Behavior Economics Explained from a CFO Perspective

Please note that the transcript is AI-generated and may contain errors. Podcast is not intended as advice and is meant for informational and entertainment purposes only.

Chris (00:16):

Today, we are talking with Almera Mahmood, who’s the CFO at Prolific, as she shares her thoughts on behavioral economics, a CFO perspective, and why it’s important for CFOs to get to the root cause and understand the behavior that’s helped driving the organizations. Welcome, Almera.

Almera (00:37):

Hey, Chris. How’s it going? Thank you so much for having me. I am really excited to be here and talk about this fun topic.

Chris (00:45):

Yeah. I was exchanging some messages with you on LinkedIn. I was reaching out, you were telling me something you were passionate about, and you dropped behavioral economics. I was so curious about that, right from the beginning, because there’s a lot of topics, a lot of conversation, a lot of CFOs hot things right now are AI, talent, value proposition, and this one was so interesting.

(01:06):

I think my first question I have for you is when you think about behavioral economics, what is that? And what’s applicable for the office of the CFO?

Almera (01:16):

That’s a great, Chris. Behavioral economics is something that is actually very old. But, it has resurged here in the last two decades. So many different fields and functions are using it. Marketing, we’re seeing the marketing function use it to sell. The sales function, and so forth. And even in finance, there’s a lot of application in finance, with respect to how people approach investments, and are people risk averse, and so forth. A really cool application of behavioral economics is not just external, but also internal. So what behavioral economics really is just a study of why people make decisions. Why do people make the decisions that they do? What influences them? Why do people navigate outside the natural laws of supply and demand? And how do we capture, or even measure emotion, and how does that play into decisions?

(02:20):

So from a CFO perspective, a CFO is constantly having to communicate, cross-collaborate, influence, and it’s really important for a CFO to also use the applications of behavioral economics to really be successful.

Chris (02:37):

I love that. It’s crossing over to the non-traditional stuff that we learn from business school. Business school-

Almera (02:44):

It is.

Chris (02:44):

MBA, all the things that it tells you not to do. I love you point where you said it crosses over, capturing that behavioral aspect of it.

(02:52):

Almera, for me, I think given my background in leading high-growth finance organizations, primarily in software technology and other industries, I’ve always looked at it that the CFO of the future is putting that chief feelings officer hat on. You got to get into the warm and fuzzies. You’d be surprised how many CFOs globally that I meet, and you ask them, “How are you getting in touch not with your direct team, but inside the business? How are you driving culture?” To your point, a lot of these behavioral aspects, it may go contradictory to what you learned in business school. For finance people, that blows their mind a little bit because we’re so used to hey, it’s very quantitative, it’s very number driven, it’s very black-and-white. But it seems to me, this behavioral economics of it says that hey, there’s going to be a little gray in that decision making that you have to be comfortable with, you have to be confident, and you have to have a level of connections.

(03:50):

My next question, you talked about this a little bit, is what are some of those use cases or examples that you see behavioral economics being super successful for CFOs inside of their business?

Almera (04:02):

Absolutely, Chris. We talked about how behavioral economics uses psychology to understand why people behavior the way that they do.

Chris (04:09):

Nice.

Almera (04:10):

So let’s take a step back and look at what that means in finance function. What’s the purpose of the finance function? What is the CFO’s role? It’s to ultimately strengthen KPIs. But, that doesn’t all fall within the ability or the reach of just the CFO or the finance function’s domain. It is something that takes a team effort. Being able to … Sorry, I don’t know if I cut out for a second. Being able to communicate, being able to work as a team to achieve organizational objectives is key. So that means that everyone has to be aligned, and everyone has to be on the same page when it comes to decision making. Every single person is different, every single person is wired different. Every single person approaches decision making in a different way.

(05:05):

Utility is a concept in behavioral economics. Utility is what are the choices people are going to make, and what are they going to give priority to? That is a key part of understanding, and what a CFO has to understand, and just the finance function in general, because the entire function is interaction and collaborating across the organization. It’s so important to understand, at a function level, what drives each organization, as well as at an individual level. What are the choices people are going to make? This also involves explaining numbers to a non-finance audience, and involves communicating with people who haven’t grown up with numbers. So how can people in finance be successful in communicating, and reaching, and basically getting everybody aligned towards that common, whether it’s a KPI, common goal, and so forth.

(06:00):

This is really where behavioral economics. Whether an individual is working across the organization or directly with the team, it’s important to understand why their behaving the way they do. One of the most … Talking about the ranking of the choices. Why are people going to prioritize profitability? Why are people going to prioritize a different type of KPI?

(06:22):

Let’s take a look at, for example, the finance function talking to a sales organization. So when a finance function is talking to a sales organization, there’s going to be … What does a sales organization focus on? It focuses on growth, sales, top line revenue. Those are the things that are top-of-mind, and that will be connected to the sales team will not only be focused on that, but often times incentivized based on that.

Chris (06:47):

Definitely.

Almera (06:48):

When a person, whether it’s a CFO or somebody within finance, is communicating with someone in the sales organization, they do have to understand that utility. They are going to prioritize anything that is focused on revenue, on sales, on growth. So in the conversations, getting their attention when communicating by focusing on those metrics is going to be key.

(07:17):

So what happens after that bridge is built? That’s where the bridge making happens. The bridge making happens is by prioritizing the discussion and the KPIs around the things that are going to matter to that sales organization. So once that bridge is built, now the runway is open for more conversation. You’ve built that credibility, “Let’s talk about what’s next.” Maybe the finance organization wants them to think about the credits, or the pricing, or the discount. Now, it opens up the avenue to go straight into some of those deeper topics once you have their attention, once you have their trust. But if a finance professional is going to approach a sales professional and go straight into discounts, you’re going to lose them before you even start the conversation. They’re going to say, “Excuse me, I don’t care if I gave them a 50% discount. I just won a $2 million deal.” That’s where it is really important to build that bridge. That’s one example of a finance professional interacting with a sales organization.

Chris (08:15):

Almera, I was sitting back here taking notes. This idea of utility, you just blew my mind with that. The way you articulated that … This is where finance teams fail. I think, too many times … I’ve always looked at it, Almera, when I worked in high-growth organizations, the sales and marketing piece were always my primary business partners. I think they were always my primary people because I knew what their priorities were. I knew how to influence them in what I needed to do. I never knew what the word was until I had this conversation with you.

(08:52):

I think the biggest takeaway in that sales example that you mentioned is, finance, we don’t only have to know the financial utility in the business. We got to know revenue growth, we got to know task priority, we got to know cash runway. We got to know this whole other element of people, and personality, and psychology utility. When you go into those different conversations across the … Because HR, it’s going to be completely different. You can’t go to an HR person and be immediately like, “Hey, we’re paying too much for people. We need to start getting rid of people.” HR’s going to be like, “Why is this finance person … “

(09:29):

When finance teams continue to go into that, we continue to perpetuate the same personality, the same prospect, the same value that people see inside of finance. This utility aspect of it, being able to diagnose that. This is where I think finance people have a leg up is if we can quantify and say, “Hey, if I’m working with sales,” and you laid it out. They care about growth, they care about making money, and they care about their commissions. I always looked at it to say WIIFM, that’s a sales approach. What’s in it for me? When you understand that for the audience that you can relate it, it gets to the point that you mentioned. Now, you didn’t build a barrier, you built a bridge to that conversation. And now, when you want to get into that deeper contracting conversations or, “We don’t need to be discounting 60%,” you’ve already built that, I would say, social utility with that partnership that built that bridge, to now you can navigate that bridge together versus what you mentioned. Coming directly in-

Almera (10:36):

Yes.

Chris (10:36):

And saying, “60% discount is bad, we shouldn’t be doing this,” when you didn’t take that time to understand. I love the way that you broke that down.

Almera (10:45):

Oh, hey, you learn over time. We’re all evolving, and we’re all growing in our professions. It’s trial and errors. And it’s also observation. We learn through watching others, and we learn also by trial and error ourselves. So we’re trying to find that brand that matches us most, and what feels authentic, and the best way to really just work as a team, and achieve organizational objectives.

Chris (11:08):

Definitely, definitely. I love this specific use case that you gave.

(11:11):

So taking it back to the team, the finance organization itself. I think a lot of the CFOs, VPs of finance, FPNA, accounts, all the finance professionals globally that are going to be listening to this. If you could give them that one-step guide, hey here’s the first … Getting to having that conversation with sales may be too much of a stretch for them. What’s that one or two things that they could takeaway to say hey, if you want to start implementing this social utility, if you want to starting bringing in behavioral economics in your finance organization, here’s the quick start guide. What would be the steps that you would recommend those CFOs or finance professionals to take?

Almera (11:54):

Sure. No, that’s a great question, Chris. Behavioral economics is so rich. It’s so rich. It gets into all the different biases people are prone to. And in some ways, we’re just starting to scratch the surface, and learning more about this field, and it’s application to business.

(12:11):

But what I will say is that, for me naturally, and I realize it’s over the course of maybe the last two, three, four years or so. But, for me naturally, I think the framing effect comes into play.

Chris (12:24):

Oh!

Almera (12:24):

I think that’s a very important one for other finance professionals. And also, the nudge effect.

(12:32):

So let’s talk about the framing effect. I can show up with a P&L of all the GL codes, and all the numbers, and say, “Here, look at all these numbers on a page that are very tiny. And look, here’s what the net income is.” I’m going to most likely lose everybody.

Chris (12:50):

Thanks.

Almera (12:51):

Before [inaudible 00:12:52] has even started. So while that information is extremely important, it needs to be part of the discussion, it needs to be part of the package, but we also know people have a very limited attention span. And for someone who hasn’t been professionally trained in numbers, they’re appetite is going to potentially be even less for numbers.

Chris (13:12):

Definitely.

Almera (13:13):

So that is something we just, as professionals, have to be aware of. So what does that mean? How do you frame the information in a summary page, or in a deck, or however we are trying to communicate and trying to get the information across? You’re going to frame that information in the way that it is the most impactful. The nudge effect talks a little bit about using the same information, but presenting it in a way where you are highlighting the things that people need to be paying attention to.

(13:49):

There was a study done about tackling obesity, and there’s been so many different laws and regulations that have tried to tackled child obesity. There was an experiment done, and what it had done is … It said okay, in a cafeteria, children are able to make all these food choices. What are they going to do? They’re going to go straight for the brownie. However, if we rearrange the same food choices in a way where all the fruits and vegetables, and all the good choices are in view, and you have the desserts and maybe not-so-great choices not necessarily out of view, but in a place where they’re not as front of view, then … After they had tested it out, kids were actually starting to make better choices.

(14:33):

So let’s take that application to a board presentation, or to a financial reporting package. I’m constantly having to take a look at all the information and say, “What are the key points? What are the key points I want to drive home? What are the key areas I want to highlight?” A lot of finance professionals are doing this. They’re trying to figure out what KPIs, information, pieces of data do they need to highlight. What are the things that management has to pay attention to? What are the things the board has to pay attention to? What are the things internal teammates have to pay attention to?

Chris (15:04):

Yeah.

Almera (15:04):

And for me, sometimes that is different depending on the function. So if I’m talking to marketing, that’s different. Like that sales example, and in your example, the HR example. When I’m talking to HR, yeah, the conversation is never the dollar-per-headcount conversation, per se. Because [inaudible 00:15:23] culture, and cohesiveness, and organization are very important. It’s about … Actually, where I work, [inaudible 00:15:30], they do a really fantastic job of making sure people are really aligned in the right roles. But you have to approach the conversation in a different way with every single organization. That’s where you’re really going to see that bridge built, and then the opportunity to go deeper, and talk more.

(15:45):

So really, that nudge effect, and then that framing effect are ones that I lean on constantly. Those are ones that I would advise for finance professionals to use. And they probably naturally are using those, and not even realizing it.

Chris (15:57):

Almera, what you just said, I’ve already been using those, and never realized it was the framing effect and nudge.

Almera (16:04):

Right.

Chris (16:05):

Literally, you’re connecting so many dots me for me right now because I think I’ve organically done these things, just like you said, trial and error, and just working with so many different teams, and building so many different organizations, that I really never knew that I was framing.

(16:21):

I always would position … If you’ve got 10 different things, I’ll do this now with my team. When we’re working with clients I’m like, “Get down to the three things.” When I’m talking with the CEO, business owner, or founder, I don’t want to be the smartest KPI person. I tell my team this. Our job is not to be the smartest finance person that they’ve ever seen. We’re meant to be their business partner to help them solve business problems from a financial lens. That’s exactly what we need to do.

Almera (16:50):

[inaudible 00:16:51].

Chris (16:51):

I always challenge me team, and even myself. If I can’t distill down 10, 20, whatever the KPIs are to, “Here are the three most important ones,” and position those. Because it comes down to choice. I’ve always read this thing about when you give people more than three options, it becomes overwhelming for them to choose. People are like, “Oh, this is too much.” That’s why it’s small, medium, large. That’s typically where people lie. That is your example of the framing effect. You’re positioning that stakeholder, or that business partner, or that banker, or that private equity person and say, “Hey, here are the three things I want you to focus on.”

(17:30):

The nudge aspect of it is, “Here’s going to be the self-service of it,” and I’m going to have that front-and-center. Maybe it’s with HR and you’re looking at employee engagement, and you’re like, “Hey, I want to look at different things.” That nudging effect can be the same thing, just looked at from different angles. Might it’s positioning, maybe it’s conversation.

(17:49):

I think another way, if I was just to add onto the nudging effect where it’s been helpful for me, is having allies even outside the organization. If I’m really trying to drive deal completion and contracts being really accurate on the sales process, I’m going to probably partner indirectly with an operations person. And then, that way, people are seeing the same issue, but they’re seeing it from different angles and perspectives. And now, you get that buy-in and say, “Hey, finance is looking at it this way, because they want to make sure we have revenue recognition. But also, I see customer support gets a lot of complaints because it’s not really clear in the contracts.”

(18:30):

When you’re able to not only nudge from a different perspective that you’re doing, but also to bring others in that situation, so that way that stakeholder can get multiple perspectives of it. Yeah, I think those two are super valuable for finance professionals. And like you said, the way you ended it is, “You’re probably already doing this stuff, but don’t even know that you’re actually doing it.”

Almera (18:53):

It’s true, it’s true. Okay, let’s take a look, also … As you were talking, I thought of another example. Let’s take a look at FPNA. We are constantly, every month, every quarter, we’re looking at variance to plan, variance to prior month, variance to prior year. We have three, four different views of the performance. So depending on the conversation, we can use each one to drive whatever objective we’re trying to hit.

(19:20):

If it’s a forward-looking conversation, we need to talk about the variance to the plan, or variance to the forecast. If it’s a conversation where we’re celebrating our performance, let’s talk about our year-over-year growth. Let’s talk about how we grew 10% in sales, and how our fixed costs only grew 2%, and so forth, relative to that. And even, then that’s framing right there.

Chris (19:41):

Yeah.

Almera (19:42):

Someone come can, “Our fixed costs grew 2%.” Okay, that sounds negative. But if we frame it in a way that says, “Hey, we grew sales 10%, we grew gross margin 8%, and our fixed costs only grew 2%.” So there really is a way to frame it to get the desired, not feedback, but just the emotion really out of people. That’s what builds the bridge. That’s what builds the bridge. Knowing who I’m talking to, knowing my audience, not only on a functional level but at a personal level. Because even after the function, there are different motivators for each individual. So different people are motivated by different things, and just comes through time, and through building trust, and so forth. But you have to find that bridge. What is that bridge, what is that thing that’s going to connect me to that person? And then, how can that then be an opportunity to have a deeper conversation about maybe an issue, or something we do need to look at, or a cost that is growing. But if I go straight there, not going to happen.

Chris (20:49):

Yeah, you’re going to lose it. Part of what you’re saying right now, too, is setting the stage. I think a lot of times, working with clients, and then working obviously in finance, you’ve got to set the stage. It’s like setting the movie of what kind of movie is this going to be? I’ve been in organizations where we talk through difficult challenges that we’re facing. Maybe we lost a key customer, or a pandemic happened, or you’re not growing as much as you thought you were, or you lost a key employee. There’s always ways to even take negative and turn that into a positive. But then, a lot of times, I struggle with this and fail at this, where there’s something really positive and it ends up taking a negative. It’s always setting that stage to be able to know hey, this is what I’m trying to drive. When the end credits are rolling to this movie or this conversation, what do I want people to leave to take away?

(21:40):

And a lot of times, finance people, we want to leave our business partners to take away that it’s, “We command the numbers.” That’s an important part, I’m not discounting that. But more so than anything right now is we think about the value of the CFO of the future, we need to put on … Yeah, the chief financial officer hat, hugely important. But I think of that other hat, of that chief feelings officer, which gets to a topic of IQ versus EQ.

Almera (22:06):

For sure.

Chris (22:08):

I think CFOs need to level up that EQ, and probably tone down that financial IQ a little bit. Let’s resize that. Because right now, it’s 80% IQ and 20% EQ. Let’s focus on bridging that emotional intelligence that we have inside the organization, coupled with that financial IQ. I think that’s a real game changer. Yeah, so that’s where I think CFOs of the future, around IQ and EQ becomes hugely important.

Almera (22:37):

Chris, that is fascinating. I love how you were talking about IQ versus EQ, because it is so connected to all of this. You are spot on. I have, over the course of my career, been in so many different meetings where a finance professional is exactly what you said. Appeared to be the smartest person in the room, knows all the data, and while that is extremely important, we need that. We need that. It is important. But, we don’t need to show that all the time. We have got to connect to our audience, and we’ve got to show that there is this human component to each of us as well. So yes, we know the data inside out, we know the numbers inside out. But we have to pull ourselves out of all of that and say, “Okay, when I’m here, I am not trying to prove that I know all this. That’s why I’m in the job.”

Chris (23:29):

Yeah.

Almera (23:30):

“That’s why they hired me. I’m in the job because I can do this. But now, I’ve got to help support them, be an advisor. What are the key pieces of information that are going to help this project, or help this organization, or help this objective move forward?” That’s where we need to be thinking outside the box, and transition into that. A lot of great finance professionals are already doing that, but that’s exactly what you said. That’s where the EQ comes in, definitely.

Chris (23:55):

Yeah, 1000%. Almera, I’ve loved this topic so much. My last question for every guest that I always ask, and this is the one for you. What is your number one hot finance trend and why?

Almera (24:08):

Oh, I’m going to say what is very common right now, which is AI.

Chris (24:14):

[inaudible 00:24:15], who would have thought? Who would have thought that?

Almera (24:19):

Who would have thought? Who would have thought?

(24:19):

With all these different forecasts, Chris, saying that just the business world is going to completely change in three years. That’s where I think behavioral economics is even more important, because a robot can calculate numbers. A computer can calculate trends, and regression analysis, and all kinds of things when it comes to even very complex forecast models. But what’s going to take longer to understand is human behavior.

Chris (24:48):

Nice.

Almera (24:48):

Why people act the way they do, what motivates people. Some of these things can’t be measured. Some of these things just come from human, person-to-person contact. So those are the things, in my opinion, that are least likely to be phased out by AI. So that is where we need … This is actually how I encourage my team a lot about this. I say, “I don’t want you guys to just be doing the numbers. Make Excel do the numbers, make the system do the numbers. I want you guys thinking outside the box. I want you thinking about what comes next. I want you solving problems, I want you fixing processes, I want you connecting with others in the organization. Do not spend all your time calculating. If you are, we’ve got to solve that.” That is where all of us, as finance professionals, if we focus there, again, I don’t see that getting phased out anytime soon, but probably at least risk right now of being phased out. That angle of AI is why I will say it’s very important for finance professionals to pay attention to.

Chris (25:48):

1000%. I think technology and AI can do the calculations, what it can’t do is build the communication, the collaboration, and the connection. It talks through everything that you talked about in this conversation, around focusing on the right scene, setting the right stage. Making sure that we’re thinking about emotion intelligence of the business and connecting with the business. I think this has been such a great conversation.

(26:12):

Almera, if people want to learn more about you, learn to connect with you, want to learn more about how you institutionalized and implemented behavioral economics on your finance teams, where can they find out more about you?

Almera (26:23):

Sure! Sure, Chris. Just holler at me over at LinkedIn. I am on LinkedIn, Almera Mahmood is the name. I am happy to connect with people.

Chris (26:32):

Awesome, awesome. Almera, thank you so much for your time and enjoy the rest of your day. Thank you so much.

Almera (26:38):

Thanks so much, Chris. I appreciate it, this was a lot of fun. Thanks for having me.