Business psychology, most commonly called industrial-organizational psychology or I-O psychology for short, has been around since World War I. As the industrial growth of America rapidly expanded, companies and organizations needed information relative to employee assessments and predicting employee performance. In the early years, the information gathered was more inclined to be used to more accurately predict business expenses. How long would employees stay on the job and how well would they perform? What kind of personality types performed better for different job roles? Early industrial psychologists were charged with answering these questions on behalf of business owners and factory managers.

Early business psychology pioneers such as Walter Dill Scott, James McKeen Cattell, and Hugo Munsterberg helped pave the way for today's modern industrial psychologists. These men were the presidents of the American Psychological Association in 1919, 1895, and 1898, respectively. They helped usher in the practice of using psychology in business. After World War II and the much publicized Hawthorne studies, business psychology or more appropriately, industrial psychology truly gained momentum. In fact, many of the results derived from the Hawthorne Studies are still the subject of research today, such as with the Hawthorne Effect.

The Hawthorne studies were some of the most widely publicized psychological experiments on workers conducted in the 20th Century. In the 20's and 30's, a Chicago based company known as Hawthorne Works conducted studies to determine the effects factory lighting had on employee production. A Harvard Business School professor, one Elton Mayo, wanted to study the effects of working conditions on employee productivity. As the studies grew in scope, additional conditions such as fatigue, facility temperatures, and other factors were studied. Mayo's results made revolutionary changes in the management of company workforces. However, it also produced the Hawthorne Effect, a term later coined by Henry Landsberger in the early 1950's.

In terms of business psychology, the Hawthorne Effect merely illuminated the tendency for study or experiment subjects to behave differently simply because they know they are being studied. For example, in the Hawthorne experiments, women participating in the studies were segregated from other workers. Their working conditions, including work hours, rest periods, lighting, and other factors, were periodically altered, with Mayo explaining each alteration before they occurred. Henry Landsberger argued that such explanations and preparations for altering the conditions produced inaccurate results because the subjects were aware that their behavior was expected to change, thus encouraging them to change their behaviors, even if for only limited time frames.

The Hawthorne Effect is still the subject of business psychology research, even today. In fact, when any change in working conditions is made, resulting in a temporary increase in productivity, it is often referred to as the Hawthorne Effect. For example, cleaning or rearranging workstations will often result in a burst of increased productivity, or Hawthorne Effect. Such studies are still the basis of industrial psychology today, although more emphasis is placed on factors such as work/life balance and overall psychological health of employees and how those factors relate to motivation and productivity.