Economists Meet Machiavelli on Leadership

Leadership requires relentless optimism that you can change the world and hard-nosed realism about who and what you are dealing with and what it will take to make progress.

The brilliant economists who never saw the economic crisis coming have been appropriately humbled by their failure to understand how people really behave. They weave their elegant theories based on how they think people should behave rather than how they do. They assume we are always thoughtful and rational in making decisions.

Finally, the economists are acknowledging that their elegant theories and proofs miss human realism, the role emotions play in decision making and the extent to which individual situations and circumstances affect how we understand the options before us. See Paul Krugman's somewhat inscrutable mea culpa in the New York Times. For a less dense version, read Ross Gittins' piece in the Sydney Morning Herald.

Those politicians the economists are so quick to disdain have taught them something about human behavior. We humans are not robots or efficiency machines. We do not always make decisions that some outside observer thinks are the "right" decisions.

The political literature, starting with Machiavelli (perhaps the godfather of today's new school of behavioral economists), has long recognized human realism. One of my all-time favorite books is "The Art of Political Manipulation" written by political scientist William Riker and published back in 1986. Buy it on Amazon. It's a great read. Riker understood, as most politicians do and most people who exercise leadership successfully do, that understanding human nature with all its quirks, ALL its quirks, is essential to success in mobilizing people on behalf of purpose.

These new behavioral economists are trying to apply their formidable intellects and analytic skills to better understanding human nature as it is, not as they wished it were. Their work may help you exercise leadership more effectively by systematizing what we might call non-rational human tendencies.

If you want a good introduction to the practical aspects of what the behavioral economists are learning, here are two easy to digest books that I have read on my "working" vacation: Predictable Irrationality by Dan Ariely and Nudge by Richard Thaler and Cass Sunstein.

Sunstein, not so incidentally, was just appointed Obama's regulatory czar, endorsed by Forbes Magazine, and attacked by the rightwing bloggers, so you will soon see some of the insights from the book turned into real White House policy proposals.

Obama's recent recommendations to stimulate more savings were right out of the Thaler-Sunstein playbook, acknowledging that most human beings fear loss more than they value gain and prefer the status quo to an uncertain future.

If you want to get the gist of their insights without wading through less accessible literature check out the entry under behavioral economists in Wikipedia. You might also check out the work being done by Jennifer Lerner, a psychologist and professor at the Harvard Kennedy School, and her Emotion and Decision Making Group at Harvard.

In our work helping people exercise leadership more successfully than they have in the past, we often encounter well-intentioned people who are not successful because they find it hard to embrace human realism, choosing instead to operate from naivete or cynicism.

What a wonderful consequence of the economic crisis it would be if those behavioral economists could redeem themselves by generating some systematic insights that would help all of us exercise more leadership on behalf of what we care most deeply about.