The Real World

by Aug 20, 2019Supply Chain Finance

Behavioral economics “studies the effects of psychological, cognitive, emotional, cultural and social factors on the economic decisions of individuals and institutions and how those decisions vary from those implied by classical theory. Behavioral economics is primarily concerned with the bounds of rationality of economic agents.” (Wikipedia)

In other words, behavioral economics is the study of why people do what they do in the real world, versus what they “should do” from a purely rational, analytical basis. It attempts to understand the “human element” involved in dealing with money.

Take the stock market for example. In finance classrooms, students are taught that the stock market is a reflection of corporate earnings, and what is expected to happen in the next 6-8 months, give or take. It is assumed that price is a direct reflection of what people are willing to pay for current and estimated future earnings. These assumptions and teachings are founded in part on the “efficient market hypothesis (EMH)” that speculates that beating the market is impossible as stocks are already accurately priced, reflecting all available information. However, this is rarely the case in reality because we do not live in the vacuum of a classroom. The reality is: stock prices can be affected by human error and emotional decision making – the human element. A more concise (and more accurate) way of capturing the manner in which the human element effects markets can be found in a tried and true maxim, “Fear and Greed Drive Wall Street.”

Another example of how the human element plays a role in how markets behave is explained by the construct of Voluntary Time Off (VTO). VTO refers to situations in which employees have the option to take unpaid time away from work without losing benefits or employment status. There are many examples, but some of the more prevalent include companies such as staffing and call centers which will offer VTO when their current workload is less than their current staffing. Though it seems counter-intuitive, these programs are, in reality, extremely popular with employees. Employees that are working for money, are eager to take time off without pay – consistently and repeatedly. Why? It can be any number of reasons, but people have needs, errands to run, rest, laziness, whatever. Some postulate that the key to VTO is a sense of control, employees are given autonomy and don’t have to ask – empowering them – if employees need extra time, they have a solution that they can exercise at will and without permission– VTO.

We see the same dynamics in our world of Supply Chain Finance (SCF) programming. In offering vendors (suppliers) early payment discounts with a SCF program, we see that these discounts that are purely optional are taken with high frequency. As with VTO, the reasons so many companies take and offer early payment discounts are as varied as people are different, but include reasons such as: cash flow needs, payroll, growth, large expenses, seasonality, unforeseen expenses, etc. As a bank or lender, ArtisPay© makes offering a SCF program extremely easy and provides your clients and their suppliers with a solution they may not necessarily know to ask for but, in reality – in practice, want and use. With ArtisPay, suppliers are put in control and given autonomy over their invoices. Consequently, the relationship between the buyer and supplier is strengthened as the buyer is helping meet the supplier’s needs.

In the end, understanding the reason why so many companies choose early payment (and offer early payments discounts) is not truly consequential, but providing companies with the option to get paid early is extremely impactful. With ArtisPay, we understand that business does not happen in the vacuum of a classroom, business happens in reality and the reality is that offering early payment options, supporting autonomy and strengthening relationships is good for business all-around.