are functional for performance optimization, managers should analyze the interaction between strategic environment (e.g., the incentive system) and distribution of preferences in the reference context.
Highly bureaucratized organizational structures with punishment-based incentive systems may be optimal in competitive environments where most participants have selfish preferences; on the contrary, again, less bureaucratized organizational structures with reward-based incentive systems may be optimal in collaborative environments where there exists a share of fair-minded agents (i.e., at least 40 percent of the reference population).
What do you think about the 3 highlights introduced above? For example, can they result effective to strategically manage human diversity in every kind of firm? And what implications can they have for policy makers?
I would love to hear your thoughts.
Thank you!
Anastassia
Relatedly, if interested, you can also read the full research article The Contribution of Social Preferences to Relational Social Constructionist Leadership: Reciprocal Fairness and Incentive Systems, published in the International Journal of Business Research Management.
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