Psychological capital: What it is and why employers need it now

Too many business leaders overlook a vital tool for organizational and employee success— “psychological capital.” Backed by psychological science, this approach to leadership, management, and employee empowerment can make a measurable impact.

What it is: Psychological capital is a collection of four healthy psychological states that enhance well-being and performance—hope, efficacy, resilience, and optimism. Together, the four states contribute more than the sum of their parts. In the workplace, individual employees can build psychological capital to enhance their personal performance and employers can build psychological capital to enhance organizational performance across teams and entire workforces. (Luthans & Broad, 2022) 

What it isn’t: Psychological capital does not focus on dysfunction or mental illness. Its focus is on helping ordinary people live more productive and meaningful lives and helping organizations create environments where both the individual employees and the organization itself can flourish.

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Although we commonly use the terms “hope,” “efficacy,” “resilience,” and “optimism” in day-to-day conversation, they have specific meanings when it comes to the science underlying psychological capital. To build psychological capital, you can’t pick just one of the four components to work on. The components are interdependent and synergistic. Combined, the four components amount to a whole that is greater than the sum of their parts.

Hope: Hope is the ability to see a potential path forward to a better future. It involves having goals and the willpower to achieve them. To realize hope, the path does not need to be easy or quick, but it must be plausible and achievable. Importantly, hope also includes the ability to generate new or alternate pathways to overcome obstacles while pursuing goals, or what is called “way power.”

Efficacy: In psychological science, “self-efficacy” refers to a sense of confidence in one’s ability, upon putting in the necessary effort, to successfully follow a path forward to accomplish goals.

Resilience: Psychological resilience is one’s ability to return to baseline, or even come back stronger, after experiencing emotionally challenging life events, including stressful work situations. It is the ability to bounce back from adversity and cope with challenges, especially through mental, emotional, and behavioral flexibility.

Optimism: This refers to a way of thinking about life that tends to attribute positive events to you or your team’s own skills and abilities, while attributing negative events to temporary, external circumstances. Optimism also refers to a general tendency to expect good things to happen in the future. Importantly, optimism is not the unrealistic belief or expectation that everything will always go smoothly. Instead, it is an expectation that the future will be generally positive with a grounded understanding that life is full of challenges.

According to a recently published statistical analysis of 244 combined studies, conducted between 2007 and 2020 (Loghman et al., 2023), as well as a previous statistical analysis of 51 studies conducted prior to 2011 (Avey et al., 2011), psychological capital results in:

• Higher job performance (both self- and supervisor-reported)
• Higher worker engagement
• Higher job satisfaction
• Lower rates of employees wanting to find a new job (turnover intention)
• Lower workplace burnout
• Positive health and relationship outcomes
• Higher subjective well-being
• Lower diagnoses of deficits, such as dysfunctional mental health and substance abuse

Research has also shown that team leaders’ psychological capital has a positive influence on their team members’ psychological capital (Wang et al., 2021). Psychologist Sarah Dawkins, PhD, an author of the 2023 analysis, notes: “There are numerous studies demonstrating the positive impact of psychological capital on individuals, teams, and organizations across a very broad cross-section of organizations, such as education, military, not for profit, health care, mental health services, volunteer, and global cultures.”

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Developing psychological capital is essential for business leaders because it:

• helps foster a resilient and positive work culture, and
• enables employees to overcome challenges, embrace change, and perform at their best, ultimately driving organizational success.

A reserve of financial capital can help ensure long-term success by providing a buffer against economic downturns or unexpected costs. In the same way, an abundant reserve of psychological capital can help ensure long-term business success by providing a buffer against the emotional and psychological strains of work that may adversely impact organizational and individual employee performance.

Bruce Avolio, PhD, professor of management at the University of Washington Foster School of Business, emphasizes that “when employers invest in building psychological capital, they are investing in who their employees are now and who they can become in the future. It is more than skills development. It is helping your workforce truly flourish.”

A beautiful thing about psychological capital is that, like other forms of capital, an individual or organization can grow the amount they have through strategic effort. For nearly two decades, applied psychologists have been working on developing, evaluating, and refining programs that include training sessions for increasing employees’ psychological capital (Lupsa, et al., 2020). Recent research has expanded these programs to include online options to make psychological capital training more accessible and efficient (Carter & Youssef-Morgan, 2022). “Online training is a potential avenue for employers to reduce the cost and increase the convenience of teaching employees about psychological capital, ultimately increasing the return on investment,” says Carolyn M. Youssef-Morgan, PhD, the Redding Chair of Business at Bellevue University.

But, even without a formal training program, there are simple steps employers can take on their own right now to increase psychological capital in their organization.

Organizations and their leaders can:

• Encourage and support employees’ personal and professional development.
• Provide opportunities for skill-building, training, and growth.
• Authentically recognize and celebrate employees’ achievements and contributions.
• Provide employees with reasonable autonomy and flexibility.
• Lead by example and model the HERO characteristics (hope, efficacy, resilience, optimism) outlined above.
• Train team leaders to model these behaviors.

Individual employees can:

• Be intentional and consciously choose to focus on positivity.
• Set personally meaningful work goals that are specific, measurable, achievable, relevant, and time-bound.
• Seek opportunities for learning and development to enhance their skills and knowledge.
• Take ownership of their work and actively contribute to the success of the organization.
• Practice positive self-reflection and seek to continuously thrive and improve.
• When faced with adversity, identify what is within their control and what isn’t. Identify options and act, looking for opportunities for growth, development, and learning from setbacks.  
• Build and maintain a strong support network of colleagues, mentors, friends, or family members.

“Building psychological capital can not only enhance job performance, it also can enhance employees’ overall mental health, and do so without the potential stigma sometimes associated with discussions of ‘anxiety’ or other mental health issues,” says Julie Broad, PhD, the founder and president of the Positive Organizational Behavior Institute. This view is shared by Fred Luthans, PhD, the George Holmes Distinguished Professor Emeritus of Management at the University of Nebraska–Lincoln, who is recognized as formulating the operational definitions and having the seminal research/publications. Luthans notes that “psychological capital focuses on developing positive psychological states rather than focusing on ridding oneself of negative psychological states.”

Fostering psychological capital may take some time, effort, and resources but research shows that the potential long-term benefits may far outweigh the costs. It is critical that psychological capital is on the minds of employers as one additional form of capital that they should grow and foster to help ensure long-term success.