What behavioural economics tells us about nepotism

Nobody involved in a family business is unaware of the dangers of nepotism: a family member who is promoted beyond their abilities is a danger to the business and the family. And yet nepotistic appointments are made again and again. You can put this down to the myopia and pig-headedness of family businesses, but the fact that family businesses are so often unable to prevent it suggests that perhaps something more complex is going on.

So why does nepotism really happen? And how can you prevent it?

A new paper entitled The weakness of strong ties: Sampling bias, social ties, and nepotism in family business succession by academics from Warwick Business School* uses behavioural economics to examine the biases that lead to nepotism.

They suggest several heuristics – rules of thumb – that business leaders may unknowingly use to evaluate their successors that can lead to nepotistic appointments. For example, the “representative heuristic” is when people appoint successors based not on ability, but on similarity to themselves. The “incumbency effect” is when people favour a small change to the status quo over a large one, such as keeping a family head rather than appointing an outsider.

The “availability heuristic” says that people make decisions based on what they remember most vividly, for example, because it happened recently. They might also remember the behaviour of family members, who they know better, more clearly than that of non-family employees. The “affect heuristic” is when people make decisions quickly, meaning that they are more influenced by their emotional state, for example their closeness to a relative.

If this wasn’t enough to cloud judgement, Liu et al suggest that there is an even bigger problem, what is known as “sampling bias”, when the information used to make a decision is in itself skewed towards a particular candidate. Here is an example. The leader of a business is looking for a successor and picks two candidates, one a family member and one not. He gives them a task, which they both fail, and the leader decided to appoint neither and keep running the business himself. 

However, he bumps into the family member’s mother at a party a few months later and hears how well he is doing. He gets a second chance, and this time beats a (new) external candidate at the (also new) task they are set. He gets the job. For all the family business leader knows, the first non-family candidate might be doing even more brilliantly, and it might have become evident that he is the perfect candidate. But the leader never hears about it. The way the family leader selects his pool of possible employees is fundamentally biased towards family members. 

What is the solution to this problem? The academics suggest that family heads don’t only rely on their so-called “strong ties” to other family members, but actively cultivate “weak ties” to others in the industry so they hear more about other potential candidates for jobs. In other words, they should build networks.

Alternatively, families could ask non-family members, who are less affected by family biases, to make big hiring decisions. A family member might be the best person for the job, but their relative is almost certainly the wrong person to decide.

* Liu, C., et al., The weakness of strong ties: Sampling bias, social ties, and nepotism in family business succession, The Leadership Quarterly, 2015