 Welcome back. In this clip I will talk about the first part of chapter 2 and specifically about human capital. After this clip you will understand a couple of things. I will have explained to you the basics of human capital theories and important to remember there are two versions of them and although they claim kind of the same thing their origins are quite different. So as a reminder in the previous clip I talked about human capital as an important resource for organizations competitive advantage and the definition that was presented there is that all the knowledge skills ideas abilities and health available in people working in an organization are an essential resource for organizational performance. If we zoom into this human capital we want to understand more deeply so how do people become an excellent resource for organizations and interestingly enough there are two distinct theories that explain the value of human capital for organizations. Only they come from quite a different background. I will talk about each of them. I'll start with Becker's perspective on human capital from an economic perspective meaning that if you invest in your knowledge as an individual and if organizations invest in the training of their employees this will lead to better performing organizations. So from the economic perspective it's all about investing in your knowledge and skills. The individual difference perspective by Spearman is a very old or to say from the psychological theory perspective old theories already developed in the 1920s and it starts from the idea that people by who they are are different and because they are different they will perform in a different way. So in order to understand the value of people for organizations we should understand what makes people different from one another and which of the of their characteristics contributes to their performance. So two essentially different theories leading to the same conclusion that in the end individuals in organizations with higher human capital will contribute to better performing organizations. So let's start with the economic view by Becker. So if you go back to the 1960s and you read Becker's theory you read that human capital can be perceived as a resource for individuals as well as for organizations. For individuals imagine that you have a university diploma that is an investment in your education and we know from data and from reasoning that it makes sense that employees with a better education they end up in better jobs they will have a better career and they will have higher incomes. So investing in your own training is a good idea if you want to progress your career. The same is true for organizations. Organizations who invest in their employees general knowledge and specific knowledge they will have more knowledgeable employees and that will help them to have a better organizational performance. So how does it work? It's important to understand that Becker distinguishes between generic human capital and firm specific human capital. Generic human capital these are all the diplomas that you can just go to school for. You can go to higher education, you can go to have some kind of skills training that will help you achieve a job in a company. So these are broad diplomas but also working in an industry to knowing for example education system that will help you to also function in another education institute. Firm specific human capital on the other hand was already introduced also in the previous clip. So this is knowledge that is tied to a single organization. By definition it loses its value if you take it away from that organization and try to use it in another organization. However for the unique competitive advantage of an organization it is important that an organization has a lot of non-transferable firm specific knowledge. So both types of knowledge are important for organizations. There's however one tricky thing with investing in knowledge and in education. If you don't invest in your knowledge that after a while it loses its value. For example imagine a doctor if you go to med school you have all these trainings and you know everything. But imagine that your training was in the 1980s and now we are way ahead decades. A lot of things have changed. We know of diseases that didn't exist by then. We know of techniques to counter these diseases that they were unaware of by then. So for a doctor to rely on their knowledge they really need to keep investing in their knowledge. And it's for a good reason that for certain professions there are systems that require professionals to update to continuously update their knowledge. So this is not only true for the medical staff but for example also in the financial professions. It's very common that professionals need to keep updating their knowledge. This is all to be traced back to the idea that if you don't do this this resource loses its value. For organizations it's a similar logic. So if you never invest in the training of your employees you might get stuck with a workforce that is unable to adapt to technological changes. It's a common problem in organizations where for example they're low skilled workers all of a sudden are faced with new technology and then there's a group of employees that doesn't fit the new organization anymore. So investing in training and development of employees is equally important for organizations as well as for individual employees. If we look at if we want to understand what human capital in organizations or how well organizations invest in this specific resource then you may want to have a look for example at the training budgets of organizations. So a common research is to look at how much money organizations invest in training and then relate that for example to important organizational outcomes like financial or productivity. So how do we know how much human capital matters for a business performance? By now you know that if you want to understand the effect of some investment in human resource management to some kind of outcome you preferably look at a meta analysis. An overview study summarizes a load of previous research into this question. The example I show here is based on a meta analysis performed by Kroek and colleagues of 2011. So what did they do? They collected 66 different studies indicating a relationship between some kind of investment in human capital and some outcome or indicator of organizational performance. In these 66 studies they had like over 12,000 of measurement points so individual observations of if your level of human capital is this then the outcome is such and so. So combining these they found an overall correlational strength of 0.21 between human capital and organizational performance. So what does it mean? So this means that a one standard deviation increase in human capital so for example a one standard deviation increase in the training budget of an organization as compared to the mean of the sample that leads to a 0.21 improvement in the performance outcome. So that could be for example the performance of the financial performance of the organization. Another example is for example the total experience of the board of managers. So imagine you have a team of managers that is responsible for the for guiding the entire organization so five people maybe and imagine that this board has been working together for a long time. They have grown up in the company and then their average is if you add them all up together each one has at least 10 years of experience and together they have like 60 years of experience in that company. Also there are boards where the team of managers is relatively new because for many reasons the average tenure of board members can be much lower. So they found for example a difference in the total experience of the board of managers from the 35 years on average to 59 years of average is translated to an increase in return on investment from 0.5 to 0.9. This increase translates in an 80 percent improvement of the return on investment. So it pays off to have an experience board. It's one of the conclusions that you could draw from this from this mid analysis and similar positive effects were also found for educational level, training budgets, tenure of staff and many other indicators of human capital. So summarized there's a load of evidence that investing in human capital like predicted by Gary Becker is really important. So what does it mean for human resource management? Nice talk. Well obviously if you are to work in human resource management investing in employee training is one of the core things that you should be concerned about. Another implication is maybe not as obvious but nowadays there's a big trend to have a huge flexible staff in the organization and we know that by changing staff in the organization a lot of knowledge also gets lost. So the composition of the workforce is another element that you could think about if you think about Gary Becker's view on human capital and its implications for human resource management. All right. So in the start of this clip I mentioned that there's also another theory of human capital and that is the one that we call the human capital as individual differences theory that was originated by Spearman in 1927 which was what elaborated and researched over decades until today so we also know quite a lot about this one. What's the idea here? So the key idea of individual differences is that if you compare people you'll notice that they have different abilities. Some people are good at math others are not others are good at language some people are really social so people differ from each other and they do so in a kind of stable way somebody is really talkative will be that as a child and probably also be more talkative when they retire. Another key assumption of the individual differences theory is that these differences between individuals they matter for their performance and it makes it makes sense. A talkative person is more likely to perform well in a job where a lot of talking is part of the job and other people will not like that and maybe perform less there. A question is so which abilities do really matter for creating a sustainable performance difference over time? Well I could like feel a couple of days talking about that but let me bring this back to the essence. The well researched differences within individuals that matter for performance are basically two things. First intelligence and second personality. Intelligence relates to the speed with which people process, retrieve and combine information. So some people are just good at saving solving puzzles and others can come to the same conclusion but they need a bit more time. So the intelligence part is about the speed of processing, retrieving and combining information. Why is this useful to know? A good thing about intelligence is that over the years resources have developed valid and reliable tests with which we can measure intelligence and we can more or less rely on their outcomes and then we can use that to predict which employee is more smart than the other one. Another important individual difference is personality. So personality is defined as the relatively consistent style in which people think, act and feel. So I mentioned that being talkative is an expression of extroversion. Extroverted people like to be with others, like to be in a group and they tend to talk a lot. As with intelligence it's also possible to measure personality using reliable tests or an interview. A side note should however be that the tests for intelligence are on average more reliable than personality tests. Personality tests suffer a little bit from faking. If you are very smart and you know what a job is about then you can kind of know what kind of personality a organization is looking for. Whilst with intelligence if you don't know the answer to a question it's just wrong. So looking at intelligence you're probably familiar with the notion of the normal curve. There's a lot of debate about what intelligence actually is. Is it possible that people have multiple intelligence? Is it possible that that you can develop your intelligence? So there are a lot of research questions that you could contribute to the concept of intelligence. The most important thing to remember is that there is something underlying all the difference intelligence performance. So if you compare a whole big group of people then on average there are people who score on average better on all the different intelligence tests than others. We call this concept G. So G is the underlying intelligence. Tricky with the G concept is that there's no test that directly taps into this underlying intelligence. So usually if you want to understand your intelligence you go to a psychologist or you go to the internet and then you take a test and it exists of many different sub-tests. So for example memory test or speed of retrieval, logical reasoning. If you compare the performance of many people on this these kind of tests you'll see that there are positive correlations between those tests meaning that there's people who are on average have a higher intelligence, they tend to perform better on all these tests. Mind you this is statistics, this is not true for every individual, this is true for people on average. So like with statistics these scores are normally distributed over the population with the majority of people circling around the average and there's a small group that are really smart and a small group that is not so smart. Why is this important? Well first scores on intelligence are relatively stable over a lifetime. So for example if an organization is looking for talented people to fill the ranks of their trainee programs for example it makes sense to include an intelligence test. You don't need any work experience, there's nothing that you need to show yet. However you kind of predict that somebody with a higher intelligence can, is a quick learner and they will find their way around in the organization so it makes sense to select on intelligence. Also if you look at meta-analysis you'll see that scores on intelligence test correlate high with performance and high is 0.5. So of course in other sciences they will laugh about the correlation of 0.5 because there's still a lot of error and we know this. Not every smart kid in your class is going to be a professor one day. However it is to the best we know about differences between people this is the strongest prediction that we can make using intelligence to predict future performance of employees. Now to personality. Personality like said is a bit more tricky there is not something like an underlying personality and you cannot have more personality or less personality so the concept in itself is already more difficult. There is a pattern in personality dimensions and nowadays the big five model is the most known and the acronym stands for ocean so it's an easy way to remember. Openness to experience C, contentiousness, E, extraversion, A, agreeableness and neuroticism or contrast of course is the more preferred one emotional stability. What do these mean? Openness to experience or you can read all the definitions also in the book. Openness is to be curious, interested in arts and science. Consentious, the persons who like to work hard to meet their agreements to be goal oriented so this is the industrious preference. Extraversion already mentioned like to be talkative the social aspect, agreeableness to what extent you like to be like, you like to have harmony in teams and finally neuroticism how quickly are stressed about things or how unquickly you are completely cool about everything. Which of these dimensions matters for performance because that was the question of this chapter so there's human capital, everybody has characteristics, everybody has some score on one of these on each of these dimensions so you have different profiles they may look like this so somebody scores a bit lower on openness and they score a little bit higher on conscientiousness but what does a profile file like this mean for an individual's performance? Well, actually not all the, excuse me, not all the dimensions are equally important for performance. If you look at overall performance then actually only conscientiousness and to some extent neuroticism and then again the opposite of that so the stableness they are for any job important and it makes sense so people who work hard where in their preference to work neatly to keep their work organized and to keep their appointments those are the ones who are realizing a better performance. For all the other dimensions there is no stable relationship between a preference or a non-preference and the overall performance. If you zoom in on the job level and you compare for example for a management position with a financial expert of course it's possible to frame hypothesis about the importance of the other dimensions as well and there of course there is also some evidence so you need to go back to to your knowledge or your research about this and then you can also for example use extraversion to hire managers as an example but overall important thing to remember for overall job performance across any job conscientiousness and low score on neuroticism are positively related to performance however to a lesser extent than intelligence although you can increase the correlation between intelligence test score and performance if you combine that with conscientiousness because there's no relationship between for example conscientiousness and intelligence so personality and intelligence are different distinct things. A lot of technical talk so back to you what Pehrman's implications are for his definition of human capital well think about it for a moment if these differences between people are stable and they were there to exist over a lifetime then it's not so much training that you want to invest in but selection. So Becker and Pehrman's theories together they emphasize an investment in human capital by means of on the one hand training and on the other hand selection and there are excellent selection methods that can help you make a good decision. So summarizing these two theories how do these individual difference of human capital contribute to performance well in the upper row here you see the individual differences that matter for overall performance so these are intelligence, conscientiousness and emotional stability. Intelligence has a double effect it not only directly contributes to job performance but it also contributes to learning and then the two theories come together because if you are able to learn more quickly they are also able to achieve a higher level of education. So this brings me to the end of this knowledge clip we discussed two human capital theories Becker's economic perspective on human capital and Pehrman's individual difference perspective in the next clip I will zoom deeper into the concept of knowledge because there's a load more to say about that.