WEBVTT 00:00:00.301 --> 00:00:01.792 What you have here 00:00:01.792 --> 00:00:04.417 is an electronic cigarette. 00:00:04.417 --> 00:00:09.258 It's something that's, since it was invented a year or two ago, 00:00:09.258 --> 00:00:10.964 has given me untold happiness. 00:00:10.964 --> 00:00:11.931 (Laughter) 00:00:11.931 --> 00:00:14.943 A little bit of it, I think, is the nicotine, 00:00:14.943 --> 00:00:16.831 but there's something much bigger than that. 00:00:16.831 --> 00:00:21.290 Which is ever since, in the U.K., they banned smoking in public places, 00:00:21.290 --> 00:00:25.853 I've never enjoyed a drinks party ever again. 00:00:25.853 --> 00:00:27.000 (Laughter) 00:00:27.000 --> 00:00:29.792 And the reason, I only worked out just the other day, 00:00:29.792 --> 00:00:31.828 which is when you go to a drinks party 00:00:31.828 --> 00:00:34.365 and you stand up and you hold a glass of red wine 00:00:34.365 --> 00:00:36.050 and you talk endlessly to people, 00:00:36.050 --> 00:00:38.610 you don't actually want to spend all the time talking. 00:00:38.610 --> 00:00:40.037 It's really, really tiring. 00:00:40.037 --> 00:00:43.542 Sometimes you just want to stand there silently, alone with your thoughts. 00:00:43.542 --> 00:00:47.583 sometimes you just want to stand in the corner and stare out of the window. 00:00:47.583 --> 00:00:51.991 Now the problem is, when you can't smoke, 00:00:51.991 --> 00:00:55.609 if you stand and stare out of the window on your own, 00:00:55.609 --> 00:00:58.705 you're an antisocial, friendless idiot. 00:00:58.705 --> 00:00:59.959 (Laughter) 00:00:59.959 --> 00:01:03.519 If you stand and stare out of the window on your own with a cigarette, 00:01:03.519 --> 00:01:05.845 you're a fucking philosopher. 00:01:05.845 --> 00:01:08.333 (Laughter) 00:01:08.333 --> 00:01:13.292 (Applause) 00:01:13.292 --> 00:01:17.500 So the power of reframing things 00:01:17.500 --> 00:01:21.606 cannot be overstated. 00:01:21.606 --> 00:01:25.156 What we have is exactly the same thing, the same activity, 00:01:25.156 --> 00:01:27.488 but one of them makes you feel great 00:01:27.488 --> 00:01:30.477 and the other one, with just a small change of posture, 00:01:30.477 --> 00:01:33.042 makes you feel terrible. 00:01:33.042 --> 00:01:35.923 And I think one of the problems with classical economics 00:01:35.923 --> 00:01:38.240 is it's absolutely preoccupied with reality. 00:01:38.240 --> 00:01:42.875 And reality isn't a particularly good guide to human happiness. 00:01:42.875 --> 00:01:44.625 Why, for example, 00:01:44.625 --> 00:01:48.090 are pensioners much happier 00:01:48.090 --> 00:01:50.150 than the young unemployed? 00:01:50.150 --> 00:01:54.259 Both of them, after all, are in exactly the same stage of life. 00:01:54.259 --> 00:01:57.125 You both have too much time on your hands and not much money. 00:01:57.125 --> 00:02:00.292 But pensioners are reportedly very, very happy, 00:02:00.292 --> 00:02:04.125 whereas the unemployed are extraordinarily unhappy and depressed. 00:02:04.125 --> 00:02:08.083 The reason, I think, is that the pensioners believe they've chosen to be pensioners, 00:02:08.083 --> 00:02:10.771 whereas the young unemployed 00:02:10.771 --> 00:02:12.554 feel it's been thrust upon them. 00:02:12.554 --> 00:02:17.737 In England the upper-middle-classes have actually solved this problem perfectly, 00:02:17.737 --> 00:02:20.458 because they've rebranded unemployment. 00:02:20.458 --> 00:02:23.054 If you're an upper-middle-class English person, 00:02:23.054 --> 00:02:25.333 you call unemployment "a year off." 00:02:25.333 --> 00:02:27.083 (Laughter) 00:02:27.083 --> 00:02:31.300 And that's because having a son who's unemployed in Manchester 00:02:31.300 --> 00:02:32.931 is really quite embarrassing, 00:02:32.931 --> 00:02:36.202 but having a son who's unemployed in Thailand 00:02:36.202 --> 00:02:38.745 is really viewed as quite an accomplishment. 00:02:38.745 --> 00:02:40.208 (Laughter) 00:02:40.208 --> 00:02:42.894 But actually the power to rebrand things, 00:02:42.894 --> 00:02:47.830 to understand that actually our experiences, costs, things 00:02:47.830 --> 00:02:50.786 don't actually much depend on what they really are, 00:02:50.786 --> 00:02:51.625 but on how we view them, 00:02:51.625 --> 00:02:55.000 I genuinely think can't be overstated. 00:02:55.000 --> 00:02:57.612 There's an experiment I think Daniel Pink refers to 00:02:57.612 --> 00:02:59.745 where you put two dogs in a box 00:02:59.745 --> 00:03:03.208 and the box has an electric floor. 00:03:03.208 --> 00:03:08.583 Every now and then an electric shock is applied to the floor, 00:03:08.583 --> 00:03:11.625 which pains the dogs. 00:03:11.625 --> 00:03:16.614 The only difference is one of the dogs has a small button in its half of the box. 00:03:16.614 --> 00:03:19.669 And when it nuzzles the button, the electric shock stops. 00:03:19.669 --> 00:03:23.208 The other dog doesn't have the button. 00:03:23.208 --> 00:03:27.902 It's exposed to exactly the same level of pain as the dog in the first box, 00:03:27.902 --> 00:03:29.919 but it has no control over the circumstances. 00:03:29.919 --> 00:03:34.000 Generally the first dog can be relatively content. 00:03:34.000 --> 00:03:37.708 The second dog lapses into complete depression. 00:03:37.708 --> 00:03:42.583 The circumstances of our lives may actually matter less to our happiness 00:03:42.583 --> 00:03:47.917 than the sense of control we feel over our lives. 00:03:47.917 --> 00:03:49.777 It's an interesting question. 00:03:49.777 --> 00:03:53.973 We ask the question -- the whole debate in the Western world 00:03:53.973 --> 00:03:55.631 is about the level of taxation. 00:03:55.631 --> 00:03:57.958 But I think there's another debate to be asked, 00:03:57.958 --> 00:04:00.950 which is the level of control we have over our tax money. 00:04:00.950 --> 00:04:05.639 That what costs us 10 pounds in one context can be a curse. 00:04:05.639 --> 00:04:11.211 What costs us 10 pounds in a different context we may actually welcome. 00:04:11.211 --> 00:04:15.708 And pay 20,000 pounds in tax toward health 00:04:15.708 --> 00:04:18.085 and you're merely feeling a mug. 00:04:18.085 --> 00:04:21.787 Pay 20,000 pounds to endow a hospital ward 00:04:21.787 --> 00:04:23.950 and you're called a philanthropist. 00:04:23.950 --> 00:04:27.186 I'm probably in the wrong country to talk about willingness to pay tax. 00:04:27.186 --> 00:04:29.896 (Laughter) 00:04:29.896 --> 00:04:35.077 So I'll give you one in return. How you frame things really matters. 00:04:35.077 --> 00:04:37.073 Do you call it the bailout of Greece 00:04:37.073 --> 00:04:40.454 or the bailout of a load of stupid banks which lent to Greece? 00:04:40.454 --> 00:04:43.667 Because they are actually the same thing. 00:04:43.667 --> 00:04:46.065 What you call them actually affects 00:04:46.065 --> 00:04:49.579 how you react to them, viscerally and morally. 00:04:49.579 --> 00:04:52.956 I think psychological value is great to be absolutely honest. 00:04:52.956 --> 00:04:56.086 One of my great friends, a professor called Nick Chater, 00:04:56.086 --> 00:04:58.713 who's the Professor of Decision Sciences in London, 00:04:58.713 --> 00:05:01.235 believes that we should spend far less time 00:05:01.235 --> 00:05:02.708 looking into humanity's hidden depths 00:05:02.708 --> 00:05:06.333 and spend much more time exploring the hidden shallows. 00:05:06.333 --> 00:05:08.083 I think that's true actually. 00:05:08.083 --> 00:05:10.895 I think impressions have an insane effect 00:05:10.895 --> 00:05:13.050 on what we think and what we do. 00:05:13.050 --> 00:05:17.395 But what we don't have is a really good model of human psychology. 00:05:17.395 --> 00:05:19.233 At least pre-Kahneman perhaps, 00:05:19.233 --> 00:05:22.307 we didn't have a really good model of human psychology 00:05:22.307 --> 00:05:26.708 to put alongside models of engineering, of neoclassical economics. 00:05:26.708 --> 00:05:31.070 So people who believed in psychological solutions didn't have a model. 00:05:31.070 --> 00:05:32.840 We didn't have a framework. 00:05:32.840 --> 00:05:35.684 This is what Warren Buffett's business partner Charlie Munger calls 00:05:35.684 --> 00:05:37.792 "A latticework on which to hang your ideas." 00:05:37.792 --> 00:05:42.583 Engineers, economists, classical economists 00:05:42.583 --> 00:05:44.333 all had a very, very robust existing latticework 00:05:44.333 --> 00:05:47.292 on which practically every idea could be hung. 00:05:47.292 --> 00:05:50.583 We merely have a collection of random individual insights 00:05:50.583 --> 00:05:53.583 without an overall model. 00:05:53.583 --> 00:05:57.577 And what that means is that in looking at solutions, 00:05:57.577 --> 00:06:00.208 we've probably given too much priority 00:06:00.208 --> 00:06:03.875 to what I call technical engineering solutions, Newtonian solutions, 00:06:03.875 --> 00:06:07.292 and not nearly enough to the psychological ones. 00:06:07.292 --> 00:06:09.336 You know my example of the Eurostar. 00:06:09.336 --> 00:06:11.917 Six million pounds spent to reduce the journey time 00:06:11.917 --> 00:06:15.425 between Paris and London by about 40 minutes. 00:06:15.425 --> 00:06:20.196 For 0.01 percent of this money you could have put WiFi on the trains, 00:06:20.196 --> 00:06:22.867 which wouldn't have reduced the duration of the journey, 00:06:22.867 --> 00:06:26.292 but would have improved its enjoyment and its usefullness far more. 00:06:26.292 --> 00:06:28.917 For maybe 10 percent of the money, 00:06:28.917 --> 00:06:32.236 you could have paid all of the world's top male and female supermodels 00:06:32.236 --> 00:06:36.598 to walk up and down the train handing out free Chateau Petrus to all the passengers. 00:06:36.598 --> 00:06:40.791 You'd still have five billion pounds in change, 00:06:40.791 --> 00:06:43.569 and people would ask for the trains to be slowed down. 00:06:43.569 --> 00:06:45.967 (Laughter) 00:06:45.967 --> 00:06:49.132 Why were we not given the chance 00:06:49.132 --> 00:06:51.333 to solve that problem psychologically? 00:06:51.333 --> 00:06:53.750 I think it's because there's an imbalance, an asymmetry, 00:06:53.750 --> 00:06:58.542 in the way we treat creative, emotionally-driven psychological ideas 00:06:58.542 --> 00:07:03.431 versus the way we treat rational, numerical, spreadsheet-driven ideas. 00:07:03.431 --> 00:07:06.523 If you're a creative person, I think quite rightly, 00:07:06.523 --> 00:07:08.858 you have to share all your ideas for approval 00:07:08.858 --> 00:07:10.958 with people much more rational than you. 00:07:10.958 --> 00:07:14.708 You have to go in and you have to have a cost-benefit analysis, 00:07:14.708 --> 00:07:17.587 a feasibility study, an ROI study and so forth. 00:07:17.587 --> 00:07:19.381 And I think that's probably right. 00:07:19.381 --> 00:07:21.700 But this does not apply the other way around. 00:07:21.700 --> 00:07:25.010 People who have an existing framework, 00:07:25.010 --> 00:07:27.545 an economic framework, an engineering framework, 00:07:27.545 --> 00:07:30.831 feel that actually logic is its own answer. 00:07:30.831 --> 00:07:33.838 What they don't say is, "Well the numbers all seem to add up, 00:07:33.854 --> 00:07:36.125 but before I present this idea, I'll go and show it to some really crazy people 00:07:36.125 --> 00:07:39.809 to see if they can come up with something better." 00:07:39.809 --> 00:07:42.577 And so we, artificially I think, prioritize 00:07:42.577 --> 00:07:46.873 what I'd call mechanistic ideas over psychological ideas. 00:07:46.873 --> 00:07:49.402 An example of a great psychological idea: 00:07:49.402 --> 00:07:54.375 The single best improvement in passenger satisfaction on the London Underground per pounds spent 00:07:54.375 --> 00:07:59.404 came when they didn't add any extra trains nor change the frequency of the trains, 00:07:59.404 --> 00:08:02.208 they put dot matrix display board on the platforms. 00:08:02.208 --> 00:08:05.458 Because the nature of a wait 00:08:05.458 --> 00:08:08.531 is not just dependent on its numerical quality, its duration, 00:08:08.531 --> 00:08:11.346 but on the level of uncertainty you experience during that wait. 00:08:11.346 --> 00:08:14.738 Waiting seven minutes for a train with a countdown clock 00:08:14.738 --> 00:08:16.952 is less frustrating and irritating 00:08:16.952 --> 00:08:18.979 than waiting four minutes, knuckle-biting 00:08:18.979 --> 00:08:22.167 going, "When's this train going to damn well arrive?" 00:08:22.167 --> 00:08:26.069 Here's a beautiful example of a psychological solution deployed in Korea. 00:08:26.069 --> 00:08:28.632 Red traffic lights have a countdown delay. 00:08:28.632 --> 00:08:31.871 It's proven to reduce the accident rate in experiments. 00:08:31.871 --> 00:08:34.750 Why? Because road rage, impatience and general irritation 00:08:34.750 --> 00:08:40.032 are massively reduced when you can actually see the time you have to wait. 00:08:40.032 --> 00:08:43.042 In China, not really understanding the principle behind this, 00:08:43.042 --> 00:08:45.776 they applied the same principle to green traffic lights. 00:08:45.776 --> 00:08:47.127 (Laughter) 00:08:47.127 --> 00:08:51.542 Which isn't a great idea. 00:08:51.542 --> 00:08:55.870 You're 200 yards away, you realize you've got five seconds to go, you floor it. 00:08:55.870 --> 00:08:57.458 (Laughter) 00:08:57.458 --> 00:09:01.292 The Koreans, very assiduously, did test both. 00:09:01.292 --> 00:09:05.121 The accident rate goes down when you apply this to red traffic lights; 00:09:05.121 --> 00:09:06.850 it goes up when you apply it to green traffic lights. 00:09:06.850 --> 00:09:10.442 This is all I'm asking for really in human decision making, 00:09:10.442 --> 00:09:12.398 is the consideration of these three things. 00:09:12.398 --> 00:09:15.454 I'm not asking for the complete primacy of one over the other. 00:09:15.454 --> 00:09:17.505 I'm merely saying that when you solve problems, 00:09:17.505 --> 00:09:19.807 you should look at all three of these equally 00:09:19.807 --> 00:09:22.333 and you should seek as far as possible 00:09:22.333 --> 00:09:25.167 to find solutions which sit in the sweet spot in the middle. 00:09:25.167 --> 00:09:27.375 If you actually look at a great business, 00:09:27.375 --> 00:09:30.833 you'll nearly always see all of these three things coming into play. 00:09:30.833 --> 00:09:33.281 Really, really successful businesses -- 00:09:33.281 --> 00:09:35.787 Google is great, great technological success, 00:09:35.787 --> 00:09:38.521 but it's also based on a very good psychological insight: 00:09:38.521 --> 00:09:42.721 People believe something that only does one thing 00:09:42.721 --> 00:09:46.923 is better at that thing than something that does that thing and something else. 00:09:46.923 --> 00:09:49.875 It's an innate thing called goal dilution. 00:09:49.875 --> 00:09:51.873 Ayelet Fishbach has written a paper about this. 00:09:51.873 --> 00:09:54.192 Everybody else at the time of Google, more or less, 00:09:54.192 --> 00:09:55.548 was trying to be a portal. 00:09:55.548 --> 00:09:56.864 Yes, there's a search function, 00:09:56.864 --> 00:10:00.690 but you also have weather, sports scores, bits of news. 00:10:00.690 --> 00:10:03.208 Google understood that if you're just a search engine, 00:10:03.208 --> 00:10:06.871 people assume you're a very, very good search engine. 00:10:06.871 --> 00:10:08.452 All of you know this actually 00:10:08.452 --> 00:10:10.137 from when you go in to buy a television. 00:10:10.137 --> 00:10:13.700 And in the shabbier end of the row of flatscreen TV's 00:10:13.700 --> 00:10:19.002 you can see are these rather despised things called combined TV and DVD players. 00:10:19.002 --> 00:10:22.094 And we have no knowledge whatsoever of the quality of those things, 00:10:22.094 --> 00:10:26.042 but we look at a combined TV and DVD player and we go, "Uck. 00:10:26.042 --> 00:10:30.448 It's probably a bit of a crap telly and a bit rubbish as a DVD player." 00:10:30.448 --> 00:10:32.738 So we walk out of the shops with one of each. 00:10:32.738 --> 00:10:38.042 Google is as much a psychological success as it is a technological one. 00:10:38.042 --> 00:10:40.944 I propose that we can use psychology to solve problems 00:10:40.944 --> 00:10:43.727 that we didn't even realize were problems at all. 00:10:43.727 --> 00:10:46.827 This is my suggestion for getting people to finish their course of antibiotics. 00:10:46.827 --> 00:10:49.210 Don't give them 24 white pills. 00:10:49.210 --> 00:10:52.081 Give them 18 white pills and six blue ones 00:10:52.081 --> 00:10:55.698 and tell them to take the white pills first and then take the blue ones. 00:10:55.698 --> 00:10:57.750 It's called chunking. 00:10:57.750 --> 00:11:00.854 The likelihood that people will get to the end is much greater 00:11:00.854 --> 00:11:03.458 when there is a milestone somewhere in the middle. 00:11:03.458 --> 00:11:06.417 One of the great mistakes, I think, of economics 00:11:06.417 --> 00:11:08.844 is it fails to understand that what something is, 00:11:08.844 --> 00:11:11.163 whether it's retirement, unemployment, cost, 00:11:11.163 --> 00:11:16.417 is a function, not only of its amount, but also its meaning. 00:11:16.417 --> 00:11:20.333 This is a toll crossing in Britain. 00:11:20.333 --> 00:11:23.858 Quite often queues happen at the tolls. 00:11:23.858 --> 00:11:25.960 Sometimes you get very, very severe queues. 00:11:25.960 --> 00:11:27.958 You could apply the same principle actually, if you like, 00:11:27.958 --> 00:11:29.583 to the security lanes in airports. 00:11:29.583 --> 00:11:33.408 What would happen if you could actually pay twice as much money to cross the bridge, 00:11:33.408 --> 00:11:35.792 but go through a lane that's an express lane? 00:11:35.792 --> 00:11:39.527 It's not an unreasonable thing to do. It's an economically efficient thing to do. 00:11:39.527 --> 00:11:41.992 Time means more to some people than others. 00:11:41.992 --> 00:11:44.292 If you're waiting trying to get to a job interview, 00:11:44.292 --> 00:11:48.259 you'd patently pay a couple of pounds more to go through the fast lane. 00:11:48.259 --> 00:11:50.446 If you're on the way to visit your mother in-law, 00:11:50.446 --> 00:11:55.287 you'd probably prefer to stay on the left. 00:11:55.287 --> 00:11:59.715 The only problem is if you introduce this economically efficient solution, 00:11:59.715 --> 00:12:01.061 people hate it. 00:12:01.061 --> 00:12:04.250 Because they think you're deliberately creating delays at the bridge 00:12:04.250 --> 00:12:05.787 in order to maximize your revenue, 00:12:05.787 --> 00:12:09.283 and "Why on earth should I pay to subsidize your imcompetence?" 00:12:09.283 --> 00:12:11.892 On the other hand, change the frame slightly 00:12:11.892 --> 00:12:14.500 and create charitable yield management, 00:12:14.500 --> 00:12:19.571 so the extra money you get goes not to the bridge company, it goes to charity, 00:12:19.571 --> 00:12:22.125 and the mental willingness to pay completely changes. 00:12:22.125 --> 00:12:25.792 You have a relatively economically efficient solution, 00:12:25.792 --> 00:12:28.834 but one that actually meets with public approval 00:12:28.834 --> 00:12:31.023 and even a small degree of affection, 00:12:31.023 --> 00:12:33.267 rather than being seen as bastardy. 00:12:33.267 --> 00:12:36.977 So where economists make the fundamental mistake 00:12:36.977 --> 00:12:39.083 is they think that money is money. 00:12:39.083 --> 00:12:44.475 Actually my pain experienced in paying five pounds 00:12:44.475 --> 00:12:46.237 is not just proportionate to the amount, 00:12:46.237 --> 00:12:48.737 but where I think that money is going. 00:12:48.737 --> 00:12:51.756 And I think understanding that could revolutionize tax policy. 00:12:51.756 --> 00:12:54.152 It could revolutionize the public services. 00:12:54.152 --> 00:12:56.379 It could really change things quite significantly. 00:12:56.379 --> 00:12:59.175 Here's a guy you all need to study. 00:12:59.175 --> 00:13:01.079 He's an Austrian school economist 00:13:01.079 --> 00:13:06.290 who was first active in the first half of the 20th century in Vienna. 00:13:06.290 --> 00:13:08.135 What was interesting about the Austrian school 00:13:08.135 --> 00:13:11.204 is they actually grew up alongside Freud. 00:13:11.204 --> 00:13:13.880 And so they're predominantly interested in psychology. 00:13:13.880 --> 00:13:19.000 They believed that there was a discipline called praxeology, 00:13:19.000 --> 00:13:21.083 which is a prior discipline to the study of economics. 00:13:21.083 --> 00:13:25.860 Praxeology is the study of human choice, action and decision making. 00:13:25.860 --> 00:13:27.088 I think they're right. 00:13:27.088 --> 00:13:29.496 I think the danger we have in today's world 00:13:29.496 --> 00:13:31.365 is we have the study of economics 00:13:31.365 --> 00:13:35.823 considers itself to be a prior discipline to the study of human psychology. 00:13:35.823 --> 00:13:38.588 But as Charlie Munger says, "If economics isn't behavioral, 00:13:38.588 --> 00:13:40.833 I don't know what the hell is." 00:13:40.833 --> 00:13:47.371 Von Mises interestingly believes economics is just a subset of psychology. 00:13:47.371 --> 00:13:49.010 I think he just refers to economics as 00:13:49.010 --> 00:13:52.602 "The study of human praxeology under conditions of scarcity." 00:13:52.602 --> 00:13:55.665 But von Mises, among many other things, 00:13:55.665 --> 00:14:01.633 I think uses an analogy which is probably the best justification and explanation 00:14:01.633 --> 00:14:04.490 for the value of marketing, the value of perceived value 00:14:04.490 --> 00:14:08.902 and the fact that we should actually treat it as being absolutely equivalent 00:14:08.902 --> 00:14:10.417 to any other kind of value. 00:14:10.417 --> 00:14:13.059 We tend to, all of us -- even those of us who work in marketing -- 00:14:13.059 --> 00:14:14.575 to think of value in two ways. 00:14:14.605 --> 00:14:15.727 There's the real value, 00:14:15.727 --> 00:14:17.125 which is when you make something in a factory and provide a service, 00:14:17.125 --> 00:14:19.750 and then there's a kind of dubious value, 00:14:19.750 --> 00:14:22.056 which you create by changing the way people look at things. 00:14:22.056 --> 00:14:25.217 Von Mises completely rejected this distinction. 00:14:25.217 --> 00:14:26.933 And he used this following analogy. 00:14:26.933 --> 00:14:32.148 He referred actually to strange economists called the French Physiocrats 00:14:32.148 --> 00:14:36.475 who believed that the only true value was what you extracted from the land. 00:14:36.475 --> 00:14:39.071 So if you're a shepherd or a quarryman or a farmer, 00:14:39.071 --> 00:14:40.836 you created true value. 00:14:40.836 --> 00:14:43.304 If however, you bought some wool from the shepherd 00:14:43.319 --> 00:14:46.458 and charged a premium for converting it into a hat, 00:14:46.458 --> 00:14:48.792 you weren't actually creating value, 00:14:48.792 --> 00:14:50.759 you were exploiting the shepherd. 00:14:50.759 --> 00:14:54.625 Now von Mises's said that modern economists make exactly the same mistake 00:14:54.625 --> 00:14:56.777 with regard to advertising and marketing. 00:14:56.777 --> 00:14:59.167 He says, "If you run a restaurant, 00:14:59.167 --> 00:15:01.375 there is no healthy distinction to be made 00:15:01.375 --> 00:15:03.833 between the value you create by cooking the food 00:15:03.833 --> 00:15:06.000 and the value you create by sweeping the floor." 00:15:06.000 --> 00:15:09.212 One of them creates, perhaps, the primary product -- 00:15:09.212 --> 00:15:10.681 the thing we think we're paying for -- 00:15:10.681 --> 00:15:11.920 the other one creates a context 00:15:11.920 --> 00:15:15.652 within which we can enjoy and appreciate that product. 00:15:15.652 --> 00:15:18.667 And the idea that one of them should actually have priority over the other 00:15:18.667 --> 00:15:20.833 is fundamentally wrong. 00:15:20.833 --> 00:15:22.093 Try this quick thought experiment. 00:15:22.093 --> 00:15:24.670 Imagine a restaurant that serves Michelin-starred food, 00:15:24.700 --> 00:15:26.958 but actually where the restaurant smells of sewage 00:15:26.958 --> 00:15:31.434 and there's human feces on the floor. 00:15:31.434 --> 00:15:33.534 The best thing you can do there to create value 00:15:33.565 --> 00:15:36.925 is not actually to improve the food still further, 00:15:36.925 --> 00:15:40.042 it's to get rid of the smell and clean up the floor. 00:15:40.042 --> 00:15:44.036 And it's vital we understand this. 00:15:44.036 --> 00:15:46.321 If that seems like some strange, abstruse thing, 00:15:46.321 --> 00:15:50.787 in the U.K., the post office had a 98 percent success rate 00:15:50.787 --> 00:15:53.125 at delivering first-class mail the next day. 00:15:53.125 --> 00:15:55.492 They decided this wasn't good enough 00:15:55.492 --> 00:15:57.454 and they wanted to get it up to 99. 00:15:57.454 --> 00:16:01.583 The effort to do that almost broke the organization. 00:16:01.583 --> 00:16:04.833 If at the same time you'd gone and asked people, 00:16:04.833 --> 00:16:08.125 "What percentage of first-class arrives the next day?" 00:16:08.125 --> 00:16:12.476 the average answer, or the modal answer would have been 50 to 60 percent. 00:16:12.476 --> 00:16:15.233 Now if your perception is much worse than your reality, 00:16:15.233 --> 00:16:18.733 what on earth are you doing trying to change the reality. 00:16:18.733 --> 00:16:22.750 That's like trying to improve the food in a restaurant that stinks. 00:16:22.750 --> 00:16:25.000 What you need to do 00:16:25.000 --> 00:16:26.660 is first of all tell people 00:16:26.660 --> 00:16:30.835 that 98 percent of mail gets there the next day, first-class mail. 00:16:30.835 --> 00:16:32.542 That's pretty good. 00:16:32.542 --> 00:16:35.167 I would argue, in Britain there's a much better frame of reference, 00:16:35.167 --> 00:16:36.765 which is to tell people 00:16:36.765 --> 00:16:38.790 that more first-class mail arrives the next day 00:16:38.790 --> 00:16:40.125 in the U.K. than in Germany. 00:16:40.125 --> 00:16:43.375 Because generally in Britain if you want to make us happy about something, 00:16:43.375 --> 00:16:45.125 just tell us we do it better than the Germans. 00:16:45.125 --> 00:16:47.500 (Laughter) 00:16:47.500 --> 00:16:48.375 (Applause) 00:16:48.375 --> 00:16:54.250 Choose your frame of reference and the perceived value 00:16:54.250 --> 00:16:57.000 and therefore the actual value is completely tranformed. 00:16:57.000 --> 00:16:59.229 It has to be said of the Germans 00:16:59.229 --> 00:17:01.196 that the Germans and the French are doing a brilliant job 00:17:01.196 --> 00:17:03.327 of creating a united Europe. 00:17:03.327 --> 00:17:05.765 The only thing they don't expect is their uniting Europe 00:17:05.765 --> 00:17:08.445 through a shared mild hatred of the French and Germans. 00:17:08.460 --> 00:17:10.750 But I'm British, that's the way we like it. 00:17:10.750 --> 00:17:16.833 What you also notice is that in any case our perception is leaky. 00:17:16.833 --> 00:17:19.166 We can't tell the difference between the quality of the food 00:17:19.166 --> 00:17:22.375 and the environment in which we consume it. 00:17:22.375 --> 00:17:23.250 All of you will have seen this phenomenon 00:17:23.250 --> 00:17:25.908 if you have your car washed or valeted. 00:17:25.908 --> 00:17:29.333 When you drive away, your car feels as if it drives better. 00:17:29.333 --> 00:17:32.542 And the reason for this, 00:17:32.542 --> 00:17:34.292 unless my car valet mysteriously is changing the oil 00:17:34.292 --> 00:17:37.542 and performing work which I'm not paying him for and I'm unaware of, 00:17:37.542 --> 00:17:39.958 is because perception is in any case leaky. 00:17:39.958 --> 00:17:44.083 Analgesics that are branded are more effective at reducing pain 00:17:44.083 --> 00:17:46.250 than analgesics that are not branded. 00:17:46.250 --> 00:17:48.558 I don't just mean through reported pain reduction, 00:17:48.558 --> 00:17:50.556 actual measured pain reduction. 00:17:50.556 --> 00:17:55.067 And so perception actually is leaky in any case. 00:17:55.082 --> 00:17:58.621 So if you do something that's perceptually bad in one respect, 00:17:58.621 --> 00:18:00.398 you can damage the other. 00:18:00.398 --> 00:18:00.898 Thank you very much. 00:18:00.898 --> 00:18:02.167 (Applause)