Have you ever begged a waiter to remove the bread basket from your table so as not to get full before your steak arrives?
How about thrown away a half-finished bag of Halloween sweets when your kid is distracted?
Rational humans should prefer optionality. We should want the bread basket and bag of treats to be available, yet resist eating them when it does not serve us. In the long run having the option provides greater benefit. Yet we prefer to have the option removed from us, making the correct path easier to take.
The Nobel Prize winning economist, Richard Thaler explains this limiting of options as the Ulysses Strategy.
As Ulysses prepared to sail past the Sirens, he had his sailors tie him to the mast. It was the only way he could resist their seductions.
We all want our freedoms, especially of choice. Occasionally, like Ulysses, we prefer to have them removed in order to help us act in our best interests.
Thaler famously took this theory and developed his Nudge system. Where through the use of certain controls we can nudge people to behave in ways that are best for them.Retirement accounts with high early withdrawal penalties are an example of this nudge system.
In our HoldCo we look to maximize cash flow production. While it is in our CEOs' best interest to have healthy cash flows, it is also tempting to buy discounted inventory offers or extend credit to increase sales. Here are some ways we nudge their behavior:
We have replaced our profit sharing plan with a percentage of cash distributions to the HoldCo paid out as a bonus.
We have at times limited purchasing to the replacement of the previous month's cost of goods sold.
Credit approvals above a certain amount are decided by the Board of Directors.
Major investments and CAPEX decisions are made by the HoldCo.
How do you nudge your own behavior or those in your company?