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00:00:01,101 --> 00:00:02,627
What you have here

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is an electronic cigarette.

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It's something that, since it was
invented a year or two ago,

4
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has given me untold happiness.

5
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(Laughter)

6
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A little bit of it,
I think, is the nicotine,

7
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but there's something
much bigger than that;

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which is, ever since, in the UK,
they banned smoking in public places,

9
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I've never enjoyed
a drinks party ever again.

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(Laughter)

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And the reason, I only worked out
just the other day,

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which is: when you go
to a drinks party and you stand up

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and hold a glass of red wine
and you talk endlessly to people,

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you don't actually want to spend
all the time talking.

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It's really, really tiring.

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Sometimes you just want to stand there
silently, alone with your thoughts.

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Sometimes you just want to stand
in the corner and stare out of the window.

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Now the problem is, when you can't smoke,

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if you stand and stare
out of the window on your own,

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you're an antisocial, friendless idiot.

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(Laughter)

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If you stand and stare out of the window
on your own with a cigarette,

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you're a fucking philosopher.

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(Laughter)

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(Applause)

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So the power of reframing things

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cannot be overstated.

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What we have is exactly
the same thing, the same activity,

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but one of them makes you feel great

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and the other one,
with just a small change of posture,

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makes you feel terrible.

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And I think one of the problems
with classical economics is,

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it's absolutely preoccupied with reality.

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And reality isn't a particularly good
guide to human happiness.

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Why, for example,
are pensioners much happier

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than the young unemployed?

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Both of them, after all,
are in exactly the same stage of life.

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You both have too much time
on your hands and not much money.

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But pensioners are reportedly
very, very happy,

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whereas the unemployed
are extraordinarily unhappy and depressed.

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The reason, I think,
is that the pensioners believe

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they've chosen to be pensioners,

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whereas the young unemployed
feel it's been thrust upon them.

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In England, the upper-middle classes have
actually solved this problem perfectly,

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because they've re-branded unemployment.

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If you're an upper-middle-class
English person,

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you call unemployment "a year off."

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(Laughter)

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And that's because having a son
who's unemployed in Manchester

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is really quite embarrassing.

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But having a son
who's unemployed in Thailand

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is really viewed
as quite an accomplishment.

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(Laughter)

54
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But actually, the power
to re-brand things --

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to understand that
our experiences, costs, things

56
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don't actually much depend
on what they really are,

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but on how we view them --

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I genuinely think can't be overstated.

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There's an experiment
I think Daniel Pink refers to,

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where you put two dogs in a box

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and the box has an electric floor.

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Every now and then,
an electric shock is applied to the floor,

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which pains the dogs.

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The only difference is one of the dogs
has a small button in its half of the box.

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And when it nuzzles the button,
the electric shock stops.

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The other dog doesn't have the button.

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It's exposed to exactly the same level
of pain as the dog in the first box,

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but it has no control
over the circumstances.

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Generally, the first dog
can be relatively content.

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The second dog lapses
into complete depression.

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The circumstances of our lives
may actually matter less to our happiness

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than the sense of control
we feel over our lives.

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It's an interesting question.

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We ask the question -- the whole
debate in the Western world

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is about the level of taxation.

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But I think there's another
debate to be asked,

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which is the level of control
we have over our tax money,

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that what costs us 10 pounds
in one context can be a curse;

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what costs us 10 pounds in a different
context, we may actually welcome.

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You know, pay 20,000 pounds
in tax toward health,

81
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and you're merely feeling a mug.

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Pay 20,000 pounds
to endow a hospital ward,

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and you're called a philanthropist.

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I'm probably in the wrong country
to talk about willingness to pay tax.

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(Laughter)

86
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So I'll give you one in return:
how you frame things really matters.

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Do you call it "The bailout of Greece"?

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Or "The bailout of a load of stupid banks
which lent to Greece"?

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(Laughter)

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Because they are actually the same thing.

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What you call them
actually affects how you react to them,

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viscerally and morally.

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I think psychological value is great,
to be absolutely honest.

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One of my great friends,
a professor called Nick Chater,

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who's the Professor of Decision
Sciences in London,

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believes we should spend far less time
looking into humanity's hidden depths,

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and spend much more time
exploring the hidden shallows.

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I think that's true, actually.

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I think impressions have an insane effect
on what we think and what we do.

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But what we don't have is a really
good model of human psychology --

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at least pre-Kahneman, perhaps,

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we didn't have a really good model
of human psychology

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to put alongside models of engineering,
of neoclassical economics.

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So people who believed in psychological
solutions didn't have a model.

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We didn't have a framework.

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This is what Warren Buffett's
business partner Charlie Munger calls

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"a latticework on which
to hang your ideas."

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Engineers, economists,
classical economists

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all had a very, very robust
existing latticework

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on which practically
every idea could be hung.

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We merely have a collection
of random individual insights

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without an overall model.

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And what that means
is that, in looking at solutions,

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we've probably given too much priority

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to what I call technical engineering
solutions, Newtonian solutions,

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and not nearly enough
to the psychological ones.

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You know my example of the Eurostar:

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six million pounds spent

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to reduce the journey time
between Paris and London

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by about 40 minutes.

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For 0.01 percent of this money,
you could have put wi-fi on the trains,

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which wouldn't have reduced
the duration of the journey,

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but would have improved its enjoyment
and its usefulness far more.

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For maybe 10 percent of the money,

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you could have paid all of the world's top
male and female supermodels

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to walk up and down the train
handing out free Château Pétrus

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to all the passengers.

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(Laughter)

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You'd still have five million
pounds in change,

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and people would ask
for the trains to be slowed down.

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(Laughter)

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Why were we not given the chance
to solve that problem psychologically?

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I think it's because there's an imbalance,

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an asymmetry in the way we treat creative,
emotionally driven psychological ideas

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versus the way we treat rational,
numerical, spreadsheet-driven ideas.

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If you're a creative person,
I think, quite rightly,

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you have to share
all your ideas for approval

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with people much more rational than you.

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You have to go in
and have a cost-benefit analysis,

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a feasibility study,
an ROI study and so forth.

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And I think that's probably right.

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But this does not apply
the other way around.

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People who have an existing framework --

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an economic framework,
an engineering framework --

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feel that, actually,
logic is its own answer.

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What they don't say is,
"Well, the numbers all seem to add up,

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but before I present this idea,
I'll show it to some really crazy people

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to see if they can come up with
something better."

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And so we -- artificially,
I think -- prioritize

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what I'd call mechanistic ideas
over psychological ideas.

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An example of a great psychological idea:

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the single best improvement
in passenger satisfaction

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on the London Underground,

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per pound spent,

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came when they didn't add
any extra trains,

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nor change the frequency of the trains;

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they put dot matrix display boards
on the platforms --

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because the nature of a wait is not just
dependent on its numerical quality,

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its duration,

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but on the level of uncertainty
you experience during that wait.

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Waiting seven minutes for a train
with a countdown clock

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is less frustrating and irritating

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than waiting four minutes,
knuckle biting, going,

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"When's this train
going to damn well arrive?"

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Here's a beautiful example
of a psychological solution

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deployed in Korea.

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Red traffic lights have a countdown delay.

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It's proven to reduce
the accident rate in experiments.

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Why?

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Because road rage, impatience and general
irritation are massively reduced

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when you can actually see
the time you have to wait.

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In China, not really understanding
the principle behind this,

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they applied the same principle
to green traffic lights --

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(Laughter)

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which isn't a great idea.

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You're 200 yards away, you realize
you've got five seconds to go,

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you floor it.

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(Laughter)

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The Koreans, very assiduously,
did test both.

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The accident rate goes down
when you apply this to red traffic lights;

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it goes up when you apply it
to green traffic lights.

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This is all I'm asking for, really,
in human decision making,

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is the consideration
of these three things.

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I'm not asking for the complete primacy
of one over the other.

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I'm merely saying
that when you solve problems,

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you should look
at all three of these equally,

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and you should seek as far as possible

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to find solutions which sit
in the sweet spot in the middle.

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If you actually look at a great business,

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you'll nearly always see all of these
three things coming into play.

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Really successful businesses --

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Google is a great, great
technological success,

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but it's also based
on a very good psychological insight:

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people believe something
that only does one thing

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is better at that thing than something
that does that thing and something else.

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It's an innate thing
called "goal dilution."

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Ayelet Fishbach has written
a paper about this.

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Everybody else at the time
of Google, more or less,

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was trying to be a portal.

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Yes, there's a search function,
but you also have weather,

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sports scores, bits of news.

202
00:10:01,929 --> 00:10:04,471
Google understood
that if you're just a search engine,

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people assume you're a very,
very good search engine.

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00:10:07,357 --> 00:10:10,839
All of you know this, actually,
from when you go in to buy a television,

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00:10:10,863 --> 00:10:13,765
and in the shabbier end
of the row of flat-screen TVs,

206
00:10:13,789 --> 00:10:16,094
you can see, are these
rather despised things

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00:10:16,118 --> 00:10:19,092
called "combined TV and DVD players."

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00:10:19,802 --> 00:10:22,993
And we have no knowledge whatsoever
of the quality of those things,

209
00:10:23,017 --> 00:10:26,456
but we look at a combined
TV and DVD player and we go, "Uck.

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It's probably a bit of a crap telly
and a bit rubbish as a DVD player."

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00:10:30,436 --> 00:10:32,853
So we walk out of the shops
with one of each.

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00:10:33,326 --> 00:10:37,926
Google is as much a psychological success
as it is a technological one.

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00:10:39,000 --> 00:10:41,633
I propose that we can use
psychology to solve problems

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00:10:41,657 --> 00:10:43,988
that we didn't even realize
were problems at all.

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00:10:44,012 --> 00:10:47,775
This is my suggestion for getting people
to finish their course of antibiotics.

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00:10:47,799 --> 00:10:49,368
Don't give them 24 white pills;

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00:10:49,392 --> 00:10:52,405
give them 18 white pills and six blue ones

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00:10:52,429 --> 00:10:54,496
and tell them to take
the white pills first,

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and then take the blue ones.

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It's called "chunking."

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The likelihood that people will get
to the end is much greater

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00:11:01,061 --> 00:11:03,641
when there is a milestone
somewhere in the middle.

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One of the great mistakes,
I think, of economics

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is it fails to understand
that what something is --

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whether it's retirement,
unemployment, cost --

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00:11:13,416 --> 00:11:17,140
is a function, not only of its amount,
but also its meaning.

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00:11:17,971 --> 00:11:20,773
This is a toll crossing in Britain.

228
00:11:20,797 --> 00:11:23,734
Quite often queues happen at the tolls.

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00:11:23,758 --> 00:11:25,982
Sometimes you get very,
very severe queues.

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00:11:26,006 --> 00:11:28,196
You could apply
the same principle, actually,

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to the security lanes in airports.

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What would happen if you could actually
pay twice as much money

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00:11:32,994 --> 00:11:34,145
to cross the bridge,

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00:11:34,169 --> 00:11:36,288
but go through a lane
that's an express lane?

235
00:11:36,312 --> 00:11:38,082
It's not an unreasonable thing to do;

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it's an economically
efficient thing to do.

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Time means more
to some people than others.

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00:11:42,206 --> 00:11:44,637
If you're waiting trying
to get to a job interview,

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you'd patently pay a couple of pounds more
to go through the fast lane.

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00:11:48,899 --> 00:11:51,228
If you're on the way
to visit your mother-in-law,

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00:11:51,252 --> 00:11:52,403
you'd probably prefer --

242
00:11:52,427 --> 00:11:53,610
(Laughter)

243
00:11:53,634 --> 00:11:55,768
you'd probably prefer to stay on the left.

244
00:11:56,356 --> 00:11:59,833
The only problem is if you introduce
this economically efficient solution,

245
00:11:59,857 --> 00:12:01,007
people hate it ...

246
00:12:01,634 --> 00:12:04,965
because they think you're deliberately
creating delays at the bridge

247
00:12:04,989 --> 00:12:06,643
in order to maximize your revenue,

248
00:12:06,667 --> 00:12:10,055
and, "Why on earth should I pay
to subsidize your incompetence?"

249
00:12:10,376 --> 00:12:12,556
On the other hand,
change the frame slightly

250
00:12:12,580 --> 00:12:14,871
and create charitable yield management,

251
00:12:14,895 --> 00:12:18,029
so the extra money you get
goes not to the bridge company,

252
00:12:18,053 --> 00:12:19,244
it goes to charity ...

253
00:12:20,211 --> 00:12:23,056
and the mental willingness
to pay completely changes.

254
00:12:24,128 --> 00:12:26,771
You have a relatively
economically efficient solution,

255
00:12:26,795 --> 00:12:29,114
but one that actually meets
with public approval

256
00:12:29,138 --> 00:12:31,138
and even a small degree of affection,

257
00:12:31,162 --> 00:12:33,351
rather than being seen as bastardy.

258
00:12:34,504 --> 00:12:37,158
So where economists
make the fundamental mistake

259
00:12:37,182 --> 00:12:39,147
is they think that money is money.

260
00:12:40,275 --> 00:12:44,506
Actually, my pain experienced
in paying five pounds

261
00:12:44,530 --> 00:12:46,677
is not just proportionate to the amount,

262
00:12:46,701 --> 00:12:48,685
but where I think that money is going.

263
00:12:49,314 --> 00:12:52,310
And I think understanding that
could revolutionize tax policy.

264
00:12:52,334 --> 00:12:54,337
It could revolutionize
the public services.

265
00:12:54,361 --> 00:12:56,874
It could actually change things
quite significantly.

266
00:12:56,898 --> 00:12:58,360
[Ludwig Von Mises is my hero.]

267
00:12:58,384 --> 00:13:00,098
Here's a guy you all need to study.

268
00:13:00,122 --> 00:13:01,727
He's an Austrian School economist

269
00:13:01,751 --> 00:13:06,315
who was first active in the first half
of the 20th century in Vienna.

270
00:13:06,339 --> 00:13:08,531
What was interesting
about the Austrian School

271
00:13:08,555 --> 00:13:11,588
is they actually grew up alongside Freud.

272
00:13:11,612 --> 00:13:14,265
And so they're predominantly
interested in psychology.

273
00:13:14,289 --> 00:13:18,842
They believed that there was
a discipline called praxeology,

274
00:13:18,866 --> 00:13:21,462
which is a prior discipline
to the study of economics.

275
00:13:21,486 --> 00:13:25,934
Praxeology is the study of human choice,
action and decision-making.

276
00:13:26,660 --> 00:13:27,985
I think they're right.

277
00:13:28,009 --> 00:13:30,077
I think the danger
we have in today's world

278
00:13:30,101 --> 00:13:31,781
is we have the study of economics

279
00:13:31,805 --> 00:13:35,835
considers itself to be a prior discipline
to the study of human psychology.

280
00:13:35,859 --> 00:13:38,828
But as Charlie Munger says,
"If economics isn't behavioral,

281
00:13:38,852 --> 00:13:40,399
I don't know what the hell is."

282
00:13:41,804 --> 00:13:47,605
Von Mises, interestingly, believes
economics is just a subset of psychology.

283
00:13:47,629 --> 00:13:49,534
I think he just refers to economics

284
00:13:49,558 --> 00:13:52,838
as "the study of human praxeology
under conditions of scarcity."

285
00:13:53,742 --> 00:13:56,838
But Von Mises, among many other things,

286
00:13:56,862 --> 00:14:01,512
I think uses an analogy which is probably
the best justification and explanation

287
00:14:01,536 --> 00:14:05,743
for the value of marketing,
the value of perceived value

288
00:14:05,767 --> 00:14:09,044
and the fact that we should treat it
as being absolutely equivalent

289
00:14:09,068 --> 00:14:10,551
to any other kind of value.

290
00:14:11,054 --> 00:14:14,006
We tend to, all of us, even those of us
who work in marketing,

291
00:14:14,030 --> 00:14:15,328
think of value in two ways:

292
00:14:15,352 --> 00:14:18,249
the real value, which is when
you make something in a factory

293
00:14:18,273 --> 00:14:19,427
or provide a service,

294
00:14:19,451 --> 00:14:21,069
and then there's a dubious value,

295
00:14:21,093 --> 00:14:23,904
which you create by changing
the way people look at things.

296
00:14:23,928 --> 00:14:26,222
Von Mises completely rejected
this distinction.

297
00:14:26,246 --> 00:14:28,137
And he used this following analogy:

298
00:14:28,161 --> 00:14:33,494
he referred to strange economists
called the French physiocrats,

299
00:14:33,518 --> 00:14:37,148
who believed that the only true value
was what you extracted from the land.

300
00:14:37,172 --> 00:14:39,657
So if you're a shepherd
or a quarryman or a farmer,

301
00:14:39,681 --> 00:14:41,102
you created true value.

302
00:14:41,126 --> 00:14:43,985
If however, you bought
some wool from the shepherd

303
00:14:44,009 --> 00:14:46,990
and charged a premium
for converting it into a hat,

304
00:14:47,014 --> 00:14:48,796
you weren't actually creating value,

305
00:14:48,820 --> 00:14:50,580
you were exploiting the shepherd.

306
00:14:51,439 --> 00:14:55,162
Now, Von Mises said that modern
economists make exactly the same mistake

307
00:14:55,186 --> 00:14:57,243
with regard to advertising and marketing.

308
00:14:57,577 --> 00:14:59,459
He says if you run a restaurant,

309
00:14:59,483 --> 00:15:01,722
there is no healthy distinction to be made

310
00:15:01,746 --> 00:15:04,299
between the value you create
by cooking the food

311
00:15:04,323 --> 00:15:06,626
and the value you create
by sweeping the floor.

312
00:15:07,203 --> 00:15:09,693
One of them creates, perhaps,
the primary product --

313
00:15:09,717 --> 00:15:11,582
the thing we think we're paying for --

314
00:15:11,606 --> 00:15:14,447
the other one creates a context
within which we can enjoy

315
00:15:14,471 --> 00:15:15,995
and appreciate that product.

316
00:15:16,019 --> 00:15:19,191
And the idea that one of them
should have priority over the other

317
00:15:19,215 --> 00:15:20,365
is fundamentally wrong.

318
00:15:20,944 --> 00:15:22,611
Try this quick thought experiment:

319
00:15:22,635 --> 00:15:25,286
imagine a restaurant
that serves Michelin-starred food,

320
00:15:25,310 --> 00:15:27,957
but where the restaurant smells of sewage

321
00:15:27,981 --> 00:15:30,119
and there's human feces on the floor.

322
00:15:30,143 --> 00:15:31,552
(Laughter)

323
00:15:31,576 --> 00:15:34,069
The best thing you can do there
to create value

324
00:15:34,093 --> 00:15:37,109
is not actually to improve
the food still further,

325
00:15:37,133 --> 00:15:39,932
it's to get rid of the smell
and clean up the floor.

326
00:15:42,259 --> 00:15:44,812
And it's vital we understand this.

327
00:15:44,836 --> 00:15:47,483
If that seems like a sort
of strange, abstruse thing --

328
00:15:47,507 --> 00:15:51,405
in the UK, the post office
had a 98 percent success rate

329
00:15:51,429 --> 00:15:53,613
at delivering first-class
mail the next day.

330
00:15:54,192 --> 00:15:56,077
They decided this wasn't good enough,

331
00:15:56,101 --> 00:15:57,893
and they wanted to get it up to 99.

332
00:15:59,234 --> 00:16:02,607
The effort to do that
almost broke the organization.

333
00:16:03,520 --> 00:16:05,910
If, at the same time,
you'd gone and asked people,

334
00:16:05,934 --> 00:16:08,753
"What percentage of first-class mail
arrives the next day?"

335
00:16:08,777 --> 00:16:12,683
the average answer, or the modal answer,
would have been "50 to 60 percent."

336
00:16:13,381 --> 00:16:16,095
Now, if your perception
is much worse than your reality,

337
00:16:16,119 --> 00:16:19,143
what on earth are you doing
trying to change the reality?

338
00:16:19,167 --> 00:16:22,782
That's like trying to improve the food
in a restaurant that stinks.

339
00:16:24,362 --> 00:16:27,080
What you need to do is,
first of all, tell people

340
00:16:27,104 --> 00:16:31,611
that 98 percent of first-class mail
gets there the next day.

341
00:16:31,635 --> 00:16:33,156
That's pretty good.

342
00:16:33,180 --> 00:16:36,388
I would argue, in Britain,
there's a much better frame of reference,

343
00:16:36,412 --> 00:16:39,779
which is to tell people that more
first-class mail arrives the next day

344
00:16:39,803 --> 00:16:42,518
in the UK than in Germany,
because generally, in Britain,

345
00:16:42,542 --> 00:16:44,826
if you want to make us happy
about something,

346
00:16:44,850 --> 00:16:47,042
just tell us we do it
better than the Germans.

347
00:16:47,066 --> 00:16:48,796
(Laughter)

348
00:16:48,820 --> 00:16:51,072
(Applause)

349
00:16:51,096 --> 00:16:54,317
Choose your frame of reference
and the perceived value,

350
00:16:54,341 --> 00:16:57,747
and therefore, the actual value
is completely transformed.

351
00:16:57,771 --> 00:16:59,416
It has to be said of the Germans

352
00:16:59,440 --> 00:17:02,142
that the Germans and the French
are doing a brilliant job

353
00:17:02,166 --> 00:17:03,620
of creating a united Europe.

354
00:17:03,644 --> 00:17:06,514
The only thing they didn't expect
is they're uniting Europe

355
00:17:06,538 --> 00:17:09,536
through a shared mild hatred
of the French and Germans.

356
00:17:09,560 --> 00:17:11,610
But I'm British;
that's the way we like it.

357
00:17:11,634 --> 00:17:13,759
(Laughter)

358
00:17:14,099 --> 00:17:16,220
What you'll also notice
is that, in any case,

359
00:17:16,244 --> 00:17:17,434
our perception is leaky.

360
00:17:17,458 --> 00:17:20,336
We can't tell the difference
between the quality of the food

361
00:17:20,360 --> 00:17:22,373
and the environment
in which we consume it.

362
00:17:22,397 --> 00:17:24,435
All of you will have seen this phenomenon

363
00:17:24,459 --> 00:17:26,441
if you have your car washed or valeted.

364
00:17:26,465 --> 00:17:29,586
When you drive away,
your car feels as if it drives better.

365
00:17:29,610 --> 00:17:30,951
(Laughter)

366
00:17:30,975 --> 00:17:32,231
And the reason for this --

367
00:17:32,255 --> 00:17:34,903
unless my car valet
mysteriously is changing the oil

368
00:17:34,927 --> 00:17:38,270
and performing work which I'm not paying
him for and I'm unaware of --

369
00:17:38,294 --> 00:17:40,601
is because perception
is, in any case, leaky.

370
00:17:40,625 --> 00:17:44,542
Analgesics that are branded
are more effective at reducing pain

371
00:17:44,566 --> 00:17:46,377
than analgesics that are not branded.

372
00:17:46,401 --> 00:17:49,019
I don't just mean through reported
pain reduction --

373
00:17:49,043 --> 00:17:50,714
actual measured pain reduction.

374
00:17:50,738 --> 00:17:55,362
And so perception
actually is leaky in any case.

375
00:17:56,021 --> 00:17:59,039
So if you do something
that's perceptually bad in one respect,

376
00:17:59,063 --> 00:18:00,286
you can damage the other.

377
00:18:00,310 --> 00:18:01,461
Thank you very much.

378
00:18:01,485 --> 00:18:03,873
(Applause)