Rory Sutherland on Praxeology – Lessons from a Lost Science

Why you need to understand the Lizard Brain

Rory’s brilliant talk at Business of Software 2011 brings psychology, philosophy and economics together to demonstrate how software developers, entrepreneurs and engineers need to embrace the forgotten science of Praxeology. A science whose time has come.

From unlikely beginnings as a classics teacher to his current job as Vice Chairman of Ogilvy Group, Rory Sutherland has created his own brand of the Cinderella story. He joined Ogilvy & Mather’s planning department in 1988, and became junior copywriter, working on Microsoft’s account in its pre-Windows days. An early fan of the Internet, he was among the first in the traditional ad world to see the potential in these relatively unknown technologies.

An immediate understanding of the possibilities of digital technology and the Internet powered Sutherland’s meteoric rise. He continues to provide insight into advertising in the age of the Internet and social media through his blog at Campaign, his column “The Wiki Man” at The Spectator and his busy Twitter account (@rorysutherland).

Find Rory’s talk video, transcript, and more from Rory below.

Find out more about BoS

Get details about our next conference, subscribe to our newsletter, and watch more of the great BoS Talks you hear so much about.

Video

Transcript

I just want to begin by giving credit to one of the people who has been a great influence in my interest in this whole area who I think was one of the speakers last year; the author of the blog “Joel on Software.”

In particular, those you who haven’t read it, his blog on pricing. If you search for “Gel camels and rubber duckies” trust me that is not quite a Googlewhack but it’s pretty close. You’ll find this extraordinary blog on the pricing of software which is one of the things that actually got me interested in the whole area of behavioral economics and the understanding that actually technology without psychology can actually be a source of dangerously misapplied effort.

This is the example I always give which I gave at a TED talk a few years ago…

A Eurostar train, which for some years now has actually carried people between London, Paris and Brussels and after about 10 years of this they decided to do what the French should done years before and upgrade the track between London and Folkestone which is where the train enters a tunnel to go into France. The cost of the track was about 6 billion pounds, about 9 billion dollars, and what this did is it reduced the journey time from about three and a quarter hours to about two hours 40 minutes. Now, don’t get me wrong, I am not absolutely disparaging the beneficial effects of engineering, I was just asking whether in terms of the hedonic opportunity cost, the best to improve this journey with a budget of 6 billion dollars would be actually to reduce the duration from three hours fifteen to about two hours forty.

Most interestingly I think, is the fact that still after spending 6 billion dollars on making the journey bit faster there is still no WiFi on the train. [Laughter]

I would argue for a creative point of view there are two sorts of people on the train: there are people who need to work and there are people who like looking out of the window.

Those people who like looking out of window aren’t overly bothered by the duration of the trip, they probably quite enjoy it. It’s also worth remembering about train travel, if you look at the last train journey you made ambling about it was a nightmare except the train journey itself get into the station, carrying your luggage, getting up a flight of stairs, parking your car, buying a ticket, all this was absolutely dismal but once you actually set on the train it was really quite enjoyable. So, you might also raise a question which is why are you spending 6 billion dollars reducing in duration the only part of the journey which isn’t crap? [Laughter]

OK? A third suggestion in terms of hedonic opportunity cost is you could, indeed with a budget of 6 billion as an imaginative creative marketer, you could’ve simply employed all of the world’s top male and female supermodels, got them to walk up and down the length of the train throughout the journey handing out free Chateau Petrus.

Er, you’d still have 5 billion left in change and people would ask for the trains to be slowed down. [Laughter]

There is a very interesting point which emerges from all this and it’s what I call the “Creative Double Standard.”

I think Josh will be interested in as well, I think Josh would support me here. When you have a creative idea it is, and perhaps quite rightly, heavily policed by people more rational than you. If you come up with a creative idea it has to be presented to people for costing, cost benefit analysis, ROI all manner of massive rational processes are deployed to police creativity. However, this does not happen the other way around. If someone comes up with an idea they think of as logical e.g. 6 billion pounds reduced journey time, they don’t go…

Well this is probably quite logically valid but before I actually put it forward to anybody else I will show you some really wacky people to see if they’ve got some weird ideas they might come up with instead. [Laughter] [Clapping]

So, what you have institutionally at all organizations is a double standard. That creativity is really heavily pleased by rationality, whereas rationality actually goes dangerously un-policed, as I think this example shows;

“If you think creativity is expensive you should try logic.”

Logic can be spectacularly expensive because it takes you down a line of pretty much unquestioned assumption, without ever asking the question you know, is this whole thing based on a completely erroneous premise? Now, you gotta watch engineers here. One of the things you gotta remember about people who like engineering, and that applies to all kinds of engineering but particularly mechanical engineering, and indeed financial engineering, accountancy, other highly mechanistic disciplines which are strongly affected by what some psychologists call ‘physics envy’. It’s the belief that actually my discipline in order to have validity must have exactly the same level of mathematical consistency and predictability of physics.

But actually most things in life to be absolutely honest, certainly most things involving human beings and people, are much closer to meteorology than they are to physics [Laughter].

You know they’re much closer to you know, something deeply uncertain. The problem is, is that people who actually like the mechanistic world and are trained in it aren’t very comfortable with the blurry bit that comes when you deal with people. That kind of counterintuitive stuff the you know, stuff that’s completely counterintuitive, things that are entirely disproportionate, things that are illogical. Actually most of the people, interestingly the marketing director of Eurostar has now found that since they reduced the journey time he quite frequently gets complaints from people who said they preferred it when it was longer. That’s not completely crazy because if you are coming back to the UK bare in mind you have actually spent an hour and half getting through Paris dealing with French people, OK? [Laughter] After which you probably, to be absolutely realistic, earned yourself a good sit down. [Laughter]

So, the problem we face is that highly rational people are actually uncomfortable with a lot of the implications of psychology and indeed are uncomfortable with dealing with people full-stop.

That’s why when you go to get your car serviced the human experience is generally so bad because the people who like repairing cars don’t like dealing with people. That’s why they leave you standing around feeling like a complete idiot for 30 minutes while you are waiting for anybody to say “Can I help you?” It’s that famous phrase which is often said about actuaries; So how can you spot an extrovert actuary? When he talks to you he doesn’t look at his shoes he looks at your shoes. [Laughter]

This engineering bias, this physics envy, has far more serious consequences

This is an interesting exercise, if you look at these five university faculties, where do the suicide bombers come from? Islamic studies are a very-very distant second. Number one by miles is engineering, by miles. Now, if you want the back-up, not only was Osama Bin Laden from an engineering family in Saudi Arabia but Umar Farouk Abdul Mutalib was a mechanical engineer, Mohammad Aatil was an architectural engineer, Khalid Sheikh Mohammed got a degree in mechanical engineering and two of the  three people behind the Mumbai attacks were professors of the university of engineering and technology in Lahore. In addition to this I used this slide a week ago and someone rang up to find out that in Egypt the nick name for the Islamic brotherhood is the “Engineers Union” because so many of them are actually qualified engineers.

Now, in business terms this is an extraordinary fact when you think about it and if suggested, if you want to improve airport security [Laughter] don’t bother with things like ethnic profiling, religious profiling any other kind of thing just ask them what they did at university?

If it was engineering, rubber gloves on basically [Laughter]

The likely reason for this was investigated by two sociologists called Gambeter and Hurtog who believed that there is a particular mind set amongst engineers that distains ambiguity and compromise. They are more passionate about bring rewards to their society and see the religious unambiguous law put forward in radical Islam as a way of effectively taking your physics envy and applying it to how you behave in everyday life. In other words you know, a scientific approach to everyday life which allows for no compromise or ambiguity. And actually it’s interesting that the report from British Intelligence shows that Islamic extremists who from (?) college campuses actually specifically single out engineers as the most likely recruits.

Now, don’t get me wrong. I’m not disparaging engineering culture or indeed the huge advances its bought to humanity. I’m flying back this evening on British Airways I don’t want to think that the people who check the wheel nuts on the plane are desperately creative and imaginative people. [Laughter] You know, “Ah hell let’s try anticlockwise this time!” [Laugher] You know, “let’s just break with tradition.” But none the less, I think it’s important to be alert to the fact that the very best things in life, the very best advances actually comes somewhere from the sweet spot. They make economic sense so that they’re self sustaining and they work but they actually employ not only technological ability and insight, but also psychological insight. And the very very best things do this very very well.

This is a great example from of psychological insight applied to traffic lights.

Now, on the London underground the single most effective thing they did to improve passenger satisfaction per pound spent didn’t involve a single extra train, a single extra yard of track. It was simply putting dot matrix display boards on the platforms to tell you how long you had to wait for your next train. If you purely give an engineer’s the brief the dangerous they always want to put more trains on or not totally stupidly they might have said “Now we can track trains exactly to the you know, to a 100 yards, we will make sure that the service becomes more regular with the same number of trains” that’s not bad by the way.

What’s better is if you realise that actually what’s bad about waiting for a train isn’t waiting it’s uncertainty. You’d probably be happier mentally waiting seven minutes for a train knowing it was going to come in seven minutes than actually waiting four minutes for a train when you weren’t sure whether a train was going to arrive at all.

Someone’s taken this insight to traffic lights and realised that waiting on a red traffic light is a hell of lot less irritating if you know how long you’ve got to wait. And so they very sensibly employed this countdown device which ticks along the outside.

In Korea they did some tests and soon found that it significantly reduced accidents at interchanges because it kind of reduced road rage, impatience and the propensity of people to jump the lights. I might add that there is a very bad application of this which someone didn’t think of very clearly when in Shanghai they now started applying this to green lights [Laughter]

If you think about it anybody approaching from a 100 yards away realizing they‘ve got the three seconds of green left fairly instinctively just decides to floor it. The Koreans tested this and found that all credits to their dedication to the scientific method, the Koreans tested this and found that applying it to green lights increased accidents.

Someone forgot to tell the Chinese that what applies in one situation doesn’t apply in another. But I think you know, we can take, I mean one of the very interesting things anybody who is in the usability experience or the customer experience business actually is possessed to psychological insights like this which you learn over time, which actually could be deployed elsewhere.

One of the greatest insights of all is I think the software loading bar without which no one would have downloaded anything ever. [Laughter]

Some mark of progress is what you need if you are going to wait, my argument is why not apply this to other things in life this is you know, if you take antibiotics; huge dangers are rising in antibiotics because people tend not to take the full course of antibiotics as prescribed they give up early as soon as they feel a bit better and this causes a risk of resistant bacteria developing. Why not take the practice of the loading bar to antibiotics? Don’t give to even 24 white pills give them 18 white pills and 6 blue ones and tell them when you finish the white pills take the blue ones. It’s called ‘chunking’, it’s the business of psychological insight in behavioral economics that if you split a task into sub-tasks, each one of which actually you know, has a clear milestone when you complete it, people are much more like be to complete the whole task.

But the problem we have is that actually that within business psychology is woefully at the moment lacking an entrance, marketing lacks influence, sales in many ways lacks influence. And one of the reasons is I think, that actually in economics there was a similar group of people who also believed that actually the perfect market hypothesis meant that you could therefore apply a kind of you know, rigid economic law to business. You didn’t need to understand people you just needed to understand balance sheets.

That was actually a quote from a business guy in the UK:

“All I need to know about my customers, I can read on a balance sheet because it tells me the only important thing which is: whether they are buying or whether they are not.”

That’s an incredibly absurd reductionist approach to human understanding, particularly as you realize that nearly all the really successful businesses you see are usually based on a really-really good human insight.

McDonalds I will talk about later but actually Ray Kroc had a fantastic human insight he had several, one of them that:

‘Most people don’t want the best burger in the world but actually they want a burger that’s just like the one they had last time.’

That actually in psychological terms, avoidance of disappointment or unpleasant surprises is actually more important to us then the attainment of some kind of platonic ideal of perfection in the burger. And that’s why you will notice in McDonald’s the rules for example, you toast the bun for 37 seconds and so it is absolutely rigidly applied. And we also don’t have first principles.

Ludwig von Mises

There aren’t any, if you get stuck in marketing there aren’t any first principles you can go back to as there are in most disciplines but Ludwig von Mises, erm, anybody heard of it? Any Austrian school…? Well this is extraordinary! In the UK nobody has heard of him, obviously delighted that von Mises institute is in force. He has a few utterly brilliant things which fascinate me.

One of them is his understanding that it’s completely wrong to differentiate.

This is what makes it very sympathetic to an advertising man such as myself, it’s completely wrong to differentiate between intangible value and actual value. He believes that most economists and most businesses make a completely stupid distinction between a primary product you produce and other things you do around that product that give it value. For example marketing, advertising, positioning and so forth.

A brilliant analogy he uses, he says,

‘If you run a restaurant it is impossible to distinguish between the value you create in a restaurant by cooking the food and the value you create in a restaurant by sweeping the floor.’

One of them is your primary good. None the less if you run a restaurant where the food is spectacular and Michelin quality but there is a faint smell of sewage in the air the best way, because the Austrian school believes that value is subjective- it’s contextual and subjective and can only be defined in subjective terms (they also interestingly in the Austrian school refuse to use math because they believe that numbers are an inadequate way of actually representing human preference and therefore, they actually spurn most of this sort of mathematics stuffs the physics envy stuff that goes on a neo- classical economics.)

But that’s a fantastic point because actually one of the things it says is that you know, if you know if you’ve got a restaurant that has fantastic food but there is a slight smell of sewage around it, don’t try and improve the food. That actually it’s impossible to distinguish between the subjective part of value which is the context in which the primary good is consumed, and the frame of mind in which the primary good is consumed and the actual nature of the good itself.

You can’t say one of them is genuine in value and the other one is artificial.

That’s a very-very interesting and very sympathetic way of looking at marketing which I have never come across elsewhere. If you notice of course that many of the things you know, that actually are own perception of value works that way. We can’t disentangle in many cases the quality of food from the environment in which we consume it. We think we can but I genuinely don’t think I genuinely don’t think we can. I think you know, when you are in a bad mood you know, when there is something wrong with the surroundings is simply less valuable food. We don’t necessarily attribute the causes accurately.

I know this phenomenon which you might call a sort of ‘perceptual blurring’. Anybody had occasion to have that car valeted? It’s a brilliant thing to do because it only costs about 0.1% of the cost of a new car and gives you 50% of the pleasure, particularly if you have children they tend to mess your car up OK?

One of the things I noticed whenever I had my car valeted I left it with someone and then they clean the car and sort of hoovered or vacuumed it and sort of cleaned the upholstery. And when I drove the car away I don’t know if anybody else has noticed this, it feels if it drives better? [Laughter]

Does anyone else notice this that when you clean your car you drive it out of a car wash and weirdly it feels as though it’s driving better?

Now there are two possibilities here:

Either when I leave my car to be valeted unknown to me and completely unpaid they decide to do a complete service of the car, replacing various bearings and lubricating the thing, or it’s something going on in my head.

I think that that extraordinary connection between our psychological perception of things and what those things actually are is something I will be talking about going forward. But it is extraordinary the extent to which actually we, I think in our heads aren’t really capable though we think we are of actually separating the two. I don’t we can really separate the quality of a product and the nature of its brand. I think the two actually become inextricably linked or if not inextricably linked they color each other to an extraordinary extent.

Now the other reason I love von Mise is because the Austrian school, growing up in the first half of the last century were also sort of rubbing shoulders with people like Freud.

As economists they believed that economics is actually a subset of psychology.

I think most modern economists believe it’s the other way around; you have perfect economic modals which are fantastically efficient, you develop those using mathematics and then impose them on people. What von Mise would say is no, praxeology, which is the discipline that Austrians use which is the science of human behavior and decision making, he believed as a prior discipline to economics. I think the Austrian definition is that praxeology is the study of…Sorry the economics is merely the study of human praxeology under conditions of scarcity, that’s largely his definition. That’s an extraordinary useful acknowledgement which actually the world would be a much better place if it actually remembered that.

Charlie Munger, Warren Buffet’s business partner puts it another way in support of behavioral economics he simply says, “If economics isn’t behavioral, I don’t know what the hell is?” So, what I’m hoping for in marketing is actually a new vocabulary.

What we have if you look it… If you talk to marketers, the language of marketing is much like the language of astrology which is it’s fine if you are talking to fellow believers but it’s not all that great if you are talking to anybody who doesn’t believe. You know, if you’re an astrologer and you believe in astrology you can chat to all your astrological mates and say “Oh! That behavior is typically Sagittarius and they will nod along. Anybody else thinks you are lunatic. My brother has this problem particularly acutely as he’s actually an astronomer and occasional at parties you introduce yourself, ‘I’m an astronomer’ and they say, ‘that’s very interesting I’m a Sagittarius’ [Laughter]

At which point he makes his excuses and heads to the lavatory [Laughter].

But one of the things behavioral economics has given us is a whole variety of words which are scientifically validated by first rate academics at very-very good universities. And understanding and introducing this vocabulary into marketing is of enormous value because actually it’s a kind of psychological Esperanto.

You can use this language unlike the language of marketing to talk to finance guys – in fact guys are usually very interested in behavioral economics funnily enough because of course it’s based on a recognizable discipline that they themselves know and simply builds on it rather than being entirely alien to everything they know and believe. Some of these availability signaling that’s a Darwinian term in many ways that actually what we do is we signal things through our actions – I will talk about that a little bit later.

Handicap: that’s the peacock’s tail thing

he reason the peacock has a huge tail is to signal to female peahens to the right extent actually that it has resources to spare that you ought to think of actually breeding with me. Obviously there’s a degree of consent in peacock sex which differentiate from some senior French bankers for example. [Laughter] But I actually have so many resources I can actually carry around this tail for purely decorative purposes, that’s how I fit I am.

Now arguably the Ferrari is effectively the sort of you know, the human male equivalent.

It also interestingly has to be slightly pointless or wasteful to have meaning, it has to be a handicap you know, if woman were merely attracted to man with expensive vehicles they’d all chase truck drivers but the truck doesn’t serve a useful signaling purpose because it’s actually useful [Laughter].

What you have to be doing is you have to be buying something with spare resources in order to have meaning. Framing, comparison and context I’ll talk about later.

The Lizard Brain

Immediacy is an extraordinary potent thing. The part of our brain, our brain is bit like an Intel Duo Core Processor, it has an older, what I call type 1 lizard part which mostly operates unconsciously and it has you know, a lot of frontal stuff which is where of course our consciousness comes in. Of course because our consciousness is our consciousness we grossly over-estimate the role it actually plays in human decision making because it’s all we’re actually aware of. In fact what it’s mostly doing is ratifying our post rationalizing decisions our inner lizard has already taken. The virtues of the lizard brain, which is why we haven’t lost it completely, is simply that actually it’s very-very decisive and very-very fast apart from a few other virtues as well.

• So, if you are about to be hit by bus don’t use complex physics to work out how to jump out of way.
• Rely on the lizard brain and it would be much more reliable.

It’s much more decisive, it’s much quicker, it’s also extremely difficult, not quite impossible, but very-very difficult to actually make decisions which don’t involve the lizard. It’s the bit that actually plumps for ‘I’m going to do this, I’m going to do that.’

There are people who have lost that ability through a brain injury and they find it absolutely impossible to make a decision. If you say, ‘do you want to come and meet on Wednesday or Friday next week?’ they’ll start deploying all manner of statistical information like what the weather’s likely to be like and actually end up in a complete funk. That’s because they are trying to actually make decisions using only rationality which is almost impossible to do.

The lizard is ultimately what makes the choice. The lizard basically only operates in the here and now. It’s very-very short term in its focus. That’s why it’s so difficult to give up smoking actually because that part of your brain’s decided to have a cigarette before you have a chance to over rule it in any meaningful way. The only solution would be actually to put a kind of timer device on a packet of cigarettes which require a 10 minute delay before it opened, rather as safes in strong rooms have, then might give you a chance of actually overcoming the problem.

It’s why actually immediacy really matters to us in an emotional way. The speed of feedback is as anybody who is designed a website knows -just speed – is an extraordinary potent thing in the success of any transaction online.

One of the worst things, there are several crimes that the DVD player commits against behavioral economics and one of them of course is choice architecture, where you have 80 buttons on the remote control,  40 of which you will never use and have no idea what they are for but those buttons are often no larger or no smaller than the buttons which control functions like ‘play’ or ‘stop’.

The second rate crime of the DVD but most annoying thing of all is that when you press ‘eject’ nothing happens for three seconds so your lizard brain- panicking that actually you haven’t pressed the button, presses it again, [Laughter]

That means that the DVD comes out, taunts you for a second and half [Laughter] before disappearing back into the machine.

That’s what I mean, about immediacy really-really matters.

The here and now really-really matters, extraordinarily short term things will affect purchase decisions, even when you are choosing a pension the ease of form filling will have an effect on whether you choose the pension or not despite the fact that logically choosing a pension should all be in the sort of 30 year time horizon, our immediate irritation or the opposite has an insane effect on how we respond to anything.

Now, what’s quite interesting. This is a bit of game theory if you think about it. What’s interesting is that we understand a lot of this actually subconsciously. An engagement ring is a commitment device. It says that I’m probably going to buy the purchase of this extremely expensive thing in which I have very little you know, selfish interest but one of the reasons women like flowers and jewelry is precisely because men are not remotely interested in flowers or jewelry. Therefore, when you buy them flowers or jewelry it’s patently involved some sacrifice on your part. Whereas if you buy them for example a remote control model car or PS3 [Laughter] there is the suspicion of self interest.

Just a smidge of suspicion, whereas flowers and jewelry interestingly there is no such suspicion because basically they leave blokes completely cold, OK?

This is an interesting thing because it effectively says, ‘if I were planning a one night stand it is unlikely that I would have invested this much money in jewelry upfront OK, it’s actually a commitment device. Brands work in a very similar way. If I have spent, in game theory there are of course two separate things; there’s the short game where you just grab as much as you can immediately and the long game where you try and build up some sort of reputational currency, OK?

All tourist restaurants play the short game, why?

Because nobody ever comes back, possibly incidentally why things like Trip Adviser are changing that.

Meaning the tourist restaurants that you visit once do actually develop a reputational currency and we can kill them off. But actually until recently tourist restaurants were notoriously bad because they knew you were never going to come back however good the food was so, why produce good food? What this is saying, what this upfront investment is saying is ‘I am probably because this is expensive and to have meaning signaling sometimes has to cost money, I am probably playing the long game’, OK?

A brand is doing the same. It has taken me 15 to 20 years to build this brand, it has cost me an enormous amount of money in terms of advertising and reputation building, therefore it is probably not in my interest to make a quick buck by selling you something that is rubbish.

What’s interesting about this is its quite sophisticated game theory, we do it instinctively, we don’t do it rationally. We just instinctively know that someone who is a big brand is less likely to actually try and play the short game than someone who isn’t. So brands are, indeed as some economists criticize brands for being barriers to entry but they are barriers to entry precisely because consumers want to barrier to entry. I don’t want to spend £800 on a television from someone who can simply rock up and say I now make televisions. Just as actually I want my doctor, I don’t know about you, but I want my doctor to have some barriers to entry you know, maybe like spending six years at medical school rather than just deciding ‘today I will put on a white coat.’ [Laughter] That actually the upfront commitment, the upfront effort is a form of signaling.

Satisficing vs maximising

Now, satisficing versus maximizing it’s worth knowing most decisions Herbert Simon and Carnegie Melon came up with these two phrases, “most decisions in most categories most of the time are satisficing decisions not maximizing.” Actually we are risk averting human beings -fear of loss, fear of disappointment actually act twice as powerfully on the human decision making process as hope of improvement. That’s why it’s actually so difficult to make progress through -a competitive progress- through gradual innovation. If you are bit better than Facebook I’m sorry you’re not going anywhere because actually for in many categories most of the time this category is already satisfied by something which satisfices. It’s pretty damn good.

So, a little bit better is not, if you follow that sort of utility maximizing belief in human decision making in that classical economics espouses that everybody will actually replace everything with something a bit better, but actually something that you know that you are familiar with, that your friends have and it’s pretty good has a very-very powerful position at the market place. It can get absolutely wrong footed by total disruptive innovation, just as to some extent the Ipod totally changed the heuristic in terms of home recorded music, I had friends it was all about sound quality, remember that for years and years  it was all about sound quality and my friends would say you know,

“my speaking cable cost $200 a foot and is woven by elves, OK?” [Laugher].

Then the Ipod came along and actually the sound quality isn’t all that great but I can carry all my music in my pocket, and that’s disrupt innovation.

It changes the game completely but actually incremental improvements on what already exist are not a fantastic way to create market disruption simply because of this satisficing thing.

McDonald’s

It also explains how brands work that actually if you want to understand McDonald’s – you know there isn’t a single town in the world where McDonald is the best restaurant in town.

But most of the time it’s not worth the effort to find the best restaurants in town and finding it may entail significant risk. If you go to a Michelin starred restaurant your chance of having a horrible meal is actually much higher than it is at McDonald’s, to be absolutely honest, and all of you had had bad meals at expensive restaurants in a way, more of you have chosen the wrong thing because you didn’t know that word was actually the French for boar’s testicles or something like that [Laughter].

OK you know, the element of risk of finding out something better is quite high, I might cock up completely. Whereas there isn’t a single town in the world where McDonald’s is the worst restaurant in town.

I know exactly what I am going to get and McDonald satisfices brilliantly. I won’t get ripped off, I won’t get food poisoning – all those really bad things you know, don’t really apply. So, you can only really understand the success of very many brands if you understand satisfysing. The heuristics are fantastic because these are the subconscious processes I mean I suppose algorithms you can actually say in your language which we use to do things instead of using rational logic.

Very few of the world’s best baseball and cricket players are fantastic theoretical physicists, you’ve noticed that.

The reason is that although the theoretical physicist are better at doing the physics of the trajectory of a ball, that’s actually a very slow way of solving the problem of where the ball is going to land.

What we do is we use a heuristic, not only humans but just to share how deep in the human brain this is probably buried, dogs catching frisbees use exactly the same heuristic. What you do is you look up at the high flying ball and then you calculate the angle of gaze and run towards the ball at such a speed as keeps that angle constant. That’s the heuristic we use. It’s less optimal arguably then doing the physics but it’s about 100 times faster. So, also means you are of course solving the problem while you are actually running, while you are lessening the problem, see what I mean?  Whereas the physics requires you to sit down, get a calculator out and go ‘Oh dear it’s landed over there,’ OK? [Laughter]

Heuristics

This problem, but there are huge areas in human decision making where we deploy heuristics without being even aware of it, presented with three things: cheap one, middle priced one, expensive one, most people -the very rich and the very poor are different – most people go for the one in the middle. Steve Jobs – a very big believer in the rule of three which is why nearly all of those products – the iPad and the iPhone etc come out in three variants. The choice making is sort of easier when we have three because we all understand that kind of rule of three. So that’s an example of a heuristic -the one in the middle for example -and this is sort of on the motherboard, it’s not in software as a lot of this stuff actually exists somewhere fairly deep within us. Choice architecture is how you frame choices so that people choose in the way you want them to chose or indeed simply in a way that makes it easier for people to choose.

If you make it difficult to be able to choose, what they do which is bad in marketing terms is that they choose to do something else which is nothing at all, OK? There is always the fifth choice or the fourth choice or the third choice which is don’t do anything at all, it’s a pretty common default for human beings -when in doubt do nothing therefore, in order to get people to change their behavior whether it’s to make them more environmentally friendly or indeed you know, to get them to buy something actually making the decision easy and risk free is spectacularly important.

Organ Donation

This shows the importance of a kind of…This is the difference between different countries in Europe as to whether they agree to be organ donors in the event of their death. Nothing to do with the culture, religion, politics or anything else the whole thing is the countries on the left deploy an opt-in form where you have to tick a box, the countries on the right employ an opt out form where you take a box if you don’t want to give your organs in the event of your death.

And that sort of known default which is I don’t really know whether I want to or not so I will just go with a norm, I will just do nothing, I will not take something because it’s seems the safe option. It has a huge effect.

I always think the Japanese shopping trolley, the medium size shopping trolley was a brilliant idea. When I was a kid there were two ways of shopping in the super market; you had a massive truck size trolley and you had a basket and so you thought well that trolley is insanely large I’ll have a basket and you ended up buying a lot less you could of because the damn thing cost, weighed a tonne.

The Japanese come up with the third option, you know, what you might call the 32 gigabyte version of the trolley. And it’s the one in the middle and that’s the one that everybody chooses and it’s an ingenious idea.

I work with BP back in the UK and they have BP ultimate, which is quite a bit superior I hasten to add.  But I suggested that if they wanted to sell a lot more BP Ultimate, they needed to create a third fuel called BP Super Bling-tastic Massively Expensive Ultimate which cost 15 dollars a gallon and everybody would look at that and go ‘well that’s a bit expensive, I’ll just have the standard ultimate in the middle’ [Laughter].

When we choose through a wine list, we all use heuristics like third one from the bottom, we don’t know what we are doing:

We use prices a proxy for quality.

Here is an example, how many people have seen this extraordinary case?

The original choice was between the Economist subscription of $59 digital only and $125 dollars for Print plus digital. At that case 67% people or about two thirds of people at least chose the top one, I’ll  just have the digital one. They added a complete dummy choice $125 for the print edition only without the digital access to the archive. What’s bizarre is that that’s a completely daft choice. No one would choose it unless you have some bizarre hostility to online media. [Laughter]

Nobody did choose it in the experiment but it completely changed the choice that everybody made. Suddenly two thirds of people choose the bottom one because the frame of reference changed.

Suddenly the frame of reference was not ‘Ooo it’s more expensive to get it in print’ it was weirdly, ‘if I get print subscription I actually get the web subscription for free.’ So, this drives classic economists almost insane [Laughter]

A German car manufactures sells 30,000 more cars by simply not knocking 3,000 euros of the purchase price but adding 3,000 on to the trading price of your old car, it’s probably a framing effect that actually 3,000 euros on top of eight seems a lot more generous to deal than 3,000 euros knocked off 22. Now, this all you know, very-very well that our perception of everything- value included – actually it’s true of temperature, brightness, color, volume, pain, heat more  or less anything – pitch with if tiny exception of people who have perfect pitch – about 2/3% of people – all our perception is actually weird and relativistic and contextual just as the Austrians predicted under praxeology.

We pay $2 for a tea or coffee out on the streets, we pay about 2 cents at home. It’s probably fair to say that’s not a 100 times more enjoyable, it’s just we have the different frame of reference when we do that and we don’t regarded it as particularly ridiculous. Strange but kind of true.

We don’t have an inner unit called the hedon which measures a unit of pleasure, I mean I will $5 for a hedon, there is no means we have of actually making a trade-off between money you spend on property and money you spend on radio controlled helicopters. Personally my wife doesn’t agree with me, I prefer to spend the money on radio controlled helicopters but there you go. The problem is that in conventional market research first of all one problem; it defies logic, so logic, the engineering mentality, the physics envy mentality won’t get you there.

Second problem is a lot of this stuff does not come out in market research because people are not consciously aware of their own heuristics. Not a single baseball player could describe to you how they actually catch a ball. They had to discover that by actually doing experiments with people catching balls and with dogs and with Frisbees, no one is actually aware of these mechanisms because they actually exist at a subconscious level.

So, in market research the danger is that they won’t come out. There is also a danger in market research which is people like to presents themselves as being maximizers because it makes you look more logical and sensible and sort of more demanding of quality. Whereas in reality many-many decisions are taken from a riskier version stand point not from a perfection stand point. Now there are exceptions, if you are getting married or you are having a wedding anniversary meal, there is a degree of maximization because it has symbolic value. If you are a massive motorbike fan and once every four years you buy a bike I think it’s fair to say that bike you’ve talked about it, read about it, you know, there is a huge amount of maximization involved in choosing your bike. If you are a real fan boy in one or two particular areas but in most categories most of the time most people satisfice. The only problem is they don’t realize it.

Relativism

Now just to prove how relativistic human perception is, here is a chess board. You will agree that A is one of the dark squares, quite a bit darker than B. However, it’s only the context that is making you think that. If I change the context to show you the colors as they actually are you will see that in reality A and B are exactly the same color, they are exactly the same shade of grey. It may take a few seconds but you’ve all got that haven’t you? If I change the context back again it’s now impossible for you to see that. This isn’t one of those optical illusions where you go, ‘Ooo now I get it. Sorry, silly me.’ That’s how extraordinary relativistic our perception is. There it is, I think you will agree an even rectangle but if I change the context it’s now impossible for you not to see that as being darker on the right hand side. And that applies to our perception of value, it applies to our perception of pain, of pleasure, virtually everything we perceive actually operates on a kind of relative scale, not on an absolute scale.

It’s one of the reasons, who’s got an espresso machine? I’ve got one. I love it. OK however, it occurred to me one day that if you actually filled this thing with a jar of coffee like Folgers or Maxwell House per unit of caffeine you’d be paying about a $140 per jar OK? Because this thing is fiendishly expensive and you will all agree OK. But the weird thing is they get away with it. Why? Because I don’t know how much a spoon full of Folgers or Maxwell House cost. I never bought Maxwell House by the spoon OK, and so because this thing doesn’t come in a big jar like Maxwell House I can’t do the comparison it comes in little metallic pods like this, so my only frame of reference is not Maxwell House it’s Starbucks and I am going well I pay about a dollar for a shot of coffee in Starbucks whereas this only cost 35 cents. The machine is practically paying for itself [Laughter] and that shows how powerful a perceptual relativistic frame is on our perception of everything.

It also works I think after the event I suddenly  realized what went badly wrong with the marketing of Telepresence and video conferencing and no one could blame the people for doing it and I certainly wouldn’t have spotted this in advance. I can only spot it now in hindsight, which is they made the mistake of making video conferencing what economist call on inferior good, which is something you only buy when you can’t do something that’s more expensive – bus travel, coach travel is kind of an inferior good, unless you call it a jitney of course in which case you brand it completely. That’s a New York reference. Do you have a jitney in Boston? What they did with video conferencing is they made a terrible mistake.

They made it the poor man’s version of air travel. They should have made it the rich man’s version of a phone call.

If I’d been CISCO back 10-15 years ago I would have said we would install one of these things in your office but only in the Chief Executive’s office. Because what it became was like margarine to the butter of British Airways. It was like the pager to the mobile phone of air travel. It was what your company let you do if they didn’t trust you to get on a plane.

Therefore the relativistic frame even though all the logical arguments for this thing stacked up, in signaling terms it kind of said to your client, ‘I can’t be bothered to come and see you but I will go on video conference with you.’ But also to your staff it said, ‘we don’t really trust to you to get on the plane but you can video conference.’ It was like saying, ‘well we went let you go to Frankfurt because you’ll only get drunk in the mini bar and watch a pornographic film in the hotel, but tell you what we’ll trust you to go down into a basement room. You can look at a pixilated image of your client for 10 minutes.’

Now, if you position this as the rich man’s phone call, that incidentally is when they launched post-it notes, they gave post-it notes to the 499 other personal assistants, to the 499 other CEO’s in the fortune 500, this is three am. So, the first post-it note seen within an organization came from the top, not from the bottom.

A very, very important thing, the way that the executive mind works,

‘my boss has small adhesive squares therefore, I must get some too.’

That’s the point of relative framing in terms of anything.

If you end up as the inferior cheap substitute for something else you have failed.

We need comparison to decide.  I have Spotify which some of you will know is equivalent to -there are various US equivalents of music streaming companies. I said £9.99 a month for infinite music may not be a great idea because I don’t know what infinite music is worth, I haven’t got a clue OK? What’s infinite music worth I mean you know, I also would I also be sort of ripped off because I am subsidizing people who download a 100 times more than I do? You know, what’s all this going on? Asking how much do you want to pay for infinite music is like to me saying would you like to buy my unicorn? You don’t really have a frame of reference where you go “Yeah-yeah Unicorn $50” [Laughter]

OK, so I asked theoretically I said, ‘would you actually have more success if you set an artificial limit you said actually 200 tracks a month, people then think $200 tracks a month, that’s 20 CD’s cost about you know, it cost about $140 OK, that seems pretty reasonable.’ But without a frame of reference we often find it very difficult to decide.

This shows how hugely we are affected by one in the middle psychology. Two lagers; there £1 and £2, Carling and Budweiser. 67% buy the Budweiser £2. 33% buy the Carling. Add 30p Tesco value lager. Nobody buys it but it drags the rest of the category down market. 47% buy the Carling, 53% buy Bud. Now you add a premium French Kronenburg for £4 in a bottle, 10% of people buy that and 90% of people buy the Bud, nobody buys the Carling. That’s the extent which we choose things relativistically, not absolutely.

That would drive classical economists practically insane by the way, but that’s how we fundamentally choose according to what the frame of reference is that we are particularly looking at at the time. It shows the power I think of one in the middle bias as well that we tend to be drawn towards that on the middle it also shows an important thing by the way which is don’t necessarily if you have various levels of service don’t necessarily judge the profitability of each on the actual economic contribution it makes itself.

I said to British Airways,

‘Don’t judge the profitability of first class exclusively on how much money you make from first class passengers, you have also got to look into the effect that first class has on normalizing business class travel’.

Because we can be pretty sure that  if British Airways get rid of first class it won’t be long before employers start saying I think you should move a little bit further down to the back OK? It’s a frame of reference once again.

By the way you can exploit this frame of reference again,  if you want to sell these cars 350, 450, 500 thousand dollars, don’t sell them at a car show, sell them at a yacht or plane show. After you’ve been looking at Leer jets all afternoon and decided in a fit of responsibility not to buy one, as you are walking pass the exit: “Ah I’ll have a couple of those.” [Laughter] OK?

Huge potential. Once we actually abandon the straight jacket of conventional, classical, logically economics the huge potential arises for innovation in terms of pricing.

I think Amazon Prime is a work of genius.

It also brilliantly gamifies pricing for me so I think having paid this £35/£30, it’s 50 dollars here, 79? Blimey! It’s gone up. But it hugely gamifies things because I go, “right, I am determined to get you bastards to pay me back” and sizes to ordering everything [Laughter].

I think that’s what you intended wasn’t it?

OK but actually you know, the possibility to actually innovate in terms of price – we are just looking at a brief for getting people to shave electrically again rather than using disposable blades and we ask the question if you could price electric razors monthly they’d look like a bargain compared to Gillette, Super nutter Bastard four blade whatever it is? [Laughter]

Impulse Saving

I talked about the fact that we make decisions very instantaneously. Financial institutions knowingly discourage us from saving by the making of practice of saving very-very time consuming and boring and involving paperwork.

This thing we invented with an agency in Australia for West Perth Bank it’s called impulse saver, it’s an app for the Iphone and when you are drunk you just press the button.

It goes ‘kerching’ and it moves $10 into your savings account [Laughter].

My argument is; we can shop drunk so why don’t we let us save drunk?

Let’s even the balance a little bit after all we are suffering from a savings crises but also you all know those moments. They don’t happen very often but you’re looking at your bank account and one in three months or something you know you think, ‘actually that’s slightly better than I thought.’ You can actually then exploit the moment, but actually its more like that you are drunk and you just like the ‘kerching’ noise it makes. But I mean, that’s why we shop most of time, let’s be frank about it.

Most of you probably know the 300 million dollar button? How many.. changing one single word, er which is from register to continue on any retail websites checkout procedure increased sales by 300 million dollars demonstrably over the following year. It was very weird because it by stopping people to leave…By not forcing people to leave their Email addresses before they purchased and instead of giving the option of doing it later, you’d think that you know, this must mean people hate giving their email addresses so after they’ve purchased no one will leave their email addresses. Then when they changed it, 90% of people still happily left their Email addresses. What it was, there was something fundamentally wrong about that order. There was some element of unease that was just in encountered by the presumptions of asking for something from somebody before you have gone through the transaction page. The weird stuff like, you all know the thing, if you can reduce to checkout procedure in a website from 3 clicks to 2 your sales go up about 40%, that’s basically the lizard brain at work. It’s not rational economics at work, it’s the lizard just going, “mm, I don’t know, I feel a bit uneasy.”

You know, it’s look like those scenes in airplay, you know, that feeling of sort of you know, ‘should we turn on the runway lights? That’s exactly what they’ll be expecting us to do.’ [Laughter] You know, it’s that slight feeling of inner disquiet, which is trivial in the scheme of things, just prevents a sale from actually happening. If you can resolve in a disquiet, even if that disquiet only lasts a second or two, you can make a sale which wouldn’t otherwise. Now this maybe  totally uninteresting to Americans. Do you buy eggs in sixes and twelve’s? We do. Yeah, sixes and twelves. I presented this in South Africa. South Africa’s completely weird because you go into the Supermarket and you like buy a whole cow and things like that. [Laughter]

They don’t have normal sort of quantities that we do in Supermarkets. And they say, ‘well, we buy eggs in hundreds’ or something… OK, well but anyway and I always have because I’ve got two young girls. Six isn’t quite enough and 12 is too many? OK, cus’ if you buy six then the girls decide to make cup cakes at home and I end up with one egg you know, left. Alternatively 12 sometimes seems to be wasteful and a bit extreme. And I always had that brief, I choose free range eggs because they’re nice and then I always have, it only lasts a second but if you ask me to do the market research I’d never be able to point it out, but also that slight little bit of “Ummm,” unease, “Do I buy six, do I buy 12?” Waitrose – work of genius – sell nine. It only lasts a second but it resolves that inner conflict.

Now bear in mind that inner conflict between things, we experience in a very similar part of the brain to which we actually experience physical pain. We actually experience things like information that contradicts are prejudices apparently, actually absorbing information which is contradictory to an existing prejudice, actually registers in the part of the brain where we actually feel pain. And so understanding that even if that’s only a one second dither, if you can actually resolve that problem in that one second you’ve probably got a sale.

Reframing

Path dependency and decision making needs much-much more work.

I always think that 1-800 mattress in Manhattan is a work of genius because one, it realizes that when people are thinking about replacing a bed their principle concern is not, ‘what brand of mattress shall I buy?’ It’s: ‘how the hell do I get rid of the old one?’

If you live in a really poor area you presumably just lob it out of the window. If you are a really-really rich you can get your butler to take it away but for 90% of Manhattanites, the problem is; ‘I’m in Manhattan, I probably don’t have a car, how the hell do I get rid of a mattress?’ So their promise: ‘we’ll take your old mattress away’ is a simple work of genius because it resolves the discomfort and disquiet where it is at the critical point in the decision making path.

It is a preemptive strike, if you like, on the shops that actually sell mattresses conventionally.

A fascinating thing about the relativistic nature of perception, and I thought given them I’m in New England what better to have a Hopper painting, and one of the reasons why I love hopper is he completely re-brands, for me, experiences that I normally wouldn’t like – stopping at a gas station at 2 o’clock in the morning would normally be a bit of a miserable experience but if you, like Hopper, it becomes really new numinous and atmospheric and interesting. Just me then is it? But actually you know, what I mean, you know, sitting in a dinner on your own if you had not seen Night Hawks, would actually be pretty lonely and crap, but if you’d actually seen Night Hawks, you think what an interesting you know, this is extraordinary. Suddenly the experience is invested in all manner of social associations and values which you didn’t previously have, which means that actually like Tom Soy and Huckleberry Finn, you can take things that are bad and reposition them as a good.

How many software engineers it takes to change a lightbulb? None. We’ll just have the marketing boys portray the dead light bulbs as a feature. You got me? [Laughter]

Anyway, but actually this a little bit of truth in that. Actually there are things, a great advertising man retired to an apple farm in New Mexico and the problem he had is that the hailstones from the early hail falls pitted all the apples so they were all dented on the outside and no one in the market would buy them. So he sells them by mail order as ‘genuine hail pitted New Mexico apples’ and made actually, the fact that they were sort of like a golf ball on the outside actually a virtue, not a weakness. We can actually do that. I mean I think it’s an important thing to remember that we can actually sometimes, we automatically assume that the things are bad but with the right reframing we can made them good.

Night Nurse

A very-very successful flu remedy in the UK was called Night Nurse. It started out being called Day Nurse. The only problem was that as effective as it was at relieving the symptoms of influenza, it also sent people fast to sleep.  Until a very genius marketing man said, ‘but actually if you position it as the night time flu cure, the fact that it sends you to sleep isn’t the problem it’s an advantage.’

That’s the point that actually the frame of reference can actually massively change things from bad to good.

Ferrari

Ferrari does this most ingenuously: it’s always the cheekiest thing you could possibly do which is to say that you can have a Ferrari, if you buy a Ferrari you can have it delivered for free. All you need to do is go and collect it from the factory and pay $500! Now, it’s a really clever thing to do in a sense you know, if you think about it, it’s cheaper for them, it’s cheaper for them to actually get you to collect it, but by positioning this as an additional service -that you get little bit of a visit to the factory –  they’ve ingeniously got some of the richest people in the world to fly out directly to drive a Ferrari home and to pay for the privilege.

I had an interesting idea about this in Airlines. The conventional airline model in yield management is that you pay a premium to go on planes for which there’s more demand, OK? The more demand there is for a plane as it books up, you pay in more per seat.

I said, “well, weirdly, it may just be me and it may just be, you know, the other 10-20% of people who have mild sort of claustrophobia, I’d pay a premium to go on the emptiest flight of the day.” If British Airways said to me, “you can pay £50 and we’ll text you the day before and we’ll tell you which of the seven flights to New York you’re on but we guarantee it’ll be the one that’s least crowded.” Deal.

You know, I’m not fussy, I don’t care whether I go to the airport at 11 o’clock or 4 o’clock. I’m not one of those weird people who says, “I’ll have a whole day of meetings and then I’ll go to the airport.” I write in my diary ‘going to New York’ and block out the whole day.

My view is that in the 19th century it took six days, now it takes one that’s good enough, OK?  I am not going to squeeze things down anymore.

But if you take von Mise and his restaurant analogy, the Royal Mail in the UK were delivering 98% of letters, first class letters, next day. And they decide that this wasn’t good enough and they tried to improve the whole thing by getting it up to 99%. The effort required to do this actually broke the organization. It had a massive-massive damaging effect. All they failed to realize is that actually, it was like the restaurant which produces good food but actually stank because the perception of how many letters got there the next day was actually 60%.

“Now always bear this is mind, when you’ve got a business problem. If the bloody reality is better than the perception, what are you doing trying to improve the reality?”

If you think about it, the value of a letter is not the likelihood that it gets there the next day. The value of the letter is: my belief that the letter will get there the next day.

That’s where von Mise is absolutely right. The subjective judgment is where a value lies. Logic won’t tell you, research won’t tell you this, no one would have said,

“Red Bull can charge three times as much as coke for a drink.”

Why? Because they put it in a smaller can so we thought it was a different kind of drink.

Now, no one in a market research group would say, “I’m not gonna pay you $1.50 for a drink but I would if you gave me less of it, OK?”

But that’s how the brain works. [Laughter].

A  couple more problems:

People don’t do what they say they believe, they do what’s convenient, and then they repent.

I mentioned this lizard brain thing. In many ways, we act first and post-rationalise. The brain is not, the conscious brain is not so much the oval office of ourselves, it’s the press office. It actually issues hurry, denials and post rationalizations for decisions that are being taken elsewhere. The sadder one down here [pointing at slide] which came up with Paul Donald, the professor of behavioral sciences at the NSC, ‘when a man says, “my wife doesn’t understand me, it doesn’t mean he’s planning an affair, he’s already had one.”

This is just to explain how human behavior works. It’s vitally important for the environmental movement because what it tells you is you can change behaviors and attitudes follow.

All marketing tries to exist by changing attitudes and getting the behavior to follow.

Actually it often happens the other way round:

• If you get people to recycle they become keener on environmental things.
• If you get people to ride bicycles they became more sympathetic to environmental things.

Our attitudes are often a post rationalization of our behavior derived simply to avoid cognitive distance. Let’ be honest, students aren’t environmentally keen on environmental sustainability you know, they don’t… Students don’t ride bikes because they are keen on environmental sustainability, they are environmentally keen because they can’t afford cars.

I guarantee, if you went to a student faculty and gave them all Lincoln Navigators, the attitude to the environment will become a little less intense [Laughter] OK?

But what I’m saying is that men don’t go, “I’ve noticed declining comprehension and empathy levels in my wife so I think it’s time to outsource a range of sexual services, maybe to alternative providers.” [Laughter]

(They probably do if they work for Accenture or something but I mean other than that). [Laughter]

What actually happens is people get drunk at a party, they end up snogging someone they didn’t intent to snog and there is a desperate attempt to make sense of their actions post hoc, they actually concoct a complete bogus case against their wife, basically. Now I think this is sort of weirdly depressing but it’s worth us knowing this because I think an awful lot of human misunderstanding can be avoided if we ask ourselves the question, “is this really happening the way round we think it is?”

Here are two heroes; von Mise is the left, Daniel Cameramen, the father of behavioral economics on the right, and finally back to that sweet spot… why I don’t have and behavioral economics doesn’t have and maybe never will have is a perfect answer to absolutely everything. What it does have is some very-very good questions which takes you back, just says, ‘logic bears this out, market research bears this out, however it is still possible you may be wrong.’ Is it, you know, in terms of human behavior we will never develop.

There is a great phrase in economics actually, ‘all models are wrong but some of them are useful,’ which is not a bad and accurate thing to say. We’ll probably never have a single, you know, theory of everything model of human behavior nor should be necessarily attempt to have one- it might be dreadful if we did. However, what is worth accepting is; we can have multiple models. What people say can be interesting and revealing.

Logic is not a terrible model; quite a lot of the time if you put the price of something down more people buy it, but as the Joel on software made the point, quite often the very opposite happens.

There’s a saying in the art world actually, ‘if you put a painting in the window of your gallery £2,000 and it doesn’t sell after two weeks, double the price, you are just as likely to sell it at the higher price as you are the lower price.’

That’s crazy surely?

No, because we actually regard price as a proxy for value and there are people wondering around with £4,000 to spend on art who don’t want to buy £1,000. So, I mean if you look at the psychology of wine the whole thing goes completely haywire by the way, which is we actually enjoy it more when we’re told that it’s expensive.

The vital thing to remember is that in any decision making unit. And this is where I think the composition of boards of companies needs to acknowledge that someone from a human understanding background needs to be there. The board diversity, you can’t just have eight people who are brilliant at reading a spreadsheet, you know, reading a balance sheet. There’s the gender, undoubtedly there’s a massive gender component which is; you know, a massive testosterone packed group of highly homogenous people will not on their own make the best decisions. They think they do off course because all boards of directors are great believers in the efficient market hypothesis because the market pays them a huge amount of money which is a very strong reason to believe that it’s sufficient, OK? But you know, in many cases what businesses need is actually you know, as well as technological engineering and mechanical ability, businesses that aren’t actually blessed with some really good psychological insight somewhere  at the top that can avoid the worst excesses of logic because unpleased logic, logic unpleased by creativity or psychology, can be just as wrong as the opposite.

Then I think that will help places find what I call that ‘sweet spot’ where the solution involves not just technology, not just economics but actually what makes us human. Steve Jobs I think is you know, as a fitting tribute, was a man who solved problems by looking at the human and working and working outwards. That’s fundamentally what this is about. And they in that ‘sweet spot’ what you can do is make things charming, even advertising as I’ll show you just now. Thanks very much. [Clapping] [Music]

Find out more about BoS

Get details about our next conference, subscribe to our newsletter, and watch more of the great BoS Talks you hear so much about.

Rory Sutherland

Rory is Vice Chairman at O&M Group UK, an attractively vague job title which has allowed him to co-found Ogilvychange, a behavioral science practice. You should watch this talk if you want to change your perspective on product and problems.

Rory co-heads a team of psychology graduates who look for “butterfly effects” in consumer behaviour – these are the very small contextual changes which can have enormous effects on the decisions people make – for instance tripling the sales rate of a call centre by adding just a few sentences to the script. Put another way, lots of agencies will talk about “bought, owned and earned” media: we also look for “invented media” and “discovered media”: seeking out those unexpected (and inexpensive) nudges that transform the way that people think and act.

More From Rory.