Does Money Make You Smart?

This post originally appeared on Aubrey’s blog 8-19-09  Let's say that you make business decisions where the impact on the future of the business is not well-thought out. The decisions are praised by Wall Street but, even so, turn out to waste the resources of the business over the long term. Let's also say that in an effort to grow the company fast, you buy assets above market value to close the deals quickly, hire talented employees and pay them outlandish wages in order to get up and running as soon as possible. You also have little understanding of how to effectively motivate people but believe that money is most effective.

In particular, you believe that money will buy you the right talent, since you believe money is what matters most to talented people. Therefore, you either use salary, bonuses or other perks to motivate them.Then let's say that as the result of current economic conditions, your company has fallen on hard times in no small part due to the excesses created by your growth strategy and financial excesses.

Because of your dire financial condition the Federal Government grants you several billions of dollars of bail-out funds. What will that largess do to you? Will it really cause you to make more reasoned decisions and change the way you motivate your employees? Would you use it to buy another company in trouble even though it might take several years for it to turn a profit but would give you a larger market presence? Likewise, will your talented people make better decisions as a result of this money, or will they continue doing more of what they have always done. After all they now have money. Will those billions of dollars cause you to all of a sudden abandon your "business as usual" habits and acquire new ones? Is it possible that you might think that it was the collapse of the economy that caused your problems and not your business strategy or management practices? Will the money really make you smart? The public seems amazed that companies that receive bailout money go about business as usual. Why wouldn't they? The money only serves to strengthen existing habits. One thing we know with about as much certainty as you can know anything is that positive reinforcement increases the behavior that is occurring when you get it. If you are making bad decisions, you will make more of them as a result of that federal intervention in your business. Rewarding bad habits strengthens them, not weakens or eliminates them. I was talking to a banker a while back and he told me that he was looking to buy a couple of banks before the government propped them up with the bailout funds. He said, "It will just take longer for us to buy them. They weren't well run before the money and they won't be well run with it." The way the bailout money has been distributed indicates that those charged with designing and implementing "the bailout" do not understand a seemingly simple but most powerful element of business-that thing called ‘behavior.' Government is not alone as few business executives understand it either. Speeches, meetings and written communication about the need to change do little to change habits. Being told what to do and doing it are two different things. As my mama used to tell me, "Good intentions pave the road to Hell."

A fundamental behavioral principle is: Behavior is a function of its consequences. To change behavior, you must change consequences. To develop new habits, employees who engage in new behavior must experience frequent and consistent contact with those consequences. In addition, the government does not understand something known as a behavioral contingency. You do not change behavior by giving a reward and then try to connect it to some behavior. A positive reinforcer reinforces the behavior that was occurring when you received it. The government did not say that if you make these changes we will give you money. They said we have given you this money, now make these changes. That is about as effective as someone marrying a drunk in the hope of changing him or her - a task that most people find much harder than they thought and indeed one that a great many people fail to accomplish. I have said it many times, "If you give someone something for nothing, you will make them ‘good for nothing.'" Confidence and competence cannot be given, they must be earned. We respect most what we earn because we know how to earn more. Without an understanding of behavior, companies and the government waste much time and money. Thomas Gilbert, author of Human Competence said it best, "Any frivolous use of money weakens its power to promote human capital - the true wealth of nations." The way money is being used by business and government is weakening its power to promote human capital and that it the worst sin of all. Money can make you do smart things or it can make you do dumb things. It is not the instrument, but the way it is used that determines whether it produces value or waste. It is time for the nation to learn to use it effectively and efficiently to increase health, happiness and the personal freedom of its citizens. The technology is here.

This post originally appeared on Aubrey's blog 8-19-09