WEBVTT

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What you have here

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is an electronic cigarette.

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It's something that's,

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since it was invented a year or two ago,

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has given me untold happiness.

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(Laughter)

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

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but there's something
much bigger than that.

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Which is ever since, in the U.K.,
they banned smoking in public places,

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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

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and you stand up
and you hold a glass of red wine

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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,

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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

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is 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,

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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

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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)

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But actually the power
to re-brand things -

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to understand that actually
our experiences, costs, things

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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

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we may actually welcome.

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

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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)

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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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Because they are actually the same thing.

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What you call them actually affects

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how you react to them,
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 that we should spend
far less time

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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

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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
to reduce the journey time

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between Paris and London
by about 40 minutes.

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For 0.01 percent of this money
you could have put WiFi 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 Chateau Petrus to all the passengers.

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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

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to solve that problem psychologically?

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

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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 you have to 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,

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I'll go and 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 per pound spent

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came when they didn't add any extra trains
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

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is not just dependent on its
numerical quality, 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

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going, "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? Because road rage,
impatience and general irritation

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are massively reduced
when you can actually see

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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,

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you realize you've got five seconds to go,
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, 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,

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but you also have weather,
sports scores, bits of news.

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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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All of you know this actually

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from when you go in to buy a television.

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And in the shabbier end
of the row of flat screen TVs

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you can see are these
rather despised things

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called combined TV and DVD players.

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And we have no knowledge whatsoever
of the quality of those things,

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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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So we walk out of the shops
with one of each.

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Google is as much a psychological success
as it is a technological one.

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I propose that we can use psychology
to solve problems

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that we didn't even realize
were problems at all.

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This is my suggestion for getting people
to finish their course of antibiotics.

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Don't give them 24 white pills.

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Give them 18 white pills and six blue ones

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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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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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is a function, not only of its amount,
but also its meaning.

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This is a toll crossing in Britain.

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Quite often queues happen at the tolls.

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Sometimes you get very,
very severe queues.

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You could apply the same principle
actually, if you like,

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to the security lanes in airports.

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What would happen if you could actually

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pay twice as much money
to cross the bridge,

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but go through a lane
that's an express lane?

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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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If you're 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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If you're on the way
to visit your mother in-law,

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you'd probably prefer to stay on the left.

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The only problem is if you introduce
this economically efficient solution,

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people hate it.

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Because they think you're deliberately
creating delays at the bridge

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in order to maximize your revenue,

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and "Why on earth should I pay
to subsidize your incompetence?"

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On the other hand,
change the frame slightly

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and create charitable yield management,

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so the extra money you get goes
not to the bridge company,

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it goes to charity,

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and the mental willingness
to pay completely changes.

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You have a relatively
economically efficient solution,

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but one that actually meets
with public approval

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and even a small degree of affection,

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rather than being seen as bastardy.

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So where economists
make the fundamental mistake

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is they think that money is money.

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Actually my pain experienced
in paying five pounds

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is not just proportionate to the amount,

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but where I think that money is going.

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And I think understanding
that could revolutionize tax policy.

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It could revolutionize
the public services.

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It could really change
things quite significantly.

00:13:15.496 --> 00:13:17.910
Here's a guy you all need to study.

00:13:17.910 --> 00:13:20.328
Anybody heard of him?

00:13:20.328 --> 00:13:22.533
Good. One or two.

00:13:22.533 --> 00:13:24.493
He's an Austrian school economist

00:13:24.493 --> 00:13:29.389
who was first active in the first half
of the 20th century in Vienna.

00:13:29.389 --> 00:13:31.583
What was interesting
about the Austrian school

00:13:31.583 --> 00:13:34.792
is they actually grew up alongside Freud.

00:13:35.140 --> 00:13:37.771
And so they're predominantly
interested in psychology.

00:13:37.771 --> 00:13:42.253
They believed that there was a discipline
called praxeology,

00:13:42.253 --> 00:13:45.144
which is a prior discipline
to the study of economics.

00:13:45.144 --> 00:13:49.515
Praxeology is the study of human choice,
action and decision making.

00:13:50.237 --> 00:13:51.537
I think they're right.

00:13:51.537 --> 00:13:53.594
I think the danger
we have in today's world

00:13:53.594 --> 00:13:55.435
is we have the study of economics

00:13:55.435 --> 00:13:59.817
considers itself to be a prior discipline
to the study of human psychology.

00:13:59.817 --> 00:14:02.647
But as Charlie Munger says,
"If economics isn't behavioral,

00:14:02.647 --> 00:14:04.949
I don't know what the hell is."

00:14:05.365 --> 00:14:11.056
Von Mises, interestingly, believes
economics is just a subset of psychology.

00:14:11.056 --> 00:14:13.245
I think he just refers to economics as

00:14:13.245 --> 00:14:16.728
"the study of human praxeology
under conditions of scarcity."

00:14:17.098 --> 00:14:19.660
But von Mises, among many other things,

00:14:20.460 --> 00:14:25.372
I think uses an analogy which is probably
the best justification and explanation

00:14:25.372 --> 00:14:28.924
for the value of marketing,
the value of perceived value

00:14:29.178 --> 00:14:32.765
and the fact that we should actually
treat it as being absolutely equivalent

00:14:32.765 --> 00:14:34.574
to any other kind of value.

00:14:34.574 --> 00:14:36.994
All of us - even those of us
who work in marketing -

00:14:36.994 --> 00:14:38.672
tend to think of value in two ways.

00:14:38.672 --> 00:14:39.820
There's the real value,

00:14:39.820 --> 00:14:43.024
which is when you make something
in a factory and provide a service,

00:14:43.024 --> 00:14:44.974
and then there's a kind of dubious value,

00:14:44.974 --> 00:14:47.748
which you create by changing
the way people look at things.

00:14:47.748 --> 00:14:49.954
Von Mises completely rejected
this distinction.

00:14:49.954 --> 00:14:51.689
And he used this following analogy.

00:14:51.689 --> 00:14:56.788
He referred actually to strange economists
called the French Physiocrats,

00:14:56.788 --> 00:15:00.469
who believed that the only true value
was what you extracted from the land.

00:15:00.469 --> 00:15:03.137
So if you're a shepherd
or a quarryman or a farmer,

00:15:03.137 --> 00:15:04.669
you created true value.

00:15:04.669 --> 00:15:07.526
If however, you bought
some wool from the shepherd

00:15:07.526 --> 00:15:10.432
and charged a premium
for converting it into a hat,

00:15:10.432 --> 00:15:12.587
you weren't actually creating value,

00:15:12.587 --> 00:15:14.546
you were exploiting the shepherd.

00:15:15.095 --> 00:15:18.988
Now von Mises said that modern economists
make exactly the same mistake

00:15:18.988 --> 00:15:21.048
with regard to advertising and marketing.

00:15:21.048 --> 00:15:23.167
He says, if you run a restaurant,

00:15:23.167 --> 00:15:25.428
there is no healthy distinction to be made

00:15:25.428 --> 00:15:28.013
between the value you create
by cooking the food

00:15:28.013 --> 00:15:30.674
and the value you create
by sweeping the floor.

00:15:30.674 --> 00:15:33.225
One of them creates, perhaps,
the primary product -

00:15:33.225 --> 00:15:35.002
the thing we think we're paying for -

00:15:35.002 --> 00:15:36.564
the other one creates a context

00:15:36.564 --> 00:15:39.724
within which we can enjoy
and appreciate that product.

00:15:39.724 --> 00:15:43.220
And the idea that one of them should
actually have priority over the other

00:15:43.220 --> 00:15:44.470
is fundamentally wrong.

00:15:44.470 --> 00:15:46.136
Try this quick thought experiment.

00:15:46.136 --> 00:15:48.720
Imagine a restaurant
that serves Michelin-starred food,

00:15:48.720 --> 00:15:51.529
but actually where
the restaurant smells of sewage

00:15:51.529 --> 00:15:54.170
and there's human feces on the floor.

00:15:55.029 --> 00:15:57.607
The best thing you can do there
to create value

00:15:57.607 --> 00:16:00.848
is not actually to improve
the food still further,

00:16:00.848 --> 00:16:03.949
it's to get rid of the smell
and clean up the floor.

00:16:05.307 --> 00:16:08.107
And it's vital we understand this.

00:16:08.107 --> 00:16:10.493
If that seems like some strange,
abstruse thing,

00:16:10.493 --> 00:16:15.027
in the U.K., the post office
had a 98 percent success rate

00:16:15.027 --> 00:16:17.571
at delivering first-class mail
the next day.

00:16:17.571 --> 00:16:19.458
They decided this wasn't good enough

00:16:19.458 --> 00:16:21.593
and they wanted to get it up to 99.

00:16:22.843 --> 00:16:26.088
The effort to do that
almost broke the organization.

00:16:27.107 --> 00:16:29.337
If at the same time you'd gone
and asked people,

00:16:29.337 --> 00:16:32.188
"What percentage of first-class mail
arrives the next day?"

00:16:32.188 --> 00:16:36.319
the average, or the modal answer
would have been 50 to 60 percent.

00:16:36.975 --> 00:16:39.738
Now if your perception
is much worse than your reality,

00:16:39.738 --> 00:16:42.765
what on earth are you doing
trying to change the reality?

00:16:42.765 --> 00:16:46.443
That's like trying to improve
the food in a restaurant that stinks.

00:16:47.968 --> 00:16:49.222
What you need to do

00:16:49.222 --> 00:16:50.660
is first of all tell people

00:16:50.660 --> 00:16:54.583
that 98 percent of mail gets there
the next day, first-class mail.

00:16:55.419 --> 00:16:56.738
That's pretty good.

00:16:56.738 --> 00:16:59.965
I would argue, in Britain there's
a much better frame of reference,

00:16:59.965 --> 00:17:01.107
which is to tell people

00:17:01.107 --> 00:17:03.315
that more first-class mail
arrives the next day

00:17:03.315 --> 00:17:05.049
in the U.K. than in Germany.

00:17:05.049 --> 00:17:08.532
Because generally in Britain if you want
to make us happy about something,

00:17:08.532 --> 00:17:10.726
just tell us we do it better
than the Germans.

00:17:10.726 --> 00:17:12.123
(Laughter)

00:17:12.123 --> 00:17:13.658
(Applause)

00:17:15.079 --> 00:17:18.016
Choose your frame of reference
and the perceived value

00:17:18.016 --> 00:17:21.295
and therefore the actual value
is completely transformed.

00:17:21.295 --> 00:17:23.331
It has to be said of the Germans

00:17:23.331 --> 00:17:26.071
that the Germans and the French
are doing a brilliant job

00:17:26.071 --> 00:17:27.572
of creating a united Europe.

00:17:27.572 --> 00:17:30.349
The only thing they didn't expect
is they're uniting Europe

00:17:30.349 --> 00:17:33.209
through a shared mild hatred
of the French and Germans.

00:17:33.209 --> 00:17:35.719
But I'm British,
that's the way we like it.

00:17:37.859 --> 00:17:40.905
What you also notice is that
in any case our perception is leaky.

00:17:40.905 --> 00:17:43.741
We can't tell the difference
between the quality of the food

00:17:43.741 --> 00:17:45.856
and the environment
in which we consume it.

00:17:45.856 --> 00:17:47.880
All of you will have seen this phenomenon

00:17:47.880 --> 00:17:50.302
if you have your car washed or valeted.

00:17:50.604 --> 00:17:54.332
When you drive away,
your car feels as if it drives better.

00:17:55.816 --> 00:17:57.213
And the reason for this,

00:17:57.213 --> 00:17:59.680
unless my car valet
mysteriously is changing the oil

00:17:59.680 --> 00:18:02.921
and performing work which
I'm not paying him for and I'm unaware of,

00:18:02.921 --> 00:18:05.438
is because perception
is in any case leaky.

00:18:05.438 --> 00:18:09.394
Analgesics that are branded
are more effective at reducing pain

00:18:09.394 --> 00:18:11.256
than analgesics that are not branded.

00:18:11.256 --> 00:18:13.665
I don't just mean through
reported pain reduction,

00:18:13.665 --> 00:18:15.468
actual measured pain reduction.

00:18:15.468 --> 00:18:19.956
And so perception actually
is leaky in any case.

00:18:20.752 --> 00:18:23.678
So if you do something
that's perceptually bad in one respect,

00:18:23.678 --> 00:18:25.286
you can damage the other.

00:18:25.286 --> 00:18:26.876
I'll end very quicky

00:18:26.876 --> 00:18:30.078
with something without which
you'd never be happy for me to miss

00:18:30.078 --> 00:18:32.152
which is the perfect demonstration

00:18:32.152 --> 00:18:35.160
of creating economically
fairly sustainable value,

00:18:35.160 --> 00:18:37.088
through doing nothing to the product,

00:18:37.088 --> 00:18:40.190
and everything to the way
in which it's consumed and perceived.

00:18:40.190 --> 00:18:43.600
(Video) Man:
Shreddies are supposed to be square.

00:18:44.203 --> 00:18:47.547
Woman: Have any of these
diamond shapes gone out?

00:18:48.667 --> 00:18:51.469
[Diamond Shreddies]
Woman: New Diamond Shreddies cereal

00:18:51.469 --> 00:18:54.600
Same 100% Whole Grain Wheat
in a delicious diamond shape.

00:18:55.981 --> 00:18:59.203
Rory Sutherland: Very finally,
here's the poster campaign.

00:18:59.203 --> 00:19:01.365
(Laughter)

00:19:01.365 --> 00:19:04.322
(Applause)

00:19:09.466 --> 00:19:11.746
Some Canadians are inherently
very conservative,

00:19:11.746 --> 00:19:15.036
and were very annoyed that their
square Shreddies had been taken away.

00:19:15.036 --> 00:19:17.703
It was kind of a new-coat
marketing moment.

00:19:17.703 --> 00:19:20.528
So after long thought and deliberation,

00:19:20.528 --> 00:19:22.494
they arrived at a compromise.

00:19:22.494 --> 00:19:23.855
Thank you very much.

00:19:23.855 --> 00:19:26.442
(Applause)