WEBVTT 99:59:59.999 --> 99:59:59.999 What you have here 99:59:59.999 --> 99:59:59.999 is an electronic cigarette. 99:59:59.999 --> 99:59:59.999 It's something that's, since it was invented a year or two ago, 99:59:59.999 --> 99:59:59.999 has given me untold happiness. 99:59:59.999 --> 99:59:59.999 (Laughter) 99:59:59.999 --> 99:59:59.999 A little bit of it, I think, is the nicotine, 99:59:59.999 --> 99:59:59.999 but there's something much bigger than that. 99:59:59.999 --> 99:59:59.999 Which is ever since, in the U.K., they banned smoking in public places, 99:59:59.999 --> 99:59:59.999 I've never enjoyed a drinks party ever again. 99:59:59.999 --> 99:59:59.999 (Laughter) 99:59:59.999 --> 99:59:59.999 And the reason, I only worked out just the other day, 99:59:59.999 --> 99:59:59.999 which is when you go to a drinks party 99:59:59.999 --> 99:59:59.999 and you stand up and you hold a glass of red wine 99:59:59.999 --> 99:59:59.999 and you talk endlessly to people, 99:59:59.999 --> 99:59:59.999 you don't actually want to spend all the time talking. 99:59:59.999 --> 99:59:59.999 It's really, really tiring. 99:59:59.999 --> 99:59:59.999 Sometimes you just want to stand there silently, alone with your thoughts. 99:59:59.999 --> 99:59:59.999 sometimes you just want to stand in the corner and stare out of the window. 99:59:59.999 --> 99:59:59.999 Now the problem is, when you can't smoke, 99:59:59.999 --> 99:59:59.999 if you stand and stare out the window on your own, 99:59:59.999 --> 99:59:59.999 you're an antisocial, friendless idiot. 99:59:59.999 --> 99:59:59.999 (Laughter) 99:59:59.999 --> 99:59:59.999 If you stand and stare out of the window on your own with a cigarette, 99:59:59.999 --> 99:59:59.999 you're a fucking philosopher. 99:59:59.999 --> 99:59:59.999 (Laughter) 99:59:59.999 --> 99:59:59.999 (Applause) 99:59:59.999 --> 99:59:59.999 So the power of reframing things 99:59:59.999 --> 99:59:59.999 cannot be overstated. 99:59:59.999 --> 99:59:59.999 What we have is exactly the same thing, the same activity, 99:59:59.999 --> 99:59:59.999 but one of them makes you feel great 99:59:59.999 --> 99:59:59.999 and the other one, with just a small change of posture, 99:59:59.999 --> 99:59:59.999 makes you feel terrible. 99:59:59.999 --> 99:59:59.999 And I think one of the problems with classical economics 99:59:59.999 --> 99:59:59.999 is it's absolutely preoccupied with reality. 99:59:59.999 --> 99:59:59.999 And reality isn't a particularly good guide to human happiness. 99:59:59.999 --> 99:59:59.999 Why, for example, 99:59:59.999 --> 99:59:59.999 are pensioners much happier 99:59:59.999 --> 99:59:59.999 than the young unemployed? 99:59:59.999 --> 99:59:59.999 Both of them, after all, are in exactly the same stage of life. 99:59:59.999 --> 99:59:59.999 You both have too much time on your hands and not much money. 99:59:59.999 --> 99:59:59.999 But pensioners are reportedly very, very happy, 99:59:59.999 --> 99:59:59.999 whereas the unemployed are extraordinarily unhappy and depressed. 99:59:59.999 --> 99:59:59.999 The reason, I think, is that pensioners believe they've chosen to be pensioners, 99:59:59.999 --> 99:59:59.999 whereas the young unemployed 99:59:59.999 --> 99:59:59.999 feel it's been thrust upon them. 99:59:59.999 --> 99:59:59.999 In England the upper-middle-classes have actually solved this problem perfectly, 99:59:59.999 --> 99:59:59.999 because they've rebranded unemployment. 99:59:59.999 --> 99:59:59.999 If you're an upper-middle-class English person, 99:59:59.999 --> 99:59:59.999 you call unemployment "a year off." 99:59:59.999 --> 99:59:59.999 (Laughter) 99:59:59.999 --> 99:59:59.999 And that's because having a son who's unemployed in Manchester 99:59:59.999 --> 99:59:59.999 is really quite embarrassing, 99:59:59.999 --> 99:59:59.999 but having a son who's unemployed in Thailand 99:59:59.999 --> 99:59:59.999 is really viewed as quite an accomplishment. 99:59:59.999 --> 99:59:59.999 (Laughter) 99:59:59.999 --> 99:59:59.999 But actually the power to rebrand things, 99:59:59.999 --> 99:59:59.999 to understand that actually our experiences, costs, things 99:59:59.999 --> 99:59:59.999 don't actually much depend on what they really are, 99:59:59.999 --> 99:59:59.999 but on how we view them, 99:59:59.999 --> 99:59:59.999 I genuinely think can't be overstated. 99:59:59.999 --> 99:59:59.999 There's an experiment I think Daniel Pink refers to 99:59:59.999 --> 99:59:59.999 where you put two dogs in a box 99:59:59.999 --> 99:59:59.999 and the box has an electric floor. 99:59:59.999 --> 99:59:59.999 Every now and then an electric shock is applied to the floor, 99:59:59.999 --> 99:59:59.999 which pains the dogs. 99:59:59.999 --> 99:59:59.999 The only difference is one of the dogs has a small button in its half of the box. 99:59:59.999 --> 99:59:59.999 And when it nuzzles the button, the electric shock stops. 99:59:59.999 --> 99:59:59.999 The other dog doesn't have the button. 99:59:59.999 --> 99:59:59.999 It's exposed to exactly the same level of pain as the dog in the first box, 99:59:59.999 --> 99:59:59.999 but it has no control over the circumstances. 99:59:59.999 --> 99:59:59.999 Generally the first dog can be relatively content. 99:59:59.999 --> 99:59:59.999 The second dog lapses into complete depression. 99:59:59.999 --> 99:59:59.999 The circumstances in our lives may actually matter less to our happiness. 99:59:59.999 --> 99:59:59.999 than the sense of control we feel over our lives. 99:59:59.999 --> 99:59:59.999 It's an interesting question. 99:59:59.999 --> 99:59:59.999 We ask the question -- the whole debate in the Western world 99:59:59.999 --> 99:59:59.999 is about the level of taxation. 99:59:59.999 --> 99:59:59.999 But I think there's another debate to be asked, 99:59:59.999 --> 99:59:59.999 which is the level of control we have over our tax money. 99:59:59.999 --> 99:59:59.999 That what costs us 10 pounds in one context can be a curse. 99:59:59.999 --> 99:59:59.999 What costs us 10 pounds in a different context we may actually welcome. 99:59:59.999 --> 99:59:59.999 And pay 20,000 pounds in tax toward health 99:59:59.999 --> 99:59:59.999 and you're merely filling a mug. 99:59:59.999 --> 99:59:59.999 Pay 20,000 pounds to endow a hospital ward 99:59:59.999 --> 99:59:59.999 and you're called a philanthropist. 99:59:59.999 --> 99:59:59.999 I'm probably in the wrong country to talk about willingness to pay tax. 99:59:59.999 --> 99:59:59.999 (Laughter) 99:59:59.999 --> 99:59:59.999 So I'll give you one in return. How you frame things really matters. 99:59:59.999 --> 99:59:59.999 Do you call it the bailout of Greece 99:59:59.999 --> 99:59:59.999 or the bailout of a load of stupid banks which lent to Greece? 99:59:59.999 --> 99:59:59.999 Because they are actually the same thing. 99:59:59.999 --> 99:59:59.999 What you call them actually affects 99:59:59.999 --> 99:59:59.999 how you react to them, viscerally and morally. 99:59:59.999 --> 99:59:59.999 I think psychological value is great to be absolutely honest. 99:59:59.999 --> 99:59:59.999 One of my great friends, a professor called Nick Chater, 99:59:59.999 --> 99:59:59.999 who's the Professor of Decision Sciences in London, 99:59:59.999 --> 99:59:59.999 believes that we should spend far less time 99:59:59.999 --> 99:59:59.999 looking into humanity's hidden depths 99:59:59.999 --> 99:59:59.999 and spend much more time exploring the hidden shallows. 99:59:59.999 --> 99:59:59.999 I think that's true actually. 99:59:59.999 --> 99:59:59.999 I think impressions have an insane effect 99:59:59.999 --> 99:59:59.999 on what we think and what we do. 99:59:59.999 --> 99:59:59.999 But what we don't have is a really good model of human psychology. 99:59:59.999 --> 99:59:59.999 At least pre-[unclear] perhaps, 99:59:59.999 --> 99:59:59.999 we didn't have a really good model of human psychology 99:59:59.999 --> 99:59:59.999 to put alongside models of engineering, of neoclassical economics. 99:59:59.999 --> 99:59:59.999 So people who believed in psychological solutions didn't have a model. 99:59:59.999 --> 99:59:59.999 We didn't have a framework. 99:59:59.999 --> 99:59:59.999 This is what Warren Buffett's business partner Charlie Munger calls 99:59:59.999 --> 99:59:59.999 "A latticework on which to hang your ideas." 99:59:59.999 --> 99:59:59.999 Engineers, economists, classical economists 99:59:59.999 --> 99:59:59.999 all had a very, very robust existing latticework 99:59:59.999 --> 99:59:59.999 on which practically every idea could be hung. 99:59:59.999 --> 99:59:59.999 We merely have a collection of random individual insights 99:59:59.999 --> 99:59:59.999 without no real model. 99:59:59.999 --> 99:59:59.999 And what that means is that in looking at solutions, 99:59:59.999 --> 99:59:59.999 we've probably given too much priority 99:59:59.999 --> 99:59:59.999 to what I call technical engineering solutions, Newtonian solutions, 99:59:59.999 --> 99:59:59.999 and not nearly enough to the psychological ones. 99:59:59.999 --> 99:59:59.999 You know my example of the Eurostar. 99:59:59.999 --> 99:59:59.999 Six million pounds spent to reduce the journey time 99:59:59.999 --> 99:59:59.999 between Paris and London by about 40 minutes. 99:59:59.999 --> 99:59:59.999 For 0.01 percent of this money you could put WiFi on the trains, 99:59:59.999 --> 99:59:59.999 which wouldn't have reduced the duration of the journey, 99:59:59.999 --> 99:59:59.999 but would have improved its enjoyment and its usefullness far more. 99:59:59.999 --> 99:59:59.999 For maybe 10 percent of the money, 99:59:59.999 --> 99:59:59.999 you could have paid all of the world's top male and female supermodels 99:59:59.999 --> 99:59:59.999 to walk up and down the train handing out free Chateau Petrus to all the passengers. 99:59:59.999 --> 99:59:59.999 You'd still have five billion pounds in change, 99:59:59.999 --> 99:59:59.999 and people would ask for the trains to be slowed down. 99:59:59.999 --> 99:59:59.999 (Laughter) 99:59:59.999 --> 99:59:59.999 Why were we not given the chance 99:59:59.999 --> 99:59:59.999 to solve that problem psychologically? 99:59:59.999 --> 99:59:59.999 I think It's because there's an imbalance, an asymmetry, 99:59:59.999 --> 99:59:59.999 in the way we treat creative, emotionally-driven psychological ideas 99:59:59.999 --> 99:59:59.999 versus the way we treat rational numerical spreadsheet-driven ideas. 99:59:59.999 --> 99:59:59.999 If you're a crazy person, I think quite rightly, 99:59:59.999 --> 99:59:59.999 you have to share all your ideas for approval 99:59:59.999 --> 99:59:59.999 with people much more rational than you. 99:59:59.999 --> 99:59:59.999 You have to go in and you have to have a cost-benefit analysis, 99:59:59.999 --> 99:59:59.999 a feasibility study, an ROI study and so forth. 99:59:59.999 --> 99:59:59.999 And I think that's probably right. 99:59:59.999 --> 99:59:59.999 But this does not apply the other way around. 99:59:59.999 --> 99:59:59.999 People who have an existing framework, 99:59:59.999 --> 99:59:59.999 an economic framework, an engineering framework, 99:59:59.999 --> 99:59:59.999 feel that actually logic is its own answer. 99:59:59.999 --> 99:59:59.999 What they don't say is "Well the numbers all seem to add up, 99:59:59.999 --> 99:59:59.999 but before I present this idea, I'll go and show it to some really crazy people 99:59:59.999 --> 99:59:59.999 to see if they can come up with something better." 99:59:59.999 --> 99:59:59.999 And so we, artificially I think, prioritize 99:59:59.999 --> 99:59:59.999 what I'd call mechanistic ideas over psychological ideas. 99:59:59.999 --> 99:59:59.999 An example of a great psychological idea: 99:59:59.999 --> 99:59:59.999 The single best improvement on customer satisfaction on the London Underground per pounds spent 99:59:59.999 --> 99:59:59.999 came when they did add any extra trains or change the frequency of the trains, 99:59:59.999 --> 99:59:59.999 they put dot matrix display board on the platforms. 99:59:59.999 --> 99:59:59.999 Because the nature of the wait 99:59:59.999 --> 99:59:59.999 is not just dependent on its numerical quality, its duration, 99:59:59.999 --> 99:59:59.999 but on the level of uncertainty you experience during that wait. 99:59:59.999 --> 99:59:59.999 Waiting seven minutes for a train with a countdown clock 99:59:59.999 --> 99:59:59.999 is less frustrating and irritating 99:59:59.999 --> 99:59:59.999 than waiting four minutes, knuckle-biting 99:59:59.999 --> 99:59:59.999 going, "When's this train going to damn well arrive?" 99:59:59.999 --> 99:59:59.999 Here's a beautiful example of a psychological solution deployed in Korea. 99:59:59.999 --> 99:59:59.999 Red traffic lights have a countdown delay. 99:59:59.999 --> 99:59:59.999 It's proven to reduce the accident rate in experiments. 99:59:59.999 --> 99:59:59.999 Why? Because road rage, impatience and general irritation 99:59:59.999 --> 99:59:59.999 are massively reduced when you can actually see the time you have to wait. 99:59:59.999 --> 99:59:59.999 In China, not really understanding the principle behind this, 99:59:59.999 --> 99:59:59.999 they applied the principle to green traffic lights. 99:59:59.999 --> 99:59:59.999 (Laughter) 99:59:59.999 --> 99:59:59.999 Which isn't a great idea. 99:59:59.999 --> 99:59:59.999 You're 200 yards away, you realize you've got five seconds to go, you floor it. 99:59:59.999 --> 99:59:59.999 (Laughter) 99:59:59.999 --> 99:59:59.999 The Koreans, very assiduously, did test both. 99:59:59.999 --> 99:59:59.999 The accident rate goes down when you apply this to red traffic lights; 99:59:59.999 --> 99:59:59.999 it goes up when you apply it to green traffic lights. 99:59:59.999 --> 99:59:59.999 This is all I'm asking for really in human decision making, 99:59:59.999 --> 99:59:59.999 is the consideration of these three things. 99:59:59.999 --> 99:59:59.999 I'm not asking for the complete primacy of one over the other. 99:59:59.999 --> 99:59:59.999 I'm merely saying that when you solve problems, 99:59:59.999 --> 99:59:59.999 you should look at all three of these equally 99:59:59.999 --> 99:59:59.999 and you should seek as far as possible 99:59:59.999 --> 99:59:59.999 to find solutions which sit in the sweet spot in the middle. 99:59:59.999 --> 99:59:59.999 If you actually look at a great business, 99:59:59.999 --> 99:59:59.999 you'll nearly always see all of these three things coming into play. 99:59:59.999 --> 99:59:59.999 Really, really successful businesses -- 99:59:59.999 --> 99:59:59.999 Google is great, great technological success, 99:59:59.999 --> 99:59:59.999 but it's also based on a very good psychological insight: 99:59:59.999 --> 99:59:59.999 People believe something that only does one thing 99:59:59.999 --> 99:59:59.999 is better at that thing than something that does that thing and something else. 99:59:59.999 --> 99:59:59.999 It's an innate thing called goal dilution. 99:59:59.999 --> 99:59:59.999 Ayelet Fishbach has written a paper about this. 99:59:59.999 --> 99:59:59.999 Everybody else besides Google, more or less, 99:59:59.999 --> 99:59:59.999 was trying to be a portal. 99:59:59.999 --> 99:59:59.999 Yes, there's a search function, 99:59:59.999 --> 99:59:59.999 but you also have weather, sports scores, bits of news. 99:59:59.999 --> 99:59:59.999 Google understood that if you're just a search engine, 99:59:59.999 --> 99:59:59.999 people assume you're a very, very good search engine. 99:59:59.999 --> 99:59:59.999 All of you know this actually 99:59:59.999 --> 99:59:59.999 from when you go in to buy a television. 99:59:59.999 --> 99:59:59.999 And in the shabbier end of the row of flatscreen TV's 99:59:59.999 --> 99:59:59.999 you can see are these rather despised things combined TV and DVD players. 99:59:59.999 --> 99:59:59.999 And we have know knowledge whatsoever of the quality of those things, 99:59:59.999 --> 99:59:59.999 but we look at a combined TV and DVD player and we go "Uck. 99:59:59.999 --> 99:59:59.999 It's probably a bit of a crap telly and a bit rubbish as a DVD player." 99:59:59.999 --> 99:59:59.999 So we walk out of the shops with one of each. 99:59:59.999 --> 99:59:59.999 Google is as much a psychological success as it is a technological one. 99:59:59.999 --> 99:59:59.999 I propose that we can use psychology to solve problems 99:59:59.999 --> 99:59:59.999 that we didn't even realize were problems at all. 99:59:59.999 --> 99:59:59.999 This is my suggestion for getting people to finish their course of antibiotics. 99:59:59.999 --> 99:59:59.999 Don't give them 24 white pills. 99:59:59.999 --> 99:59:59.999 Give them 18 white pills and six blue ones 99:59:59.999 --> 99:59:59.999 and tell them to take the white pills first and then take the blue ones. 99:59:59.999 --> 99:59:59.999 It's called chunking. 99:59:59.999 --> 99:59:59.999 The likelihood that people will get to the end is much greater 99:59:59.999 --> 99:59:59.999 when there is a milestone somewhere in the middle. 99:59:59.999 --> 99:59:59.999 One of the great mistakes, I think, of economics 99:59:59.999 --> 99:59:59.999 is it fails to understand that what something is, 99:59:59.999 --> 99:59:59.999 whether it's retirement, unemployment, cost, 99:59:59.999 --> 99:59:59.999 is a function, not only of its amount, but also its meaning. 99:59:59.999 --> 99:59:59.999 This is a toll crossing in Britain. 99:59:59.999 --> 99:59:59.999 Quite often queues happen at the tolls. 99:59:59.999 --> 99:59:59.999 Sometimes you get very, very severe queues. 99:59:59.999 --> 99:59:59.999 You could apply the same principle actually, if you like, 99:59:59.999 --> 99:59:59.999 to the security lanes in airports. 99:59:59.999 --> 99:59:59.999 What would happen if you could actually pay twice as much money to cross the bridge, 99:59:59.999 --> 99:59:59.999 but go through a lane that's an express lane. 99:59:59.999 --> 99:59:59.999 It's not an unreasonable thing to do. It's an economically efficient thing to do. 99:59:59.999 --> 99:59:59.999 Time means more to some people than others. 99:59:59.999 --> 99:59:59.999 If you're waiting trying to get to a job interview, 99:59:59.999 --> 99:59:59.999 you'd pay a couple of pounds more to go through the fast lane. 99:59:59.999 --> 99:59:59.999 If you're on the way to visit your mother in-law, 99:59:59.999 --> 99:59:59.999 you'd probably prefer to stay on the left. 99:59:59.999 --> 99:59:59.999 The only problem is if you introduce this economically efficient solution, 99:59:59.999 --> 99:59:59.999 people hate it. 99:59:59.999 --> 99:59:59.999 Because they think you're deliberately creating delays at the bridge 99:59:59.999 --> 99:59:59.999 in order to maximize your revenue, 99:59:59.999 --> 99:59:59.999 and "Why on earth should I pay to subsidize your imcompetence?" 99:59:59.999 --> 99:59:59.999 On the other hand, change the frame slightly 99:59:59.999 --> 99:59:59.999 and create charitable yield management, 99:59:59.999 --> 99:59:59.999 so the extra money give goes not to the bridge company, it goes to charity, 99:59:59.999 --> 99:59:59.999 and the mental willingness to pay completely changes. 99:59:59.999 --> 99:59:59.999 You have a relatively economic solution, 99:59:59.999 --> 99:59:59.999 but one that actually meets with public approval 99:59:59.999 --> 99:59:59.999 and even a small degree of affection, 99:59:59.999 --> 99:59:59.999 rather than being seen as bastardy. 99:59:59.999 --> 99:59:59.999 So where economists make the fundamental mistake 99:59:59.999 --> 99:59:59.999 is they think that money is money. 99:59:59.999 --> 99:59:59.999 Actually my pain experienced in paying five pounds 99:59:59.999 --> 99:59:59.999 is not just proportionate to the amount, 99:59:59.999 --> 99:59:59.999 but where I think that money is going. 99:59:59.999 --> 99:59:59.999 And I think understanding that could revolutionize tax policy. 99:59:59.999 --> 99:59:59.999 It could revolutionize the public services. 99:59:59.999 --> 99:59:59.999 It could really change things quite significantly. 99:59:59.999 --> 99:59:59.999 Here's a guy you all need to study. 99:59:59.999 --> 99:59:59.999 He's an Austrian school economist 99:59:59.999 --> 99:59:59.999 who was first active in the first half of the 20th century in Vienna. 99:59:59.999 --> 99:59:59.999 What was interesting about the Austrian school 99:59:59.999 --> 99:59:59.999 is they actually grew up alongside Freud. 99:59:59.999 --> 99:59:59.999 And so they're predominantly interested in psychology. 99:59:59.999 --> 99:59:59.999 They believed that there was a discipline called praxeology, 99:59:59.999 --> 99:59:59.999 which is a prior discipline to the study of economics. 99:59:59.999 --> 99:59:59.999 Praxeology is the study of human choice, action and decision making. 99:59:59.999 --> 99:59:59.999 I think they're right. 99:59:59.999 --> 99:59:59.999 I think the danger we have in today's world 99:59:59.999 --> 99:59:59.999 is we have the study of economics 99:59:59.999 --> 99:59:59.999 considers itself to be a prior discipline to the study of human psychology. 99:59:59.999 --> 99:59:59.999 But as Charlie Munger says, "If economics isn't behavioral, 99:59:59.999 --> 99:59:59.999 I don't know what the hell is." 99:59:59.999 --> 99:59:59.999 Von Mises interestingly believes economics is just a subset of psychology. 99:59:59.999 --> 99:59:59.999 I think he just refers to economics as 99:59:59.999 --> 99:59:59.999 "The study of human praxeology under conditions of scarcity." 99:59:59.999 --> 99:59:59.999 But von Mises, among many other things, 99:59:59.999 --> 99:59:59.999 I think uses an analogy which is probably the best justification and explanation 99:59:59.999 --> 99:59:59.999 for the value of marketing, the value of perceived value 99:59:59.999 --> 99:59:59.999 and the fact that we should treat it as being absolutely equivalent 99:59:59.999 --> 99:59:59.999 to any other kind of value. 99:59:59.999 --> 99:59:59.999 We tend to, all of us -- even those of us who work in marketing -- 99:59:59.999 --> 99:59:59.999 to think of value in two ways. 99:59:59.999 --> 99:59:59.999 There's the real value, 99:59:59.999 --> 99:59:59.999 which is when you make something in a factory and provide a service, 99:59:59.999 --> 99:59:59.999 and then there's a kind of dubious value, 99:59:59.999 --> 99:59:59.999 which you create by changing the way people look at things. 99:59:59.999 --> 99:59:59.999 Von Mises completely rejected this distinction. 99:59:59.999 --> 99:59:59.999 And he used this following analogy. 99:59:59.999 --> 99:59:59.999 He referred actually to strange economists called the French Physiocrats 99:59:59.999 --> 99:59:59.999 who believed that the only true value was what you extracted from the land. 99:59:59.999 --> 99:59:59.999 So if you're a shepherd or a quarryman or a farmer, 99:59:59.999 --> 99:59:59.999 you created true value. 99:59:59.999 --> 99:59:59.999 If however, you bought some wool from the shepherd 99:59:59.999 --> 99:59:59.999 and charged a premium for converting it into a hat, 99:59:59.999 --> 99:59:59.999 you weren't actually creating value, 99:59:59.999 --> 99:59:59.999 you were exploiting the shepherd.