Emotional Hedge

To implement a so-called ‘emotional hedge’, the supporter of a sports team would bet that the opponent wins an upcoming game so that if their team loses, the disappointment would be mitigated by a financial reward. In the corporate world, such a hedge would be quite simply achieved if an employee bought some equity in a direct competitor.*

This behavior is perfectly rational since it decreases the variance of the expected outcome. And yet it is not often observed. In ‘Betting Your Favorite to Win: Costly Reluctance to Hedge Desired Outcomes’ (2016), the authors explore why and identify two principal reasons. The first one is the ‘optimism bias’ whereby the probability of a positive outcome tends to be overestimated by emotionally invested individuals. This naturally reduces the desire to hedge. The second and more interesting one is loyalty. Indeed, individuals are reluctant to place a bet that is inconsistent with what they consider to be part of their identity: ‘Hedging creates an interdependence dilemma—a motivational conflict between a short-term monetary gain and the long-term benefits accrued from feelings of identification with and loyalty to a position, person, or group whom the bettor desires to succeed.’ In fact, what is generally observed is that supporters bet on their own team. It is all or nothing.

The reluctance to implement an ‘emotional hedge’ demonstrates that individuals crave identity and loyalty. When considering the perspective of success and failure, they reject the relative indifference a hedge would contribute to. They are psychologically wired to be ‘all in’ when a high degree of loyalty to a given group’s identity has been developed. The message to leadership teams at any level is clear: Focus on team identity. In the sports department, I would recommend watching Pep Guardiola in ‘All or Nothing: Manchester City’ or, in the same series, the protagonists of ‘A season with the Arizona Cardinals’. These documentaries show in raw form what can be achieved by a team in terms of efficiency and effectiveness when its identity is meticulously defined.

Tapping this source of productivity has, however, proven increasingly challenging for corporates. Many leaders deplore the job hopping mentality of the millennials and Gen Z and are reluctant to invest in long term employee relationships since they typically prove elusive. In her book ‘The Boomerang Principle’ (2017), the entrepreneur Lee Caraher argues that the right mindset for a corporate consists in building a feeling of identity and loyalty even under these circumstances since departing employees may come back as loyal suppliers, clients, advocates and even returning employees.

Fostering loyalty is the right bet to make from a corporate perspective. Next to maximizing full employee engagement, it is as a smart emotional hedge against the disappointment caused by departing employees: for any lost employee, a new, loyal stakeholder is gained.

* If allowed to do so

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