Renowned economist speaks at Fudan University

Companies are mistreating their biggest resource – human capital – and not employing the right ways to incentivize employees, said renowned behavioral economist Dan Ariely during his visit to Fudan University in late January.

One of the examples the professor of psychology and behavioral economics at Duke University cited was how companies would view the purchase of a server or a warehouse as an investment but count their investments into human capital as cost.

"But the reality is, as we move toward a knowledge-based economy, goodwill is more and more important. But companies often do things that are inconsistent with human motivation," he said.

He added that human capital is the engine of growth for every organization, and that companies will not be able to hit their full potential if they do not manage their people well enough.

Contrary to commonly-held views, financial incentives aren't the best form of motivation, said Ariely, who pointed out that big bonuses can sometimes backfire and cause people to underperform. He noted that this is usually the case for tasks that require creativity, problem solving and cognitive capabilities.

"If you go into surgery, you don't want your surgeon to think about bonuses, or about statistics. You want your surgeon to be in a state called 'flow' and be completely immersed in his or her work. Big bonuses distract people," he explained.

Instead, it is the idea of goodwill, or the connection between the person and the company, that really matters.

"What gets us goodwill is to feel that we're a part of a family, a part of an organization that we're proud of. It's not thinking about yourself as an individual trying to maximize your revenue," he said.

Ariely also suggested using other incentives, such as helping fulfill one's dreams or investing in one's education, to improve performances.