The fourth industrial revolution and being fair by design

As we move through the fourth industrial revolution, a few things stand out. Among them, that the ongoing discrimination against women — a shameful cultural and historical legacy — has no place in this century.

I find it scandalous that women are paid less than men for the same work. It is equally upsetting that commonplace human resource practices often fail to incorporate the advances in neuroscience that are improving our understanding of how the human mind works, especially the work being done on cognitive bias.

It is also increasingly obvious that the judicious application of big data, rational experimentation and thoughtful behavioral design techniques can contribute to a gender-neutral workplace. Good companies will take advantage of the advances in neuroscience and technology and re-think how people are managed, developed, appraised and promoted to better compete in their traditional markets. Great companies (and countries) will re-conceptualize the human resource experience and re-engineer the entire “recruitment to exit interview” employee life cycle to create a neutral workplace free of gender (or race or sexual orientation or religious) bias, a workplace that unleashes each employee’s creative and commercial potential. Intelligent, motivated, creative and educated people are the “working capital” of the 21st century.

The first and second industrial revolutions were characterized by control and exploitation of natural resources (e.g., coal), urbanization, colonialization and globalization. It was a period of increasing mechanization. The telegraph and telephone revolutionized communication, and steamboats and railways revolutionized transportation. It was a time of significant technological, social and economic disruption.

Consider, as a single illustration, the family farm at the turn of the 20th century. It is hard to fathom that over 40% of Americans in 1900 earned their living farming; today, fewer than 2% of Americans are farmers. Americans (and immigrants) have left the farm for the city to find employment, frequently in industries that did not even exist in 1900.

The unrelenting pace of change continued into the third industrial revolution, in part driven by increasingly sophisticated financial expertise, global capital markets, technological acumen and, most importantly, computing power. (The third revolution is characterized by the development of semi-conductors, mainframe computers, personal computers and the Internet.)

The industrial revolution

The fourth industrial revolution, where we are now, is built on big data, smaller and more sensors, mobile computing, the ubiquitous Internet, artificial intelligence, machine learning and the dominance of software or code.

Masters of code will accumulate the bulk of the wealth created by disruptive technologies and the development of Internet based peer-to-peer “platforms.”

Code is transforming everything: science, material science, commerce, finance, diplomacy, the global balance of power, law, information science, medicine, war fighting, espionage, communication, transportation, manufacturing, the nature of work and, even dating. People who cannot code (like myself) will be the illiterates of the 21st century and at the mercy of those who can. (The reign of these masters of code, however, may be relatively short lived as we are creating intelligent machines that can code.)

Masters of code, like the oil and steel titans before them, will accumulate the bulk of the wealth created by disruptive technologies (e.g., robotics and “artificial intelligence”) and the bulk of wealth created by the development of Internet based peer-to-peer “platforms.”

Platforms, such as Uber, will continue to disintermediate the traditional pipeline businesses that dominated the 20th century. There are few, if any, traditional pipeline businesses or professions that will not be challenged by these platforms and by increasingly capable cloud-based “intelligent” machines like IBM’s Watson.

As the fourth industrial revolution matures, those countries and companies that cannot command the intellectual horsepower and capital to innovate and compete will, at best, struggle.

The most valuable commodity of the 21st century

Assume for the moment that this vision of the future is at least plausible. If so, the most valuable commodity of the second half of the 21st century will be smart and well educated people. With roughly half the world population being women, those countries and people that discriminate against women will struggle and, most likely, fall behind.

Women are a vital strategic global, national and corporate resource. To indulge in a sports metaphor, it is hard to compete in any sport when only half your team shows up, and it is especially hard when half your team is unfairly treated and underpaid. In the intellectual wars of the 21st Century, it will be impossible.

How widespread is gender discrimination?

The World Bank Group (WBG) recently published Women, Business and the Law 2016, and the findings, in part, put the issue of gender discrimination in context. The WBG reports that gender differences are widespread. In the 170 economies covered, 155 of these economies — an overwhelming number — have at least one law impeding women’s economic opportunities.

The most valuable commodity of the second half of the 21st century will be smart and well educated people.

Further, there are 943 legal gender differences in those places. In 100 economies, women face gender-based job restrictions. In 46 of the economies studied, there were no laws specifically protecting women from domestic violence, and in 18 economies husbands can legally prevent their wives from working. 30 economies had 10 or more legal differences between women and men.

Perhaps more encouraging, though, is that there are 18 economies where, in the 26 areas measured, there are no legal difference between men and women.

Women in Europe

In 2013, the European Institute for Gender Equality published its Gender Equality Index (GEI). The result of three years of work by numerous contributors, the index is a scorecard for the European Union and each of its 27 member countries. The index scores six domains (work, money, knowledge, time, power and health) and two sub-domains (violence and intersecting inequalities). The report reminds the reader that equality between men and women is a fundamental value of the European Union and is vital to its economic and social growth.

It is interesting to note that despite 50+ years of gender equality policy, the GEI findings show that gender gaps are still common. With an average score of 54, there is still more work to be done. Actually, almost half of the EU member states fall below the score of 50, and scores across all member states range from 35.3 to 74.3.

The GEI also drives home how laws may provide the framework for equality but local and regional cultural, social and historical considerations result in considerable differences; in each of the domains there is room for improvement (and disagreement). (The report scores each domain for the EU and for each member state and the differences among the member states are interesting.)

Women in America

While researching for this blog, I did not find a U.S. version of the European Institute for Gender Equality’s Gender Equality Index. Last year on “Equal Pay Day,” the White House proclaimed that full-time working women earned 77% of their male counterparts.

Pay discrimination is frequently a function of cognitive bias and inadvertently gender-biased human resource practices.

Looking at both full time and part time, the Pew Research Center came to the conclusion that women earn around 84% of what men earn. The group, which has conducted a variety of studies on similar issues, also noted that the gap for young women was much smaller, at 93%.

Their research team unsurprisingly found that career interruptions to raise a family impacted earnings.

  • 39% of the women responding to this survey indicated they had taken significant time off from work
  • 42% reduced their hours
  • 27% quit altogether.

Contrast with only 24% of the men surveyed who had said that they took significant time off from work.

Cognitive bias

Without looking to be controversial, pay discrimination is frequently (but not always) a function of cognitive bias, not intention, and perhaps, of inadvertently gender-biased human resource practices. (If managers were intentionally underpaying women, they would make the economically “smart” decision and simply fire their male employees, hire only women and pocket the difference.)

It is hard to overstate the insidious nature of cognitive bias and the negative effect it has on managers and leaders. Cognitive bias in insurance and reinsurance, for example, impedes the identification of emerging risk, hinders one’s ability to manage, mitigate, transfer or avoid such risk and, perhaps most importantly cognitive bias makes us deaf and blind to what we have not experienced.

It is a real challenge to sell earthquake insurance outside of California, flood insurance outside of a flood zone, or terrorism insurance before 9/11. The insurance and reinsurance industry is littered with failed companies that were blindsided by cognitive bias.

In a very real sense, well-drafted reinsurance catastrophe contracts, with broad coverage grants, that protect against natural and man-made catastrophes are imperfect hedges against cognitive bias and intelligence failures.

On a different scale, cognitive bias may result in companies continuing to use gender-biased recruitment, appraisal and management procedures and in managers making, often unintentionally, biased decisions.

Behavioral design is the application of behavioral sciences to change human behavior.

The bad news is that it is very hard to de-bias individuals. Every year, as one Washington Post article notes, companies spend “$8 billion on diversity training despite scant evidence that these brief workshops do any good. They might even backfire – worsening discrimination by reinforcing stereotypes or by making people complacent about their prejudices.”

If traditional diversity training is ineffective, are there other non-traditional approaches worth exploring to encourage behavioral change?

Behavioral engineering

The science and art of behavioral design might be part of the solution. Behavioral design is the application of behavioral sciences (cognitive neuroscience, behavioral economics and experimentation) to change human behavior.

Behavioral engineering is being used everywhere from restaurants dealing with the problem of cancelled reservations to hoteliers trying to get you to turn off the lights, to tax collectors looking to nudge you into paying up. Behavioral design is commonly about creating simple, cheap, scientific and scalable nudges to change consumer, organizational and social behavior.

The U.K. government (and now others around the world) has created behavioral insights teams. These teams studied various problems, gathered data, experimented and developed very low-cost “nudges” to advance public policy, collect taxes, encourage good behavior, raise revenue and reduce costs without having to impose expensive regulatory regimes or education programs. See, for example, the Richard H. Thaler and Cass R. Sunstein book, Nudge – Improving Decisions about Health, Wealth and Happiness or their blog by the same name. Another more recent example is David Halpren’s Inside the Nudge Unit: How Small Changes Can Make a Big Difference. While not a panacea, it seems reasonable that these lessons can be applied to business and the challenge of bias.

Professor Iris Bohnet of Harvard does exactly that and applies these lessons in What Works, Gender Equality by Design. She argues that since it is very difficult to de-bias individuals, and traditional diversity programs do not work, the better option is to de-bias the corporation by embracing behavioral design powered by big data and thoughtful experimentation.

Consider one simple example — the self-appraisal, the beginning of the semi-annual or annual appraisal process for many companies, and a surprising example of where gender bias can “lie doggo” harming both people and companies despite everyone’s best intentions.

I have used self-appraisals for years, never realizing that the self-appraising can introduce demonstrable gender bias into the appraisal process. Professor Bohnet points out that many women suffer from the bias of under-confidence; conversely, many men suffer from the bias of over-confidence. In addition, many women prefer certainty to risk. As a result, their self-appraisals undervalue their accomplishments.

Institutional bias can be reduced with thoughtful analysis of data, experimentation, behavioral design and a careful re-consideration of how people are managed.

Compounding this, managers who review the self-appraisals experience something called anchoring bias, and predicate their appraisals on these inaccurate views. The argument goes that this gender-biased appraisal process impacts both career opportunities and compensation levels for women. This flawed model also hurts the company, as over-confident but under-performing men who may also have a penchant for excessive risk may displace under-confident but over-performing women. Managers who lack the experience to identify cognitive biases and provide the necessary coaching may even further compound the problem.

Forward thinking companies recognize the problems of cognitive bias, discrimination and the self-appraisal in conjunction with the single perspective performance review. These companies are taking advantage of new technologies, proven multi-source appraisal techniques and, new psychological insights. First, such companies take advantage of the rapid rise of mobile feedback technology to make the appraisal process efficient and user friendly. Second, these companies embrace the 360 degree appraisal review process (which was first introduced in the 1940s) to get multi-source feedback on employees. The 360 review process harnesses the insights of the employee, her /his manager, subordinates and peers and depending on the employee’s role, the reviewing community can be expanded to include customers, suppliers and other third parties.

Finally, and, most importantly, these companies invest time training their managers as how best to use the insights from the 360 review process. The first thing to understand is that using the insights from the 360 review process to change behavior is not easy. Managers need to understand that feedback, itself, does not result in change. When our perception of ourselves differs from the feedback it is human nature to be defensive and dispute the differences. Skilled managers review the feedback and identify a handful of behaviors that the employee will benefit from addressing; explore how one might address those behaviors; and, follow- up with periodic coaching sessions during the subsequent year where progress is assessed and the employee is accountable. The use of mobile feedback technology and the 360 review process done well will encourage fairness in the appraisal process it is, however, only one technique for dealing with discrimination and cognitive bias.

We can also learn something, for example, from world of classical music. In the 1970s most orchestras were all male. In the mid-1970s the Boston Orchestra experimented with blind auditions. The performers were behind a screen and, as a result, the reviewer evaluated only the music. The effect was dramatic.

Others adapted this, and the St. Louis Symphony Orchestra, for example, now has more women than men artists. This is more or less true in orchestras across the country. What would happen if all job interviews were designed to be gender neutral? Why do job applications, used by initial reviewers, contain demographic information?

Professor Bohnet suggests that companies looking to be more gender neutral in their hiring practices should:

  • Evaluate comparatively and hire and promote in batches
  • Remove demographic information for job applications
  • Use predictive tests and structured interviews to evaluate candidates
  • Be aware of framing effects: anchoring, representativeness, availability, halo….
  • Not use unstructured interviews

In thinking about Professor Bohnet’s theories on gender equality by behavioral design, it is a form of process and behavioral engineering from recruitment to the exit interview and from the mailroom to the boardroom.

While I do not agree with all of her suggestions, she does make a reasonable case that traditional approaches to diversity training as well as traditional management approaches may inadvertently foster gender bias. The good news is that institutional bias can be reduced with thoughtful analysis of data, experimentation, behavioral design and a careful re-consideration of how people are managed.

Reducing or eliminating gender bias is not only the right thing to do, in many places it is the law—and,  most importantly, in everyone’s self-interest.

Smart people regardless of their gender, nationality, race, creed or sexual orientation are too important a resource to be squandered. The second half of the 21st century will be an exciting time of significant change and dislocation. There will be fortunes to be made and fortunes to be lost. Countries and companies looking to prosper will need to master and manage the commercial, social and political implications of disruptive technologies and the equally disruptive platform business models. Only those countries and countries that treat people well, equally and fairly will have the necessary intellectual horsepower to compete and prosper.

About Pete Thomas

Pete Thomas is Chief Risk Officer of Willis Re Global. He has been with the company since 2004 and has 39 years of …
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