Annotations (14)
“In the U.S., there's an index called the SHE Index. They count what is the percentage of women on the board and in high positions in the company. What you really want to know is, how do women feel in that company? But it's hard to measure how women feel, so what do they measure instead? Something that is easy. It does much worse than the S&P 500, systematically, repeatedly, by a big gap.”— Dan Ariely
Psychology & Behavior · Strategy & Decision Making · Economics & Markets
DUR_ENDURING
Easy metrics create perverse incentives
“Think about the difference between the minimum of work you have to do to keep your job, and the maximum you can do if you're truly excited. There's a big gap between those two. Companies can contract on the minimum amount of work you need to do, but nobody can contract on how much energy you're really putting toward work, how imaginative you're trying to be, how much you're reading extra, thinking hard.”— Dan Ariely
Economics & Markets · Psychology & Behavior · Leadership & Management
DUR_ENDURING
Goodwill is the uncontractable energy gap
“Every organization wants people to try new things, but if you tell people, 'Please try new things, figure out how to make things better, but if you make a mistake, I'll punish you,' how likely are people to try new things? I try to get people in the center to take failure seriously. I try to tell them, 'You should aim for about 50% of the experiments failing.' What I mean by that is that I want them to take risk. If you want people to swing for the fences, you need to accept risk.”— Dan Ariely
Leadership & Management · Creativity & Innovation · Psychology & Behavior
DUR_ENDURING
50% failure rate signals optimal risk-taking
“You put employees at home with Zoom, all of a sudden, the role of intrinsic motivation versus extrinsic motivation changes dramatically. If you go to an office and there are people around, you have to pay attention. You take a kid, you put them at home with Zoom, they can turn the teacher off. And the same thing happens for employees. Because so many of the things we measure are about intrinsic motivation, I think the importance of those things will be higher.”— Dan Ariely
Psychology & Behavior · Leadership & Management · Operations & Execution
DUR_ENDURING
Remote work amplifies intrinsic motivation need
“We found that overall level of compensation doesn't matter so much, fairness, perception of fairness in compensation matters a lot. The same thing is true about employees versus management. If you find that people are complaining equally at management and at the level of the employee, this is not as bad a signal as if management is not complaining and employees are complaining much more.”— Dan Ariely
Psychology & Behavior · Economics & Markets · Leadership & Management
DUR_ENDURING
Fairness gaps matter more than absolute levels
“When you are setting up motivation for your employees, you're in what we call the outside view. You say, 'What would motivate them?' But you're not within the moment of the motivation. Think about running. When you think about running, you think, 'I need to put my shoes on, start running, I'll be out of breath.' When you're 10 minutes into it, your mind is very different. But it's very hard for you to imagine how you would feel 10 minutes into it.”— Dan Ariely
Psychology & Behavior · Leadership & Management
DUR_ENDURING
Cannot design from outside view
“We need to measure what we really want to measure, and when we create proxies, to remember that we make this assumption. We say, 'We're measuring women at the board and at top level, what do we think? We think that their existence will change the way women feel across the company.' It's an assumption, untested. When we measure easy things, we can create a check-the-box approach to companies, rather than trying to get them to really deal with the problem.”— Dan Ariely
Strategy & Decision Making · Operations & Execution
DUR_ENDURING
Proxies enable surface compliance without substance
“I think the real pathway for ESG goes through employee motivation. The moment you are doing some version of ESG, presumably, your employees are more on board. They feel that the company has better goals, the company is more connected to the future, taking care of their kids. But when companies do ESG, I don't think they really think about the pathway by which ESG creates profitability. We have 6% a year of alpha from treating your employees well. That's a direct path.”— Dan Ariely
Strategy & Decision Making · Psychology & Behavior · Economics & Markets
DUR_CONTEXTUAL
ESG value flows through employee motivation
“When you do statistical modeling, there's what's called nested models. You could say, 'Let me create a model for within each sector, manufacturing, consumer goods, IT, and let me also create a factor across everything and let's see whether the nested model is better in any way.' And it wasn't, it wasn't better. Before we started this research, I could see how autonomy would be incredibly important for IT. I didn't really see where it would be important in manufacturing.”— Dan Ariely
Operations & Execution · Psychology & Behavior
DUR_ENDURING
Autonomy creates innovation in manufacturing
“This data has a half lifetime of about 18 months. You want the data to be valid, but you want the value of it to go down. I think about it like rain and coffee. At some point, the coffee revealed itself, you can see how much coffee beans there are, but the rain gives you a prediction in advance of what will happen. Human capital is the same thing. At some point, these things will be revealed in better products, new procedures. So you want its usefulness to have a limited amount of time.”— Dan Ariely
Strategy & Decision Making · Economics & Markets
DUR_ENDURING
Leading indicators must decay to work
“Think about things like better coffee, better tables, better chairs, compared to feeling appreciated, there's just no comparison. If you get better coffee or a better chair, you get used to it. Feeling appreciated is something that is almost daily, you don't get used to it in the same way. Lack of fairness is not something you get used to.”— Dan Ariely
Psychology & Behavior · Leadership & Management
DUR_ENDURING
Physical amenities fade, social feedback endures
“Think about Walmart versus Target. You go to Walmart and ask the employee, 'Is there something in the back?' They pretend to go and check, but they don't really check. On the other hand, in Target, they actually go and check. These are big differences about people who care. We can all imagine how people who care at Google create a bigger impact. But people who care manifest everywhere.”— Dan Ariely
Operations & Execution · Psychology & Behavior
DUR_ENDURING
Care shows up in micro-behaviors
“The team at J.P. Morgan did a really nice analysis of our data. They were unbelievably thorough. What they also found was that our results are uncorrelated with lots of other things, which is wonderful, including being uncorrelated with ESG. The reason I think it's uncorrelated with ESG is that some companies do ESG without involving employee motivation, and some do. It's also uncorrelated with other things they looked at.”— Dan Ariely
Economics & Markets · Strategy & Decision Making
DUR_ENDURING
Uncorrelated alpha is the holy grail
“During COVID, there was actually a positive effect of employee benefits, financial benefits, health benefits. I think it's because of periods where people are more worried. Those benefits became more important, not more important than feeling appreciated or anything like that, but became from being almost not important at all to becoming slightly important. I think that will go away.”— Dan Ariely
Psychology & Behavior · Leadership & Management
DUR_CONTEXTUAL
Crisis elevates security needs temporarily
Frameworks (2)
The 50% Failure Rate Calibration
Using failure rates to measure appropriate risk-taking
Target a 50% failure rate in experimental initiatives as a calibration signal that the organization is taking appropriate levels of risk. Below 50% suggests risk aversion; above 50% suggests insufficient judgment. The framework recognizes that innovation requires accepting failure, and the failure rate itself becomes a metric for organizational risk appetite.
Components
- Establish the 50% Baseline Expectation
- Define What Constitutes an 'Experiment'
- Judge Based on Intentions, Not Outcomes
- Monitor and Adjust the Failure Rate
Prerequisites
- Psychological safety already present
- Leadership commitment to accepting failure
- Ability to separate experimental from operational work
Success Indicators
- Team members propose riskier initiatives
- Post-mortems focus on process not outcome
- Failure rate stabilizes near 50%
Failure Modes
- Leadership punishes failures despite stated policy
- Employees game the system by lowering ambition
- 50% becomes a target rather than a signal
Measure-What-Matters Test
Identifying when proxies create check-the-box behavior
Before adopting any metric or proxy variable, explicitly articulate the causal chain from proxy to outcome. If you cannot defend why the proxy should cause the desired outcome (not just correlate with it), you risk creating check-the-box compliance without substance. The test forces leaders to choose between easy-to-measure proxies and hard-to-measure actual goals.
Components
- Identify the True Goal
- Propose the Measurement Approach
- Map the Causal Chain
- Test or Accept the Risk
- Monitor for Check-the-Box Behavior
Prerequisites
- Intellectual honesty about measurement limits
- Willingness to abandon comfortable proxies
- Data infrastructure to test causal chains
Success Indicators
- Fewer metrics with stronger validity
- Open discussion of measurement limitations
- Gaming behavior decreases
Failure Modes
- Process becomes bureaucratic without improving measurement
- Teams use framework to justify not measuring at all
- Political pressure forces adoption of invalid metrics anyway
Mental Models (8)
Process vs. Outcome Evaluation
Decision MakingJudge decisions based on the quality of reasoning at the time, not on outcomes influenced by luck. Ariely's recommendation to judge experiments on intentions (the thought process) rather than results (which include noise) is this principle applied to organizational learning.
In Practice: Discussion of 50% failure rate and judging based on intentions
Demonstrated by Leg-da-001
Relative Deprivation
PsychologyPeople evaluate their wellbeing not in absolute terms but relative to reference groups.
In Practice: Discussion of compensation fairness revealing that gaps matter more than levels
Demonstrated by Leg-da-001
Hedonic Adaptation
PsychologyPeople rapidly return to a baseline level of happiness after positive or negative events.
In Practice: Explanation of why perks lose value but appreciation does not
Demonstrated by Leg-da-001
Intrinsic vs. Extrinsic Motivation
PsychologyIntrinsic motivation produces more sustained effort than extrinsic motivation.
In Practice: Remote work discussion revealing that removing physical oversight shifts the balance toward intrinsic motivation
Demonstrated by Leg-da-001
Leading Indicator Decay
TimePredictive signals lose value as their implications become visible in outcomes.
In Practice: Discussion of 18-month half-life of human capital data
Demonstrated by Leg-da-001
Utility Function Alignment
EconomicsWhen individuals adopt the goals of the organization as their own, they maximize not just personal utility but joint utility. This eliminates principal-agent problems at the motivational level.
In Practice: Explanation of goodwill as the uncontractable energy that comes from treating employee and organizational goals as joint
Demonstrated by Leg-da-001
Goodhart's Law
Systems ThinkingWhen a measure becomes a target, it ceases to be a good measure. Organizations optimize for the metr
In Practice: SHE Index example showing how easy-to-measure proxies get gamed
Demonstrated by Leg-da-001
Empathy Gap
PsychologyPeople systematically underestimate how different their preferences and behaviors will be in different emotional or physiological states.
In Practice: Discussion of intra-empathy gap in motivation design
Demonstrated by Leg-da-001
Connective Tissue (1)
Goodhart's Law from Economics
When a measure becomes a target, it ceases to be a good measure. Economist Charles Goodhart observed this in monetary policy: once the Bank of England began targeting a specific money supply metric, banks gamed it. Ariely's observation that easy-to-measure proxies (women on boards) create check-the-box behavior without solving underlying problems (how women actually feel in the company) is a direct manifestation of Goodhart's Law. The business parallel: measuring board composition is easy, so it becomes the goal, which allows companies to claim progress without changing culture. Goodhart's insight was that this is not a bug in measurement systems but a feature; any metric under pressure will be gamed. The solution Ariely advocates (measure what you actually care about, even if harder) is the same solution Goodhart would recommend: measure outcomes, not proxies, or accept that your proxy will be gamed.
Discussion of the SHE Index underperforming while actual gender equality metrics outperform revealed the Goodhart's Law dynamic at work in human capital measurement
Key Figures (2)
Ted Seides
15 mentionsPodcast Host, Capital Allocators
J.P. Morgan (institution)
2 mentionsInvestment Bank Research Team
J.P. Morgan's research team conducted independent third-party validation of Ariely's human capital data and methodology.
- The J.P. Morgan research team found that Ariely's human capital results were uncorrelated with other factors including ESG.
Concepts (7)
alignment
CL_PSYCHOLOGYThe gap between how different levels of an organization perceive fairness or appreciation
utility function
CL_ECONOMICSMathematical representation of preference ordering; whether employees adopt organization goals.
SHE Index
CL_FINANCIALIndex tracking percentage of women on corporate boards as a proxy for gender equality.
hedonic adaptation
CL_PSYCHOLOGYTendency to return to a stable level of happiness despite events; explains why perks lose power.
ESG
CL_STRATEGYEnvironmental, Social, and Governance; a framework for evaluating corporate behavior.
intrinsic motivation
CL_PSYCHOLOGYMotivation arising from internal satisfaction rather than external rewards; critical when external oversight is removed.
empathy gap
CL_PSYCHOLOGYThe inability to accurately predict preferences or behavior in a different emotional or physical state.
Synthesis
Synthesis
Migrated from Scholia