9:59:59.000,9:59:59.000 What you have here 9:59:59.000,9:59:59.000 is an electronic cigarette. 9:59:59.000,9:59:59.000 It's something that's, since it was invented a year or two ago, 9:59:59.000,9:59:59.000 has given me untold happiness. 9:59:59.000,9:59:59.000 (Laughter) 9:59:59.000,9:59:59.000 A little bit of it, I think, is the nicotine, 9:59:59.000,9:59:59.000 but there's something much bigger than that. 9:59:59.000,9:59:59.000 Which is ever since, in the U.K., they banned smoking in public places, 9:59:59.000,9:59:59.000 I've never enjoyed a drinks party ever again. 9:59:59.000,9:59:59.000 (Laughter) 9:59:59.000,9:59:59.000 And the reason, I only worked out just the other day, 9:59:59.000,9:59:59.000 which is when you go to a drinks party 9:59:59.000,9:59:59.000 and you stand up and you hold a glass of red wine 9:59:59.000,9:59:59.000 and you talk endlessly to people, 9:59:59.000,9:59:59.000 you don't actually want to spend all the time talking. 9:59:59.000,9:59:59.000 It's really, really tiring. 9:59:59.000,9:59:59.000 Sometimes you just want to stand there silently, alone with your thoughts. 9:59:59.000,9:59:59.000 sometimes you just want to stand in the corner and stare out of the window. 9:59:59.000,9:59:59.000 Now the problem is, when you can't smoke, 9:59:59.000,9:59:59.000 if you stand and stare out the window on your own, 9:59:59.000,9:59:59.000 you're an antisocial, friendless idiot. 9:59:59.000,9:59:59.000 (Laughter) 9:59:59.000,9:59:59.000 If you stand and stare out of the window on your own with a cigarette, 9:59:59.000,9:59:59.000 you're a fucking philosopher. 9:59:59.000,9:59:59.000 (Laughter) 9:59:59.000,9:59:59.000 (Applause) 9:59:59.000,9:59:59.000 So the power of reframing things 9:59:59.000,9:59:59.000 cannot be overstated. 9:59:59.000,9:59:59.000 What we have is exactly the same thing, the same activity, 9:59:59.000,9:59:59.000 but one of them makes you feel great 9:59:59.000,9:59:59.000 and the other one, with just a small change of posture, 9:59:59.000,9:59:59.000 makes you feel terrible. 9:59:59.000,9:59:59.000 And I think one of the problems with classical economics 9:59:59.000,9:59:59.000 is it's absolutely preoccupied with reality. 9:59:59.000,9:59:59.000 And reality isn't a particularly good guide to human happiness. 9:59:59.000,9:59:59.000 Why, for example, 9:59:59.000,9:59:59.000 are pensioners much happier 9:59:59.000,9:59:59.000 than the young unemployed? 9:59:59.000,9:59:59.000 Both of them, after all, are in exactly the same stage of life. 9:59:59.000,9:59:59.000 You both have too much time on your hands and not much money. 9:59:59.000,9:59:59.000 But pensioners are reportedly very, very happy, 9:59:59.000,9:59:59.000 whereas the unemployed are extraordinarily unhappy and depressed. 9:59:59.000,9:59:59.000 The reason, I think, is that pensioners believe they've chosen to be pensioners, 9:59:59.000,9:59:59.000 whereas the young unemployed 9:59:59.000,9:59:59.000 feel it's been thrust upon them. 9:59:59.000,9:59:59.000 In England the upper-middle-classes have actually solved this problem perfectly, 9:59:59.000,9:59:59.000 because they've rebranded unemployment. 9:59:59.000,9:59:59.000 If you're an upper-middle-class English person, 9:59:59.000,9:59:59.000 you call unemployment "a year off." 9:59:59.000,9:59:59.000 (Laughter) 9:59:59.000,9:59:59.000 And that's because having a son who's unemployed in Manchester 9:59:59.000,9:59:59.000 is really quite embarrassing, 9:59:59.000,9:59:59.000 but having a son who's unemployed in Thailand 9:59:59.000,9:59:59.000 is really viewed as quite an accomplishment. 9:59:59.000,9:59:59.000 (Laughter) 9:59:59.000,9:59:59.000 But actually the power to rebrand things, 9:59:59.000,9:59:59.000 to understand that actually our experiences, costs, things 9:59:59.000,9:59:59.000 don't actually much depend on what they really are, 9:59:59.000,9:59:59.000 but on how we view them, 9:59:59.000,9:59:59.000 I genuinely think can't be overstated. 9:59:59.000,9:59:59.000 There's an experiment I think Daniel Pink refers to 9:59:59.000,9:59:59.000 where you put two dogs in a box 9:59:59.000,9:59:59.000 and the box has an electric floor. 9:59:59.000,9:59:59.000 Every now and then an electric shock is applied to the floor, 9:59:59.000,9:59:59.000 which pains the dogs. 9:59:59.000,9:59:59.000 The only difference is one of the dogs has a small button in its half of the box. 9:59:59.000,9:59:59.000 And when it nuzzles the button, the electric shock stops. 9:59:59.000,9:59:59.000 The other dog doesn't have the button. 9:59:59.000,9:59:59.000 It's exposed to exactly the same level of pain as the dog in the first box, 9:59:59.000,9:59:59.000 but it has no control over the circumstances. 9:59:59.000,9:59:59.000 Generally the first dog can be relatively content. 9:59:59.000,9:59:59.000 The second dog lapses into complete depression. 9:59:59.000,9:59:59.000 The circumstances in our lives may actually matter less to our happiness. 9:59:59.000,9:59:59.000 than the sense of control we feel over our lives. 9:59:59.000,9:59:59.000 It's an interesting question. 9:59:59.000,9:59:59.000 We ask the question -- the whole debate in the Western world 9:59:59.000,9:59:59.000 is about the level of taxation. 9:59:59.000,9:59:59.000 But I think there's another debate to be asked, 9:59:59.000,9:59:59.000 which is the level of control we have over our tax money. 9:59:59.000,9:59:59.000 That what costs us 10 pounds in one context can be a curse. 9:59:59.000,9:59:59.000 What costs us 10 pounds in a different context we may actually welcome. 9:59:59.000,9:59:59.000 And pay 20,000 pounds in tax toward health 9:59:59.000,9:59:59.000 and you're merely filling a mug. 9:59:59.000,9:59:59.000 Pay 20,000 pounds to endow a hospital ward 9:59:59.000,9:59:59.000 and you're called a philanthropist. 9:59:59.000,9:59:59.000 I'm probably in the wrong country to talk about willingness to pay tax. 9:59:59.000,9:59:59.000 (Laughter) 9:59:59.000,9:59:59.000 So I'll give you one in return. How you frame things really matters. 9:59:59.000,9:59:59.000 Do you call it the bailout of Greece 9:59:59.000,9:59:59.000 or the bailout of a load of stupid banks which lent to Greece? 9:59:59.000,9:59:59.000 Because they are actually the same thing. 9:59:59.000,9:59:59.000 What you call them actually affects 9:59:59.000,9:59:59.000 how you react to them, viscerally and morally. 9:59:59.000,9:59:59.000 I think psychological value is great to be absolutely honest. 9:59:59.000,9:59:59.000 One of my great friends, a professor called Nick Chater, 9:59:59.000,9:59:59.000 who's the Professor of Decision Sciences in London, 9:59:59.000,9:59:59.000 believes that we should spend far less time 9:59:59.000,9:59:59.000 looking into humanity's hidden depths 9:59:59.000,9:59:59.000 and spend much more time exploring the hidden shallows. 9:59:59.000,9:59:59.000 I think that's true actually. 9:59:59.000,9:59:59.000 I think impressions have an insane effect 9:59:59.000,9:59:59.000 on what we think and what we do. 9:59:59.000,9:59:59.000 But what we don't have is a really good model of human psychology. 9:59:59.000,9:59:59.000 At least pre-[unclear] perhaps, 9:59:59.000,9:59:59.000 we didn't have a really good model of human psychology 9:59:59.000,9:59:59.000 to put alongside models of engineering, of neoclassical economics. 9:59:59.000,9:59:59.000 So people who believed in psychological solutions didn't have a model. 9:59:59.000,9:59:59.000 We didn't have a framework. 9:59:59.000,9:59:59.000 This is what Warren Buffett's business partner Charlie Munger calls 9:59:59.000,9:59:59.000 "A latticework on which to hang your ideas." 9:59:59.000,9:59:59.000 Engineers, economists, classical economists 9:59:59.000,9:59:59.000 all had a very, very robust existing latticework 9:59:59.000,9:59:59.000 on which practically every idea could be hung. 9:59:59.000,9:59:59.000 We merely have a collection of random individual insights 9:59:59.000,9:59:59.000 without no real model. 9:59:59.000,9:59:59.000 And what that means is that in looking at solutions, 9:59:59.000,9:59:59.000 we've probably given too much priority 9:59:59.000,9:59:59.000 to what I call technical engineering solutions, Newtonian solutions, 9:59:59.000,9:59:59.000 and not nearly enough to the psychological ones. 9:59:59.000,9:59:59.000 You know my example of the Eurostar. 9:59:59.000,9:59:59.000 Six million pounds spent to reduce the journey time 9:59:59.000,9:59:59.000 between Paris and London by about 40 minutes. 9:59:59.000,9:59:59.000 For 0.01 percent of this money you could put WiFi on the trains, 9:59:59.000,9:59:59.000 which wouldn't have reduced the duration of the journey, 9:59:59.000,9:59:59.000 but would have improved its enjoyment and its usefullness far more. 9:59:59.000,9:59:59.000 For maybe 10 percent of the money, 9:59:59.000,9:59:59.000 you could have paid all of the world's top male and female supermodels 9:59:59.000,9:59:59.000 to walk up and down the train handing out free Chateau Petrus to all the passengers. 9:59:59.000,9:59:59.000 You'd still have five billion pounds in change, 9:59:59.000,9:59:59.000 and people would ask for the trains to be slowed down. 9:59:59.000,9:59:59.000 (Laughter) 9:59:59.000,9:59:59.000 Why were we not given the chance 9:59:59.000,9:59:59.000 to solve that problem psychologically? 9:59:59.000,9:59:59.000 I think It's because there's an imbalance, an asymmetry, 9:59:59.000,9:59:59.000 in the way we treat creative, emotionally-driven psychological ideas 9:59:59.000,9:59:59.000 versus the way we treat rational numerical spreadsheet-driven ideas. 9:59:59.000,9:59:59.000 If you're a crazy person, I think quite rightly, 9:59:59.000,9:59:59.000 you have to share all your ideas for approval 9:59:59.000,9:59:59.000 with people much more rational than you. 9:59:59.000,9:59:59.000 You have to go in and you have to have a cost-benefit analysis, 9:59:59.000,9:59:59.000 a feasibility study, an ROI study and so forth. 9:59:59.000,9:59:59.000 And I think that's probably right. 9:59:59.000,9:59:59.000 But this does not apply the other way around. 9:59:59.000,9:59:59.000 People who have an existing framework, 9:59:59.000,9:59:59.000 an economic framework, an engineering framework, 9:59:59.000,9:59:59.000 feel that actually logic is its own answer. 9:59:59.000,9:59:59.000 What they don't say is "Well the numbers all seem to add up, 9:59:59.000,9:59:59.000 but before I present this idea, I'll go and show it to some really crazy people 9:59:59.000,9:59:59.000 to see if they can come up with something better." 9:59:59.000,9:59:59.000 And so we, artificially I think, prioritize 9:59:59.000,9:59:59.000 what I'd call mechanistic ideas over psychological ideas. 9:59:59.000,9:59:59.000 An example of a great psychological idea: 9:59:59.000,9:59:59.000 The single best improvement on customer satisfaction on the London Underground per pounds spent 9:59:59.000,9:59:59.000 came when they did add any extra trains or change the frequency of the trains, 9:59:59.000,9:59:59.000 they put dot matrix display board on the platforms. 9:59:59.000,9:59:59.000 Because the nature of the wait 9:59:59.000,9:59:59.000 is not just dependent on its numerical quality, its duration, 9:59:59.000,9:59:59.000 but on the level of uncertainty you experience during that wait. 9:59:59.000,9:59:59.000 Waiting seven minutes for a train with a countdown clock 9:59:59.000,9:59:59.000 is less frustrating and irritating 9:59:59.000,9:59:59.000 than waiting four minutes, knuckle-biting 9:59:59.000,9:59:59.000 going, "When's this train going to damn well arrive?" 9:59:59.000,9:59:59.000 Here's a beautiful example of a psychological solution deployed in Korea. 9:59:59.000,9:59:59.000 Red traffic lights have a countdown delay. 9:59:59.000,9:59:59.000 It's proven to reduce the accident rate in experiments. 9:59:59.000,9:59:59.000 Why? Because road rage, impatience and general irritation 9:59:59.000,9:59:59.000 are massively reduced when you can actually see the time you have to wait. 9:59:59.000,9:59:59.000 In China, not really understanding the principle behind this, 9:59:59.000,9:59:59.000 they applied the principle to green traffic lights. 9:59:59.000,9:59:59.000 (Laughter) 9:59:59.000,9:59:59.000 Which isn't a great idea. 9:59:59.000,9:59:59.000 You're 200 yards away, you realize you've got five seconds to go, you floor it. 9:59:59.000,9:59:59.000 (Laughter) 9:59:59.000,9:59:59.000 The Koreans, very assiduously, did test both. 9:59:59.000,9:59:59.000 The accident rate goes down when you apply this to red traffic lights; 9:59:59.000,9:59:59.000 it goes up when you apply it to green traffic lights. 9:59:59.000,9:59:59.000 This is all I'm asking for really in human decision making, 9:59:59.000,9:59:59.000 is the consideration of these three things. 9:59:59.000,9:59:59.000 I'm not asking for the complete primacy of one over the other. 9:59:59.000,9:59:59.000 I'm merely saying that when you solve problems, 9:59:59.000,9:59:59.000 you should look at all three of these equally 9:59:59.000,9:59:59.000 and you should seek as far as possible 9:59:59.000,9:59:59.000 to find solutions which sit in the sweet spot in the middle. 9:59:59.000,9:59:59.000 If you actually look at a great business, 9:59:59.000,9:59:59.000 you'll nearly always see all of these three things coming into play. 9:59:59.000,9:59:59.000 Really, really successful businesses -- 9:59:59.000,9:59:59.000 Google is great, great technological success, 9:59:59.000,9:59:59.000 but it's also based on a very good psychological insight: 9:59:59.000,9:59:59.000 People believe something that only does one thing 9:59:59.000,9:59:59.000 is better at that thing than something that does that thing and something else. 9:59:59.000,9:59:59.000 It's an innate thing called goal dilution. 9:59:59.000,9:59:59.000 Ayelet Fishbach has written a paper about this. 9:59:59.000,9:59:59.000 Everybody else besides Google, more or less, 9:59:59.000,9:59:59.000 was trying to be a portal. 9:59:59.000,9:59:59.000 Yes, there's a search function, 9:59:59.000,9:59:59.000 but you also have weather, sports scores, bits of news. 9:59:59.000,9:59:59.000 Google understood that if you're just a search engine, 9:59:59.000,9:59:59.000 people assume you're a very, very good search engine. 9:59:59.000,9:59:59.000 All of you know this actually 9:59:59.000,9:59:59.000 from when you go in to buy a television. 9:59:59.000,9:59:59.000 And in the shabbier end of the row of flatscreen TV's 9:59:59.000,9:59:59.000 you can see are these rather despised things combined TV and DVD players. 9:59:59.000,9:59:59.000 And we have know knowledge whatsoever of the quality of those things, 9:59:59.000,9:59:59.000 but we look at a combined TV and DVD player and we go "Uck. 9:59:59.000,9:59:59.000 It's probably a bit of a crap telly and a bit rubbish as a DVD player." 9:59:59.000,9:59:59.000 So we walk out of the shops with one of each. 9:59:59.000,9:59:59.000 Google is as much a psychological success as it is a technological one. 9:59:59.000,9:59:59.000 I propose that we can use psychology to solve problems 9:59:59.000,9:59:59.000 that we didn't even realize were problems at all. 9:59:59.000,9:59:59.000 This is my suggestion for getting people to finish their course of antibiotics. 9:59:59.000,9:59:59.000 Don't give them 24 white pills. 9:59:59.000,9:59:59.000 Give them 18 white pills and six blue ones 9:59:59.000,9:59:59.000 and tell them to take the white pills first and then take the blue ones. 9:59:59.000,9:59:59.000 It's called chunking. 9:59:59.000,9:59:59.000 The likelihood that people will get to the end is much greater 9:59:59.000,9:59:59.000 when there is a milestone somewhere in the middle. 9:59:59.000,9:59:59.000 One of the great mistakes, I think, of economics 9:59:59.000,9:59:59.000 is it fails to understand that what something is, 9:59:59.000,9:59:59.000 whether it's retirement, unemployment, cost, 9:59:59.000,9:59:59.000 is a function, not only of its amount, but also its meaning. 9:59:59.000,9:59:59.000 This is a toll crossing in Britain. 9:59:59.000,9:59:59.000 Quite often queues happen at the tolls. 9:59:59.000,9:59:59.000 Sometimes you get very, very severe queues. 9:59:59.000,9:59:59.000 You could apply the same principle actually, if you like, 9:59:59.000,9:59:59.000 to the security lanes in airports. 9:59:59.000,9:59:59.000 What would happen if you could actually pay twice as much money to cross the bridge, 9:59:59.000,9:59:59.000 but go through a lane that's an express lane. 9:59:59.000,9:59:59.000 It's not an unreasonable thing to do. It's an economically efficient thing to do. 9:59:59.000,9:59:59.000 Time means more to some people than others. 9:59:59.000,9:59:59.000 If you're waiting trying to get to a job interview, 9:59:59.000,9:59:59.000 you'd pay a couple of pounds more to go through the fast lane. 9:59:59.000,9:59:59.000 If you're on the way to visit your mother in-law, 9:59:59.000,9:59:59.000 you'd probably prefer to stay on the left. 9:59:59.000,9:59:59.000 The only problem is if you introduce this economically efficient solution, 9:59:59.000,9:59:59.000 people hate it. 9:59:59.000,9:59:59.000 Because they think you're deliberately creating delays at the bridge 9:59:59.000,9:59:59.000 in order to maximize your revenue, 9:59:59.000,9:59:59.000 and "Why on earth should I pay to subsidize your imcompetence?" 9:59:59.000,9:59:59.000 On the other hand, change the frame slightly 9:59:59.000,9:59:59.000 and create charitable yield management, 9:59:59.000,9:59:59.000 so the extra money give goes not to the bridge company, it goes to charity, 9:59:59.000,9:59:59.000 and the mental willingness to pay completely changes. 9:59:59.000,9:59:59.000 You have a relatively economic solution, 9:59:59.000,9:59:59.000 but one that actually meets with public approval 9:59:59.000,9:59:59.000 and even a small degree of affection, 9:59:59.000,9:59:59.000 rather than being seen as bastardy. 9:59:59.000,9:59:59.000 So where economists make the fundamental mistake 9:59:59.000,9:59:59.000 is they think that money is money. 9:59:59.000,9:59:59.000 Actually my pain experienced in paying five pounds 9:59:59.000,9:59:59.000 is not just proportionate to the amount, 9:59:59.000,9:59:59.000 but where I think that money is going. 9:59:59.000,9:59:59.000 And I think understanding that could revolutionize tax policy. 9:59:59.000,9:59:59.000 It could revolutionize the public services. 9:59:59.000,9:59:59.000 It could really change things quite significantly. 9:59:59.000,9:59:59.000 Here's a guy you all need to study. 9:59:59.000,9:59:59.000 He's an Austrian school economist 9:59:59.000,9:59:59.000 who was first active in the first half of the 20th century in Vienna. 9:59:59.000,9:59:59.000 What was interesting about the Austrian school 9:59:59.000,9:59:59.000 is they actually grew up alongside Freud. 9:59:59.000,9:59:59.000 And so they're predominantly interested in psychology. 9:59:59.000,9:59:59.000 They believed that there was a discipline called praxeology, 9:59:59.000,9:59:59.000 which is a prior discipline to the study of economics. 9:59:59.000,9:59:59.000 Praxeology is the study of human choice, action and decision making. 9:59:59.000,9:59:59.000 I think they're right. 9:59:59.000,9:59:59.000 I think the danger we have in today's world 9:59:59.000,9:59:59.000 is we have the study of economics 9:59:59.000,9:59:59.000 considers itself to be a prior discipline to the study of human psychology. 9:59:59.000,9:59:59.000 But as Charlie Munger says, "If economics isn't behavioral, 9:59:59.000,9:59:59.000 I don't know what the hell is." 9:59:59.000,9:59:59.000 Von Mises interestingly believes economics is just a subset of psychology. 9:59:59.000,9:59:59.000 I think he just refers to economics as 9:59:59.000,9:59:59.000 "The study of human praxeology under conditions of scarcity." 9:59:59.000,9:59:59.000 But von Mises, among many other things, 9:59:59.000,9:59:59.000 I think uses an analogy which is probably the best justification and explanation 9:59:59.000,9:59:59.000 for the value of marketing, the value of perceived value 9:59:59.000,9:59:59.000 and the fact that we should treat it as being absolutely equivalent 9:59:59.000,9:59:59.000 to any other kind of value. 9:59:59.000,9:59:59.000 We tend to, all of us -- even those of us who work in marketing -- 9:59:59.000,9:59:59.000 to think of value in two ways. 9:59:59.000,9:59:59.000 There's the real value, 9:59:59.000,9:59:59.000 which is when you make something in a factory and provide a service, 9:59:59.000,9:59:59.000 and then there's a kind of dubious value, 9:59:59.000,9:59:59.000 which you create by changing the way people look at things. 9:59:59.000,9:59:59.000 Von Mises completely rejected this distinction. 9:59:59.000,9:59:59.000 And he used this following analogy. 9:59:59.000,9:59:59.000 He referred actually to strange economists called the French Physiocrats 9:59:59.000,9:59:59.000 who believed that the only true value was what you extracted from the land. 9:59:59.000,9:59:59.000 So if you're a shepherd or a quarryman or a farmer, 9:59:59.000,9:59:59.000 you created true value. 9:59:59.000,9:59:59.000 If however, you bought some wool from the shepherd 9:59:59.000,9:59:59.000 and charged a premium for converting it into a hat, 9:59:59.000,9:59:59.000 you weren't actually creating value, 9:59:59.000,9:59:59.000 you were exploiting the shepherd.