Personal Finance gurus know they have to adjust their coaching to account for the very busy lives and ever-changing priorities of their clients. External stresses can shape how people gauge risk and reward, and this often leads to irrational investment decisions. This genre of Personal Finance is often called “Behavioral Finance.”
Dave Ramsey, whose podcast is the top-ranked business title on iTunes, maintains that most families do a poor job managing their personal finances because their plans – assuming they even have plans – don’t factor in what he believes are three critical tenets of Behavioral Finance:
- Quick wins. Paying off smallest debts first rather than highest interest debt builds momentum and belief.
- Collaboration. Transparency and frequent collaboration between all family members,ensuring everyone is spending and saving according to plan, is essential for keeping the family moving together towards goals.
- Risk management. People make poor decisions regarding debt because they fail to consider risks.
It’s easy to see how these relate to a household. But it struck me that these same Behavioral Finance principles are just as applicable to the enterprise. Let’s break it down.
Quick wins. Hundreds of enterprise performance management initiatives have failed to even get off the ground because they didn’t consider the importance of using quick wins to build momentum. While having real-time access to 100 metrics that are consistently defined across your entire enterprise is a noble goal, it’s unlikely that you can ever achieve that goal without a strategy that accounts for the Behavioral Finance tenet of quick wins. If you concentrate on the easily achievable goals at first, then you’ll build momentum for tackling more complicated targets.
Collaboration. When employees fail to engage in their company’s enterprise performance management initiatives, lack of collaboration is often a major factor. Though data quality remains a challenge in every company, collaboration can help close gaps in understanding that stem from data quality errors. Collaborative dialogue between team members adds rich context that not only promotes companywide understanding of performance – it keeps team members coming back in the same way that comments keep readers returning to a news article they’ve already read.
Risk management. Companies that engage a high percentage of their employees in collaboration focused on managing and optimizing performance can then extend that collaboration into risk assessment and risk mitigation. Risk-adjusted planning has long been a stated goal of executives, but to move from simply identifying risk to mitigating it, companies need a foundation of high-participation collaboration. Most corporate plans become irrelevant very early in the fiscal year because they fail to account for all the risks the company will face – and the plans aren’t agile enough to rapidly react when those initial key assumptions become invalid. In a collaborative culture of performance, managing risk becomes a dynamic part of managing performance.
Dave Ramsey probably didn’t imagine the Behavioral Finance principles he teaches to consumers would apply to enterprises. But sound ideas deserve to be considered anywhere they make sense. And companies starting another round of performance management initiatives would be wise to add these to the mix.