3 min read

How FinOps Practitioners can use behavioural economics to achieve value

Behavioural economics is an area of research that is established in mainstream economics and is one of the most productive areas in the business world.

 It combines an optimisation approach complemented by psychological insights, realistic analysis of how people make decisions when emotions, unconscious bias and the possibility of making systematic mistakes are factored in.

As such, behavioural economics can arguably be considered as an underutilised resource for the practice of FinOps. There is a natural fit as both concepts seek similar outcomes.

One key area that is an effective starting point is the concept of Loss Aversion theory. It is a truism to say that we hate losses more than we enjoy gains. However, this is an accepted theory in behavioural economics where FinOps practitioners can use this (and other techniques) to generate behaviours in Engineers to make them more likely to act to avoid a “loss” than to secure a “gain.”

In its simplest form, Loss Aversion is the idea that whilst we are happy when we make a gain, we suffer more when we lose – even if the amount gained or lost is the same. It is an asymmetrical model because individuals perceive losses to be as much as 2.5 times more powerful than gains

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How can Loss Aversion theory and behavioural economics be applied in the world of FinOps?

In the State of FinOps Survey 2022[1], 30% of all respondents said that making engineers take action was the biggest challenge they face and was ranked as the highest challenge for FinOps Practitioners and Teams.

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Applying Loss Aversion is a key to unlocking this challenge and directly addresses why engineers are often unwilling to take action to remediate their deployment patterns from a cost perspective.

It is important to note that engineers are not ingrained at the point of training to factor cost optimisation in their deployments. As a result, they do not have a point of reference to feel its effects. By creating the context, the change in trained behaviours can be achieved, and lasting cultural change can be made.

 

How can we use Loss Aversion for good?

Rather than rewarding engineers for making retrospective changes to the cloud infrastructure estate to gain savings or avoid cost impacts, it is more powerful to create the desire to avoid having to do the retrospective work.

Bringing this to life - if an epic is planned for the development of a particular workload, the planning of the epic will factor in a sprint for retrospective changes to happen to optimise the costs.

However, this sprint is presented as a double-edged sword. It will also be planned for individual learning and sandbox time for the developers. As a result, it has a personal value to each developer, and it is given to them up front. This creates what is known as the “endowment effect”[2].

The risk (or loss) each engineer faces is that if they do not design and build cost optimisation into their original work, they have made the choice to LOSE something that has value to them, namely their learning time. Loss Aversion will drive a behaviour where the individual will see the value in front of them diminish if they do not exhibit the desired behaviours beforehand and, as a result, will personally feel the loss.

This approach creates a higher value win for all parties involved. The business will make fewer potentially costly errors at an earlier point, the technology is optimised, the product owner gets what they want AND the engineers get what they want as well.

This key psychological and behavioural difference means that when engineers are able to take possession of time to be able to do the things they want (in this case, self-learning), they will not want to give it up to do work that they do not want to, or rather did not have to do.

The essential point is that it is their ownership that drives the right behaviours (the endowment effect) as people will place a higher value on a good that they own – or perceive to own - than on one they do not[3].

 

Summary

The practical application of behavioural economics in FinOps has significant potential, one that if used properly, can accelerate value and the desired outcomes of establishing a FinOps practice in the first place.

To consider that FinOps is solely about cost optimisation (although it is the key drive wider activity) is a false premise that means significant business value is not realised by businesses.

Every business is likely to have up to 32% of waste[4] in their public cloud infrastructures – you have to ask yourself – if you were the CIO and have that money to invest, what would you invest it on. The reality is that the money is there, the question is whether you want to get it.

 

By working in partnership with FinOps specialists, such as Thebes Cloud Management, you can get access to this budget by using not just technology driven techniques but also using psychological factors taken from proven behavioural economics to drive the right behaviours.

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References

[1] The State of FinOps 2022, FinOps Foundation

[2] Thaler, Richard (1980). "Toward a positive theory of consumer choice". Journal of Economic Behavior & Organization.

[3] Kahneman, D.; Knetsch, J.; Thaler, R. (1990). "Experimental Test of the endowment effect and the Coase Theorem"

[4] Flexera State of Cloud Report, 2022

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