0:00:01.101,0:00:02.627
What you have here

0:00:02.651,0:00:05.920
is an electronic cigarette.

0:00:06.837,0:00:10.056
It's something that, since it was[br]invented a year or two ago,

0:00:10.080,0:00:11.551
has given me untold happiness.

0:00:11.575,0:00:12.756
(Laughter)

0:00:12.780,0:00:15.215
A little bit of it,[br]I think, is the nicotine,

0:00:15.239,0:00:17.449
but there's something[br]much bigger than that;

0:00:17.473,0:00:23.040
which is, ever since, in the UK,[br]they banned smoking in public places,

0:00:23.064,0:00:25.884
I've never enjoyed[br]a drinks party ever again.

0:00:25.908,0:00:27.766
(Laughter)

0:00:27.790,0:00:30.886
And the reason, I only worked out[br]just the other day,

0:00:30.910,0:00:33.578
which is: when you go[br]to a drinks party and you stand up

0:00:33.602,0:00:36.562
and hold a glass of red wine[br]and you talk endlessly to people,

0:00:36.586,0:00:39.160
you don't actually want to spend[br]all the time talking.

0:00:39.184,0:00:40.655
It's really, really tiring.

0:00:40.679,0:00:44.692
Sometimes you just want to stand there[br]silently, alone with your thoughts.

0:00:44.716,0:00:48.718
Sometimes you just want to stand[br]in the corner and stare out of the window.

0:00:49.647,0:00:52.821
Now the problem is, when you can't smoke,

0:00:52.845,0:00:56.496
if you stand and stare[br]out of the window on your own,

0:00:56.520,0:00:58.742
you're an antisocial, friendless idiot.

0:00:58.766,0:01:01.076
(Laughter)

0:01:01.100,0:01:04.505
If you stand and stare out of the window[br]on your own with a cigarette,

0:01:04.529,0:01:06.282
you're a fucking philosopher.

0:01:06.306,0:01:09.109
(Laughter)

0:01:09.133,0:01:14.785
(Applause)

0:01:14.809,0:01:18.254
So the power of reframing things

0:01:19.718,0:01:22.174
cannot be overstated.

0:01:22.198,0:01:25.570
What we have is exactly[br]the same thing, the same activity,

0:01:25.594,0:01:27.912
but one of them makes you feel great

0:01:27.936,0:01:31.637
and the other one,[br]with just a small change of posture,

0:01:31.661,0:01:32.882
makes you feel terrible.

0:01:34.269,0:01:37.174
And I think one of the problems[br]with classical economics is,

0:01:37.198,0:01:39.631
it's absolutely preoccupied with reality.

0:01:39.655,0:01:43.289
And reality isn't a particularly good[br]guide to human happiness.

0:01:43.895,0:01:48.903
Why, for example,[br]are pensioners much happier

0:01:48.927,0:01:50.308
than the young unemployed?

0:01:51.293,0:01:54.539
Both of them, after all,[br]are in exactly the same stage of life.

0:01:54.563,0:01:57.515
You both have too much time[br]on your hands and not much money.

0:01:58.356,0:02:01.057
But pensioners are reportedly[br]very, very happy,

0:02:01.081,0:02:04.508
whereas the unemployed[br]are extraordinarily unhappy and depressed.

0:02:05.381,0:02:07.831
The reason, I think,[br]is that the pensioners believe

0:02:07.855,0:02:09.428
they've chosen to be pensioners,

0:02:09.452,0:02:13.405
whereas the young unemployed[br]feel it's been thrust upon them.

0:02:14.738,0:02:18.774
In England, the upper-middle classes have[br]actually solved this problem perfectly,

0:02:18.798,0:02:21.124
because they've re-branded unemployment.

0:02:21.148,0:02:23.414
If you're an upper-middle-class[br]English person,

0:02:23.438,0:02:25.766
you call unemployment "a year off."

0:02:25.790,0:02:28.484
(Laughter)

0:02:28.508,0:02:31.552
And that's because having a son[br]who's unemployed in Manchester

0:02:31.576,0:02:33.503
is really quite embarrassing.

0:02:33.527,0:02:36.605
But having a son[br]who's unemployed in Thailand

0:02:36.629,0:02:38.712
is really viewed[br]as quite an accomplishment.

0:02:38.736,0:02:40.765
(Laughter)

0:02:40.789,0:02:43.112
But actually, the power[br]to re-brand things --

0:02:43.136,0:02:48.675
to understand that[br]our experiences, costs, things

0:02:48.699,0:02:51.149
don't actually much depend[br]on what they really are,

0:02:51.173,0:02:52.746
but on how we view them --

0:02:52.770,0:02:55.679
I genuinely think can't be overstated.

0:02:55.703,0:02:58.159
There's an experiment[br]I think Daniel Pink refers to,

0:02:58.183,0:03:00.702
where you put two dogs in a box

0:03:00.726,0:03:03.939
and the box has an electric floor.

0:03:05.356,0:03:09.785
Every now and then,[br]an electric shock is applied to the floor,

0:03:09.809,0:03:11.636
which pains the dogs.

0:03:12.660,0:03:16.498
The only difference is one of the dogs[br]has a small button in its half of the box.

0:03:16.522,0:03:20.316
And when it nuzzles the button,[br]the electric shock stops.

0:03:21.376,0:03:23.880
The other dog doesn't have the button.

0:03:23.904,0:03:28.145
It's exposed to exactly the same level[br]of pain as the dog in the first box,

0:03:28.169,0:03:31.043
but it has no control[br]over the circumstances.

0:03:32.178,0:03:35.073
Generally, the first dog[br]can be relatively content.

0:03:35.097,0:03:38.041
The second dog lapses[br]into complete depression.

0:03:39.382,0:03:43.670
The circumstances of our lives[br]may actually matter less to our happiness

0:03:43.694,0:03:47.431
than the sense of control[br]we feel over our lives.

0:03:48.510,0:03:50.074
It's an interesting question.

0:03:51.269,0:03:54.347
We ask the question -- the whole[br]debate in the Western world

0:03:54.371,0:03:56.205
is about the level of taxation.

0:03:56.229,0:03:58.452
But I think there's another[br]debate to be asked,

0:03:58.476,0:04:01.907
which is the level of control[br]we have over our tax money,

0:04:01.931,0:04:06.567
that what costs us 10 pounds[br]in one context can be a curse;

0:04:06.591,0:04:11.193
what costs us 10 pounds in a different[br]context, we may actually welcome.

0:04:12.304,0:04:16.618
You know, pay 20,000 pounds[br]in tax toward health,

0:04:16.642,0:04:18.571
and you're merely feeling a mug.

0:04:18.595,0:04:21.857
Pay 20,000 pounds[br]to endow a hospital ward,

0:04:21.881,0:04:23.747
and you're called a philanthropist.

0:04:24.917,0:04:28.318
I'm probably in the wrong country[br]to talk about willingness to pay tax.

0:04:28.342,0:04:30.029
(Laughter)

0:04:30.053,0:04:35.253
So I'll give you one in return:[br]how you frame things really matters.

0:04:35.277,0:04:37.555
Do you call it "The bailout of Greece"?

0:04:37.579,0:04:40.775
Or "The bailout of a load of stupid[br]banks which lent to Greece"?

0:04:40.799,0:04:41.810
(Laughter)

0:04:41.834,0:04:44.184
Because they are actually the same thing.

0:04:44.208,0:04:48.068
What you call them[br]actually affects how you react to them,

0:04:48.092,0:04:50.126
viscerally and morally.

0:04:50.150,0:04:53.344
I think psychological value is great,[br]to be absolutely honest.

0:04:53.368,0:04:56.240
One of my great friends,[br]a professor called Nick Chater,

0:04:56.264,0:04:59.138
who's the Professor of Decision[br]Sciences in London,

0:04:59.162,0:05:03.662
believes we should spend far less time[br]looking into humanity's hidden depths,

0:05:03.686,0:05:07.109
and spend much more time[br]exploring the hidden shallows.

0:05:07.133,0:05:08.645
I think that's true, actually.

0:05:08.669,0:05:13.743
I think impressions have an insane effect[br]on what we think and what we do.

0:05:13.767,0:05:17.350
But what we don't have is a really[br]good model of human psychology --

0:05:17.374,0:05:19.659
at least pre-Kahneman, perhaps,

0:05:19.683,0:05:22.647
we didn't have a really good model[br]of human psychology

0:05:22.671,0:05:27.544
to put alongside models of engineering,[br]of neoclassical economics.

0:05:27.568,0:05:30.891
So people who believed in psychological[br]solutions didn't have a model.

0:05:30.915,0:05:32.850
We didn't have a framework.

0:05:32.874,0:05:36.221
This is what Warren Buffett's[br]business partner Charlie Munger calls

0:05:36.245,0:05:38.606
"a latticework on which[br]to hang your ideas."

0:05:39.447,0:05:42.320
Engineers, economists,[br]classical economists

0:05:42.344,0:05:45.275
all had a very, very robust[br]existing latticework

0:05:45.299,0:05:47.994
on which practically[br]every idea could be hung.

0:05:48.018,0:05:51.414
We merely have a collection[br]of random individual insights

0:05:51.438,0:05:52.839
without an overall model.

0:05:53.612,0:05:58.051
And what that means[br]is that, in looking at solutions,

0:05:58.075,0:06:00.801
we've probably given too much priority

0:06:00.825,0:06:04.946
to what I call technical engineering[br]solutions, Newtonian solutions,

0:06:04.970,0:06:07.348
and not nearly enough[br]to the psychological ones.

0:06:07.372,0:06:09.685
You know my example of the Eurostar:

0:06:09.709,0:06:10.907
six million pounds spent

0:06:10.931,0:06:14.151
to reduce the journey time[br]between Paris and London

0:06:14.175,0:06:15.613
by about 40 minutes.

0:06:16.569,0:06:20.417
For 0.01 percent of this money,[br]you could have put wi-fi on the trains,

0:06:20.441,0:06:23.109
which wouldn't have reduced[br]the duration of the journey,

0:06:23.133,0:06:27.052
but would have improved its enjoyment[br]and its usefulness far more.

0:06:28.025,0:06:29.693
For maybe 10 percent of the money,

0:06:29.717,0:06:33.051
you could have paid all of the world's top[br]male and female supermodels

0:06:33.075,0:06:36.010
to walk up and down the train[br]handing out free Château Pétrus

0:06:36.034,0:06:37.308
to all the passengers.

0:06:37.332,0:06:38.374
(Laughter)

0:06:38.398,0:06:40.748
You'd still have five million[br]pounds in change,

0:06:40.772,0:06:43.397
and people would ask[br]for the trains to be slowed down.

0:06:43.421,0:06:47.515
(Laughter)

0:06:47.539,0:06:50.901
Why were we not given the chance[br]to solve that problem psychologically?

0:06:50.925,0:06:53.409
I think it's because there's an imbalance,

0:06:53.433,0:07:00.067
an asymmetry in the way we treat creative,[br]emotionally driven psychological ideas

0:07:00.091,0:07:04.992
versus the way we treat rational,[br]numerical, spreadsheet-driven ideas.

0:07:05.016,0:07:07.483
If you're a creative person,[br]I think, quite rightly,

0:07:07.507,0:07:09.642
you have to share[br]all your ideas for approval

0:07:09.666,0:07:11.603
with people much more rational than you.

0:07:11.627,0:07:14.891
You have to go in[br]and have a cost-benefit analysis,

0:07:14.915,0:07:17.968
a feasibility study,[br]an ROI study and so forth.

0:07:17.992,0:07:19.734
And I think that's probably right.

0:07:20.643,0:07:23.289
But this does not apply[br]the other way around.

0:07:23.313,0:07:25.341
People who have an existing framework --

0:07:25.365,0:07:27.744
an economic framework,[br]an engineering framework --

0:07:27.768,0:07:30.934
feel that, actually,[br]logic is its own answer.

0:07:31.503,0:07:34.409
What they don't say is,[br]"Well, the numbers all seem to add up,

0:07:34.433,0:07:37.885
but before I present this idea,[br]I'll show it to some really crazy people

0:07:37.909,0:07:40.275
to see if they can come up with[br]something better."

0:07:40.299,0:07:43.054
And so we -- artificially,[br]I think -- prioritize

0:07:43.078,0:07:46.829
what I'd call mechanistic ideas[br]over psychological ideas.

0:07:47.577,0:07:49.609
An example of a great psychological idea:

0:07:49.633,0:07:52.249
the single best improvement[br]in passenger satisfaction

0:07:52.273,0:07:53.577
on the London Underground,

0:07:53.601,0:07:55.171
per pound spent,

0:07:55.195,0:07:57.530
came when they didn't add[br]any extra trains,

0:07:57.554,0:07:59.459
nor change the frequency of the trains;

0:07:59.483,0:08:02.612
they put dot matrix display boards[br]on the platforms --

0:08:03.617,0:08:07.468
because the nature of a wait is not just[br]dependent on its numerical quality,

0:08:07.492,0:08:08.735
its duration,

0:08:08.759,0:08:12.173
but on the level of uncertainty[br]you experience during that wait.

0:08:12.197,0:08:15.086
Waiting seven minutes for a train[br]with a countdown clock

0:08:15.110,0:08:17.003
is less frustrating and irritating

0:08:17.027,0:08:19.966
than waiting four minutes,[br]knuckle biting, going,

0:08:19.990,0:08:22.278
"When's this train[br]going to damn well arrive?"

0:08:22.879,0:08:25.436
Here's a beautiful example[br]of a psychological solution

0:08:25.460,0:08:26.631
deployed in Korea.

0:08:26.655,0:08:29.064
Red traffic lights have a countdown delay.

0:08:29.088,0:08:32.114
It's proven to reduce[br]the accident rate in experiments.

0:08:32.138,0:08:33.296
Why?

0:08:33.320,0:08:36.841
Because road rage, impatience and general[br]irritation are massively reduced

0:08:36.865,0:08:40.714
when you can actually see[br]the time you have to wait.

0:08:40.738,0:08:43.641
In China, not really understanding[br]the principle behind this,

0:08:43.665,0:08:46.404
they applied the same principle[br]to green traffic lights --

0:08:46.428,0:08:50.266
(Laughter)

0:08:50.290,0:08:51.812
which isn't a great idea.

0:08:51.836,0:08:54.926
You're 200 yards away, you realize[br]you've got five seconds to go,

0:08:54.950,0:08:56.102
you floor it.

0:08:56.126,0:08:59.449
(Laughter)

0:08:59.473,0:09:01.974
The Koreans, very assiduously,[br]did test both.

0:09:01.998,0:09:05.333
The accident rate goes down[br]when you apply this to red traffic lights;

0:09:05.357,0:09:07.945
it goes up when you apply it[br]to green traffic lights.

0:09:07.969,0:09:10.907
This is all I'm asking for, really,[br]in human decision making,

0:09:10.931,0:09:13.036
is the consideration[br]of these three things.

0:09:13.060,0:09:16.025
I'm not asking for the complete primacy[br]of one over the other.

0:09:16.049,0:09:18.289
I'm merely saying[br]that when you solve problems,

0:09:18.313,0:09:20.795
you should look[br]at all three of these equally,

0:09:20.819,0:09:23.020
and you should seek as far as possible

0:09:23.044,0:09:25.903
to find solutions which sit[br]in the sweet spot in the middle.

0:09:25.927,0:09:27.898
If you actually look at a great business,

0:09:27.922,0:09:31.511
you'll nearly always see all of these[br]three things coming into play.

0:09:31.535,0:09:33.218
Really successful businesses --

0:09:33.242,0:09:35.904
Google is a great, great[br]technological success,

0:09:35.928,0:09:39.127
but it's also based[br]on a very good psychological insight:

0:09:40.094,0:09:42.651
people believe something[br]that only does one thing

0:09:42.675,0:09:46.834
is better at that thing than something[br]that does that thing and something else.

0:09:46.858,0:09:49.564
It's an innate thing[br]called "goal dilution."

0:09:49.588,0:09:52.349
Ayelet Fishbach has written[br]a paper about this.

0:09:52.373,0:09:54.863
Everybody else at the time[br]of Google, more or less,

0:09:54.887,0:09:56.134
was trying to be a portal.

0:09:56.158,0:09:58.984
Yes, there's a search function,[br]but you also have weather,

0:09:59.008,0:10:00.666
sports scores, bits of news.

0:10:01.929,0:10:04.471
Google understood[br]that if you're just a search engine,

0:10:04.495,0:10:07.333
people assume you're a very,[br]very good search engine.

0:10:07.357,0:10:10.839
All of you know this, actually,[br]from when you go in to buy a television,

0:10:10.863,0:10:13.765
and in the shabbier end[br]of the row of flat-screen TVs,

0:10:13.789,0:10:16.094
you can see, are these[br]rather despised things

0:10:16.118,0:10:19.092
called "combined TV and DVD players."

0:10:19.802,0:10:22.993
And we have no knowledge whatsoever[br]of the quality of those things,

0:10:23.017,0:10:26.456
but we look at a combined[br]TV and DVD player and we go, "Uck.

0:10:26.480,0:10:30.412
It's probably a bit of a crap telly[br]and a bit rubbish as a DVD player."

0:10:30.436,0:10:32.853
So we walk out of the shops[br]with one of each.

0:10:33.326,0:10:37.926
Google is as much a psychological success[br]as it is a technological one.

0:10:39.000,0:10:41.633
I propose that we can use[br]psychology to solve problems

0:10:41.657,0:10:43.988
that we didn't even realize[br]were problems at all.

0:10:44.012,0:10:47.775
This is my suggestion for getting people[br]to finish their course of antibiotics.

0:10:47.799,0:10:49.368
Don't give them 24 white pills;

0:10:49.392,0:10:52.405
give them 18 white pills and six blue ones

0:10:52.429,0:10:54.496
and tell them to take[br]the white pills first,

0:10:54.520,0:10:55.990
and then take the blue ones.

0:10:56.886,0:10:58.037
It's called "chunking."

0:10:58.061,0:11:01.037
The likelihood that people will get[br]to the end is much greater

0:11:01.061,0:11:03.641
when there is a milestone[br]somewhere in the middle.

0:11:04.847,0:11:07.193
One of the great mistakes,[br]I think, of economics

0:11:07.217,0:11:09.620
is it fails to understand[br]that what something is --

0:11:09.644,0:11:12.152
whether it's retirement,[br]unemployment, cost --

0:11:13.416,0:11:17.140
is a function, not only of its amount,[br]but also its meaning.

0:11:17.971,0:11:20.773
This is a toll crossing in Britain.

0:11:20.797,0:11:23.734
Quite often queues happen at the tolls.

0:11:23.758,0:11:25.982
Sometimes you get very,[br]very severe queues.

0:11:26.006,0:11:28.196
You could apply[br]the same principle, actually,

0:11:28.220,0:11:29.960
to the security lanes in airports.

0:11:29.984,0:11:32.970
What would happen if you could actually[br]pay twice as much money

0:11:32.994,0:11:34.145
to cross the bridge,

0:11:34.169,0:11:36.288
but go through a lane[br]that's an express lane?

0:11:36.312,0:11:38.082
It's not an unreasonable thing to do;

0:11:38.106,0:11:40.117
it's an economically[br]efficient thing to do.

0:11:40.141,0:11:42.182
Time means more[br]to some people than others.

0:11:42.206,0:11:44.637
If you're waiting trying[br]to get to a job interview,

0:11:44.661,0:11:48.875
you'd patently pay a couple of pounds more[br]to go through the fast lane.

0:11:48.899,0:11:51.228
If you're on the way[br]to visit your mother-in-law,

0:11:51.252,0:11:52.403
you'd probably prefer --

0:11:52.427,0:11:53.610
(Laughter)

0:11:53.634,0:11:55.768
you'd probably prefer to stay on the left.

0:11:56.356,0:11:59.833
The only problem is if you introduce[br]this economically efficient solution,

0:11:59.857,0:12:01.007
people hate it ...

0:12:01.634,0:12:04.965
because they think you're deliberately[br]creating delays at the bridge

0:12:04.989,0:12:06.643
in order to maximize your revenue,

0:12:06.667,0:12:10.055
and, "Why on earth should I pay[br]to subsidize your incompetence?"

0:12:10.376,0:12:12.556
On the other hand,[br]change the frame slightly

0:12:12.580,0:12:14.871
and create charitable yield management,

0:12:14.895,0:12:18.029
so the extra money you get[br]goes not to the bridge company,

0:12:18.053,0:12:19.244
it goes to charity ...

0:12:20.211,0:12:23.056
and the mental willingness[br]to pay completely changes.

0:12:24.128,0:12:26.771
You have a relatively[br]economically efficient solution,

0:12:26.795,0:12:29.114
but one that actually meets[br]with public approval

0:12:29.138,0:12:31.138
and even a small degree of affection,

0:12:31.162,0:12:33.351
rather than being seen as bastardy.

0:12:34.504,0:12:37.158
So where economists[br]make the fundamental mistake

0:12:37.182,0:12:39.147
is they think that money is money.

0:12:40.275,0:12:44.506
Actually, my pain experienced[br]in paying five pounds

0:12:44.530,0:12:46.677
is not just proportionate to the amount,

0:12:46.701,0:12:48.685
but where I think that money is going.

0:12:49.314,0:12:52.310
And I think understanding that[br]could revolutionize tax policy.

0:12:52.334,0:12:54.337
It could revolutionize[br]the public services.

0:12:54.361,0:12:56.874
It could actually change things[br]quite significantly.

0:12:56.898,0:12:58.360
[Ludwig Von Mises is my hero.]

0:12:58.384,0:13:00.098
Here's a guy you all need to study.

0:13:00.122,0:13:01.727
He's an Austrian School economist

0:13:01.751,0:13:06.315
who was first active in the first half[br]of the 20th century in Vienna.

0:13:06.339,0:13:08.531
What was interesting[br]about the Austrian School

0:13:08.555,0:13:11.588
is they actually grew up alongside Freud.

0:13:11.612,0:13:14.265
And so they're predominantly[br]interested in psychology.

0:13:14.289,0:13:18.842
They believed that there was[br]a discipline called praxeology,

0:13:18.866,0:13:21.462
which is a prior discipline[br]to the study of economics.

0:13:21.486,0:13:25.934
Praxeology is the study of human choice,[br]action and decision-making.

0:13:26.660,0:13:27.985
I think they're right.

0:13:28.009,0:13:30.077
I think the danger[br]we have in today's world

0:13:30.101,0:13:31.781
is we have the study of economics

0:13:31.805,0:13:35.835
considers itself to be a prior discipline[br]to the study of human psychology.

0:13:35.859,0:13:38.828
But as Charlie Munger says,[br]"If economics isn't behavioral,

0:13:38.852,0:13:40.399
I don't know what the hell is."

0:13:41.804,0:13:47.605
Von Mises, interestingly, believes[br]economics is just a subset of psychology.

0:13:47.629,0:13:49.534
I think he just refers to economics

0:13:49.558,0:13:52.838
as "the study of human praxeology[br]under conditions of scarcity."

0:13:53.742,0:13:56.838
But Von Mises, among many other things,

0:13:56.862,0:14:01.512
I think uses an analogy which is probably[br]the best justification and explanation

0:14:01.536,0:14:05.743
for the value of marketing,[br]the value of perceived value

0:14:05.767,0:14:09.044
and the fact that we should treat it[br]as being absolutely equivalent

0:14:09.068,0:14:10.551
to any other kind of value.

0:14:11.054,0:14:14.006
We tend to, all of us, even those of us[br]who work in marketing,

0:14:14.030,0:14:15.328
think of value in two ways:

0:14:15.352,0:14:18.249
the real value, which is when[br]you make something in a factory

0:14:18.273,0:14:19.427
or provide a service,

0:14:19.451,0:14:21.069
and then there's a dubious value,

0:14:21.093,0:14:23.904
which you create by changing[br]the way people look at things.

0:14:23.928,0:14:26.222
Von Mises completely[br]rejected this distinction.

0:14:26.246,0:14:28.137
And he used this following analogy:

0:14:28.161,0:14:33.494
he referred to strange economists[br]called the French physiocrats,

0:14:33.518,0:14:37.148
who believed that the only true value[br]was what you extracted from the land.

0:14:37.172,0:14:39.657
So if you're a shepherd[br]or a quarryman or a farmer,

0:14:39.681,0:14:41.102
you created true value.

0:14:41.126,0:14:43.985
If however, you bought[br]some wool from the shepherd

0:14:44.009,0:14:46.990
and charged a premium[br]for converting it into a hat,

0:14:47.014,0:14:48.796
you weren't actually creating value,

0:14:48.820,0:14:50.580
you were exploiting the shepherd.

0:14:51.439,0:14:55.162
Now, Von Mises said that modern[br]economists make exactly the same mistake

0:14:55.186,0:14:57.243
with regard to advertising and marketing.

0:14:57.577,0:14:59.459
He says if you run a restaurant,

0:14:59.483,0:15:01.722
there is no healthy distinction to be made

0:15:01.746,0:15:04.299
between the value you create[br]by cooking the food

0:15:04.323,0:15:06.626
and the value you create[br]by sweeping the floor.

0:15:07.203,0:15:09.693
One of them creates, perhaps,[br]the primary product --

0:15:09.717,0:15:11.582
the thing we think we're paying for --

0:15:11.606,0:15:14.447
the other one creates a context[br]within which we can enjoy

0:15:14.471,0:15:15.995
and appreciate that product.

0:15:16.019,0:15:19.191
And the idea that one of them[br]should have priority over the other

0:15:19.215,0:15:20.365
is fundamentally wrong.

0:15:20.944,0:15:22.611
Try this quick thought experiment:

0:15:22.635,0:15:25.286
imagine a restaurant[br]that serves Michelin-starred food,

0:15:25.310,0:15:27.957
but where the restaurant smells of sewage

0:15:27.981,0:15:30.119
and there's human feces on the floor.

0:15:30.143,0:15:31.552
(Laughter)

0:15:31.576,0:15:34.069
The best thing you can do there[br]to create value

0:15:34.093,0:15:37.109
is not actually to improve[br]the food still further,

0:15:37.133,0:15:39.932
it's to get rid of the smell[br]and clean up the floor.

0:15:42.259,0:15:44.812
And it's vital we understand this.

0:15:44.836,0:15:47.483
If that seems like a sort[br]of strange, abstruse thing --

0:15:47.507,0:15:51.405
in the UK, the post office[br]had a 98 percent success rate

0:15:51.429,0:15:53.613
at delivering first-class[br]mail the next day.

0:15:54.192,0:15:56.077
They decided this wasn't good enough,

0:15:56.101,0:15:57.893
and they wanted to get it up to 99.

0:15:59.234,0:16:02.607
The effort to do that[br]almost broke the organization.

0:16:03.520,0:16:05.910
If, at the same time,[br]you'd gone and asked people,

0:16:05.934,0:16:08.753
"What percentage of first-class mail[br]arrives the next day?"

0:16:08.777,0:16:12.683
the average answer, or the modal answer,[br]would have been "50 to 60 percent."

0:16:13.381,0:16:16.095
Now, if your perception[br]is much worse than your reality,

0:16:16.119,0:16:19.143
what on earth are you doing[br]trying to change the reality?

0:16:19.167,0:16:22.782
That's like trying to improve the food[br]in a restaurant that stinks.

0:16:24.362,0:16:27.080
What you need to do is,[br]first of all, tell people

0:16:27.104,0:16:31.611
that 98 percent of first-class mail[br]gets there the next day.

0:16:31.635,0:16:33.156
That's pretty good.

0:16:33.180,0:16:36.388
I would argue, in Britain,[br]there's a much better frame of reference,

0:16:36.412,0:16:39.779
which is to tell people that more[br]first-class mail arrives the next day

0:16:39.803,0:16:42.518
in the UK than in Germany,[br]because generally, in Britain,

0:16:42.542,0:16:44.826
if you want to make us happy[br]about something,

0:16:44.850,0:16:47.042
just tell us we do it[br]better than the Germans.

0:16:47.066,0:16:48.796
(Laughter)

0:16:48.820,0:16:51.072
(Applause)

0:16:51.096,0:16:54.317
Choose your frame of reference[br]and the perceived value,

0:16:54.341,0:16:57.747
and therefore, the actual value[br]is completely transformed.

0:16:57.771,0:16:59.416
It has to be said of the Germans

0:16:59.440,0:17:02.142
that the Germans and the French[br]are doing a brilliant job

0:17:02.166,0:17:03.620
of creating a united Europe.

0:17:03.644,0:17:06.514
The only thing they didn't expect[br]is they're uniting Europe

0:17:06.538,0:17:09.536
through a shared mild hatred[br]of the French and Germans.

0:17:09.560,0:17:11.610
But I'm British;[br]that's the way we like it.

0:17:11.634,0:17:13.759
(Laughter)

0:17:14.099,0:17:16.220
What you'll also notice[br]is that, in any case,

0:17:16.244,0:17:17.434
our perception is leaky.

0:17:17.458,0:17:20.336
We can't tell the difference[br]between the quality of the food

0:17:20.360,0:17:22.373
and the environment[br]in which we consume it.

0:17:22.397,0:17:24.435
All of you will have seen this phenomenon

0:17:24.459,0:17:26.441
if you have your car washed or valeted.

0:17:26.465,0:17:29.586
When you drive away,[br]your car feels as if it drives better.

0:17:29.610,0:17:30.951
(Laughter)

0:17:30.975,0:17:32.231
And the reason for this --

0:17:32.255,0:17:34.903
unless my car valet[br]mysteriously is changing the oil

0:17:34.927,0:17:38.270
and performing work which I'm not paying[br]him for and I'm unaware of --

0:17:38.294,0:17:40.601
is because perception[br]is, in any case, leaky.

0:17:40.625,0:17:44.542
Analgesics that are branded[br]are more effective at reducing pain

0:17:44.566,0:17:46.377
than analgesics that are not branded.

0:17:46.401,0:17:49.019
I don't just mean through reported[br]pain reduction --

0:17:49.043,0:17:50.714
actual measured pain reduction.

0:17:50.738,0:17:55.362
And so perception[br]actually is leaky in any case.

0:17:56.021,0:17:59.039
So if you do something[br]that's perceptually bad in one respect,

0:17:59.063,0:18:00.286
you can damage the other.

0:18:00.310,0:18:01.461
Thank you very much.

0:18:01.485,0:18:03.873
(Applause)