0:00:12.685,0:00:14.375
What you have here

0:00:14.375,0:00:16.668
is an electronic cigarette.

0:00:18.435,0:00:19.558
It's something that's,

0:00:19.558,0:00:21.501
since it was invented a year or two ago,

0:00:21.501,0:00:23.156
has given me untold happiness.

0:00:23.156,0:00:24.588
(Laughter)

0:00:24.588,0:00:26.747
A little bit of it, I think,[br]is the nicotine,

0:00:26.747,0:00:28.813
but there's something[br]much bigger than that.

0:00:28.813,0:00:34.060
Which is ever since, in the U.K.,[br]they banned smoking in public places,

0:00:34.060,0:00:37.267
I've never enjoyed[br]a drinks party ever again.

0:00:37.267,0:00:39.254
(Laughter)

0:00:39.254,0:00:42.397
And the reason,[br]I only worked out just the other day,

0:00:42.397,0:00:44.253
which is when you go to a drinks party

0:00:44.253,0:00:46.616
and you stand up[br]and you hold a glass of red wine

0:00:46.616,0:00:48.273
and you talk endlessly to people,

0:00:48.273,0:00:50.814
you don't actually want to spend[br]all the time talking.

0:00:50.814,0:00:52.284
It's really, really tiring.

0:00:52.284,0:00:54.592
Sometimes you just want[br]to stand there silently,

0:00:54.592,0:00:56.543
alone with your thoughts.

0:00:56.543,0:01:00.902
Sometimes you just want to stand[br]in the corner and stare out of the window.

0:01:00.902,0:01:03.653
Now the problem is, when you can't smoke,

0:01:04.251,0:01:07.396
if you stand and stare[br]out of the window on your own,

0:01:07.885,0:01:10.346
you're an antisocial, friendless idiot.

0:01:10.346,0:01:12.496
(Laughter)

0:01:12.496,0:01:16.118
If you stand and stare out of the window[br]on your own with a cigarette,

0:01:16.118,0:01:17.559
you're a fucking philosopher.

0:01:17.559,0:01:19.730
(Laughter)

0:01:19.730,0:01:23.357
(Applause)

0:01:26.561,0:01:29.487
So the power of reframing things

0:01:31.362,0:01:33.872
cannot be overstated.

0:01:34.513,0:01:37.464
What we have is exactly the same thing,[br]the same activity,

0:01:37.464,0:01:39.864
but one of them makes you feel great

0:01:39.864,0:01:43.114
and the other one,[br]with just a small change of posture,

0:01:43.114,0:01:45.610
makes you feel terrible.

0:01:45.897,0:01:48.584
And I think one of the problems[br]with classical economics

0:01:48.584,0:01:51.358
is it's absolutely preoccupied[br]with reality.

0:01:51.358,0:01:55.732
And reality isn't a particularly[br]good guide to human happiness.

0:01:55.732,0:01:57.667
Why, for example,

0:01:57.667,0:02:00.631
are pensioners much happier

0:02:00.631,0:02:03.023
than the young unemployed?

0:02:03.023,0:02:06.577
Both of them, after all,[br]are in exactly the same stage of life.

0:02:06.577,0:02:10.296
You both have too much time[br]on your hands and not much money.

0:02:10.296,0:02:13.179
But pensioners are reportedly[br]very, very happy,

0:02:13.179,0:02:17.232
whereas the unemployed are extraordinarily[br]unhappy and depressed.

0:02:17.232,0:02:19.726
The reason, I think,[br]is that the pensioners believe

0:02:19.726,0:02:21.762
they've chosen to be pensioners,

0:02:21.762,0:02:26.174
whereas the young unemployed[br]feel it's been thrust upon them.

0:02:26.174,0:02:28.567
In England the upper middle classes

0:02:28.567,0:02:30.649
have actually solved[br]this problem perfectly,

0:02:30.649,0:02:33.128
because they've re-branded unemployment.

0:02:33.128,0:02:35.405
If you're an upper-middle-class[br]English person,

0:02:35.405,0:02:37.799
you call unemployment "a year off."

0:02:37.799,0:02:40.258
(Laughter)

0:02:40.258,0:02:43.647
And that's because having a son[br]who's unemployed in Manchester

0:02:43.647,0:02:45.490
is really quite embarrassing,

0:02:45.490,0:02:48.787
but having a son[br]who's unemployed in Thailand

0:02:48.787,0:02:51.170
is really viewed[br]as quite an accomplishment.

0:02:51.170,0:02:52.934
(Laughter)

0:02:52.934,0:02:55.018
But actually the power[br]to re-brand things -

0:02:55.018,0:02:59.861
to understand that actually[br]our experiences, costs, things

0:02:59.861,0:03:03.030
don't actually much depend[br]on what they really are,

0:03:03.030,0:03:04.847
but on how we view them -

0:03:04.847,0:03:07.363
I genuinely think can't be overstated.

0:03:07.363,0:03:10.079
There's an experiment[br]I think Daniel Pink refers to

0:03:10.079,0:03:12.735
where you put two dogs in a box

0:03:12.735,0:03:15.714
and the box has an electric floor.

0:03:17.543,0:03:22.183
Every now and then an electric shock[br]is applied to the floor,

0:03:22.936,0:03:24.764
which pains the dogs.

0:03:25.551,0:03:29.614
The only difference is one of the dogs[br]has a small button in its half of the box.

0:03:29.614,0:03:33.223
And when it nuzzles the button,[br]the electric shock stops.

0:03:34.553,0:03:36.976
The other dog doesn't have the button.

0:03:36.976,0:03:40.902
It's exposed to exactly the same level[br]of pain as the dog in the first box,

0:03:40.902,0:03:43.488
but it has no control[br]over the circumstances.

0:03:45.222,0:03:47.677
Generally the first dog[br]can be relatively content.

0:03:48.031,0:03:51.170
The second dog lapses[br]into complete depression.

0:03:52.235,0:03:56.321
The circumstances of our lives[br]may actually matter less to our happiness

0:03:56.321,0:04:00.463
than the sense of control[br]we feel over our lives.

0:04:01.555,0:04:03.469
It's an interesting question.

0:04:03.469,0:04:06.973
We ask the question -[br]the whole debate in the Western world

0:04:06.973,0:04:08.739
is about the level of taxation.

0:04:09.133,0:04:11.338
But I think there's another debate[br]to be asked,

0:04:11.338,0:04:14.350
which is the level of control[br]we have over our tax money.

0:04:14.997,0:04:18.639
That what costs us 10 pounds[br]in one context can be a curse.

0:04:19.682,0:04:22.690
What costs us 10 pounds[br]in a different context

0:04:22.690,0:04:25.385
we may actually welcome.

0:04:25.698,0:04:28.885
You know, pay 20,000 pounds[br]in tax toward health

0:04:29.424,0:04:31.642
and you're merely feeling a mug.

0:04:31.642,0:04:34.787
Pay 20,000 pounds to endow a hospital ward

0:04:34.787,0:04:36.950
and you're called a philanthropist.

0:04:38.081,0:04:41.456
I'm probably in the wrong country[br]to talk about willingness to pay tax.

0:04:41.456,0:04:42.896
(Laughter)

0:04:42.896,0:04:48.077
So I'll give you one in return.[br]How you frame things really matters.

0:04:48.077,0:04:50.165
Do you call it the bailout of Greece

0:04:50.165,0:04:53.946
or the bailout of a load of stupid banks[br]which lent to Greece?

0:04:54.874,0:04:56.927
Because they are actually the same thing.

0:04:56.927,0:04:59.065
What you call them actually affects

0:04:59.065,0:05:02.588
how you react to them,[br]viscerally and morally.

0:05:02.931,0:05:05.956
I think psychological value[br]is great to be absolutely honest.

0:05:05.956,0:05:09.086
One of my great friends,[br]a professor called Nick Chater,

0:05:09.086,0:05:11.713
who's the Professor of Decision Sciences[br]in London,

0:05:11.713,0:05:14.235
believes that we should spend[br]far less time

0:05:14.235,0:05:16.200
looking into humanity's hidden depths

0:05:16.200,0:05:19.333
and spend much more time[br]exploring the hidden shallows.

0:05:19.995,0:05:21.393
I think that's true actually.

0:05:21.393,0:05:23.895
I think impressions have an insane effect

0:05:23.895,0:05:26.050
on what we think and what we do.

0:05:26.636,0:05:30.395
But what we don't have is a really good[br]model of human psychology.

0:05:30.395,0:05:32.233
At least pre-Kahneman perhaps,

0:05:32.233,0:05:35.307
we didn't have a really good model[br]of human psychology

0:05:35.307,0:05:40.046
to put alongside models of engineering,[br]of neoclassical economics.

0:05:40.046,0:05:44.070
So people who believed in psychological[br]solutions didn't have a model.

0:05:44.070,0:05:45.840
We didn't have a framework.

0:05:45.840,0:05:48.984
This is what Warren Buffett's[br]business partner Charlie Munger calls

0:05:48.984,0:05:51.487
"a latticework[br]on which to hang your ideas."

0:05:52.343,0:05:55.020
Engineers, economists,[br]classical economists

0:05:55.310,0:05:57.856
all had a very, very robust[br]existing latticework

0:05:57.856,0:06:00.830
on which practically every idea[br]could be hung.

0:06:00.830,0:06:04.091
We merely have a collection[br]of random individual insights

0:06:04.091,0:06:06.583
without an overall model.

0:06:06.583,0:06:10.577
And what that means[br]is that in looking at solutions,

0:06:10.577,0:06:13.718
we've probably given too much priority

0:06:13.857,0:06:17.644
to what I call technical engineering[br]solutions, Newtonian solutions,

0:06:17.644,0:06:20.292
and not nearly enough[br]to the psychological ones.

0:06:20.292,0:06:22.336
You know my example of the Eurostar.

0:06:22.336,0:06:24.917
Six million pounds spent[br]to reduce the journey time

0:06:24.917,0:06:29.040
between Paris and London[br]by about 40 minutes.

0:06:29.040,0:06:33.196
For 0.01 percent of this money[br]you could have put WiFi on the trains,

0:06:33.196,0:06:35.867
which wouldn't have reduced[br]the duration of the journey,

0:06:35.867,0:06:39.830
but would have improved its enjoyment[br]and its usefulness far more.

0:06:40.583,0:06:42.547
For maybe 10 percent of the money,

0:06:42.547,0:06:45.846
you could have paid all of the world's[br]top male and female supermodels

0:06:45.846,0:06:50.598
to walk up and down the train handing out[br]free Chateau Petrus to all the passengers.

0:06:51.302,0:06:53.791
You'd still have five [million] pounds[br]in change,

0:06:53.791,0:06:56.569
and people would ask[br]for the trains to be slowed down.

0:06:56.569,0:06:59.321
(Laughter)

0:07:00.653,0:07:02.322
Why were we not given the chance

0:07:02.322,0:07:04.333
to solve that problem psychologically?

0:07:04.333,0:07:07.119
I think it's because there's an imbalance,[br]an asymmetry,

0:07:07.945,0:07:12.065
in the way we treat creative,[br]emotionally-driven psychological ideas

0:07:13.169,0:07:17.216
versus the way we treat rational,[br]numerical, spreadsheet-driven ideas.

0:07:17.216,0:07:19.738
If you're a creative person,[br]I think quite rightly,

0:07:19.738,0:07:21.858
you have to share[br]all your ideas for approval

0:07:21.858,0:07:23.958
with people much more rational than you.

0:07:24.559,0:07:27.708
You have to go in and you have to have[br]a cost-benefit analysis,

0:07:27.708,0:07:30.587
a feasibility study,[br]an ROI study and so forth.

0:07:30.587,0:07:32.843
And I think that's probably right.

0:07:33.438,0:07:35.772
But this does not apply[br]the other way around.

0:07:36.207,0:07:38.210
People who have an existing framework,

0:07:38.210,0:07:40.545
an economic framework,[br]an engineering framework,

0:07:40.545,0:07:43.760
feel that actually logic[br]is its own answer.

0:07:44.384,0:07:47.248
What they don't say is,[br]"Well the numbers all seem to add up,

0:07:47.248,0:07:48.839
but before I present this idea,

0:07:48.839,0:07:51.034
I'll go and show it[br]to some really crazy people

0:07:51.034,0:07:53.399
to see if they can come up[br]with something better."

0:07:53.399,0:07:56.117
And so we, artificially I think,[br]prioritize

0:07:56.117,0:07:59.873
what I'd call mechanistic ideas[br]over psychological ideas.

0:08:00.334,0:08:02.402
An example of a great psychological idea:

0:08:02.402,0:08:04.948
The single best improvement[br]in passenger satisfaction

0:08:04.948,0:08:07.509
on the London Underground per pound spent

0:08:07.509,0:08:12.404
came when they didn't add any extra trains[br]nor change the frequency of the trains,

0:08:12.404,0:08:16.008
they put dot matrix display boards[br]on the platforms.

0:08:16.735,0:08:18.283
Because the nature of a wait

0:08:18.283,0:08:21.531
is not just dependent on its[br]numerical quality, its duration,

0:08:21.531,0:08:24.994
but on the level of uncertainty[br]you experience during that wait.

0:08:24.994,0:08:28.118
Waiting seven minutes for a train[br]with a countdown clock

0:08:28.118,0:08:29.952
is less frustrating and irritating

0:08:29.952,0:08:31.979
than waiting four minutes, knuckle-biting

0:08:31.979,0:08:35.167
going, "When's this train[br]going to damn well arrive?"

0:08:35.760,0:08:38.301
Here's a beautiful example[br]of a psychological solution

0:08:38.301,0:08:40.325
deployed in Korea.

0:08:40.341,0:08:42.971
Red traffic lights have a countdown delay.

0:08:42.980,0:08:46.254
It's proven to reduce the accident rate[br]in experiments.

0:08:46.254,0:08:49.766
Why? Because road rage,[br]impatience and general irritation

0:08:49.766,0:08:52.536
are massively reduced[br]when you can actually see

0:08:52.536,0:08:54.709
the time you have to wait.

0:08:54.709,0:08:57.837
In China, not really understanding[br]the principle behind this,

0:08:57.837,0:09:00.601
they applied the same principle[br]to green traffic lights.

0:09:00.601,0:09:03.808
(Laughter)

0:09:04.820,0:09:06.218
Which isn't a great idea.

0:09:06.218,0:09:07.449
You're 200 yards away,

0:09:07.449,0:09:10.117
you realize you've got five seconds to go,[br]you floor it.

0:09:10.117,0:09:12.501
(Laughter)

0:09:13.506,0:09:15.944
The Koreans, very assiduously,[br]did test both.

0:09:15.944,0:09:18.777
The accident rate goes down[br]when you apply this to red traffic lights;

0:09:18.777,0:09:21.571
it goes up when you apply it[br]to green traffic lights.

0:09:22.223,0:09:25.012
This is all I'm asking for really[br]in human decision making,

0:09:25.012,0:09:27.031
is the consideration[br]of these three things.

0:09:27.031,0:09:29.931
I'm not asking for the complete[br]primacy of one over the other.

0:09:29.931,0:09:32.169
I'm merely saying[br]that when you solve problems,

0:09:32.169,0:09:35.028
you should look[br]at all three of these equally

0:09:35.278,0:09:37.733
and you should seek as far as possible

0:09:37.733,0:09:40.605
to find solutions which sit[br]in the sweet spot in the middle.

0:09:40.605,0:09:43.141
If you actually look at a great business,

0:09:43.141,0:09:46.524
you'll nearly always see all of these[br]three things coming into play.

0:09:47.011,0:09:48.869
Really, really successful businesses -

0:09:48.869,0:09:51.759
Google is a great,[br]great technological success,

0:09:51.759,0:09:54.985
but it's also based[br]on a very good psychological insight:

0:09:55.630,0:09:58.614
People believe something[br]that only does one thing

0:09:58.614,0:10:02.747
is better at that thing than something[br]that does that thing and something else.

0:10:02.747,0:10:05.487
It's an innate thing called goal dilution.

0:10:05.487,0:10:07.824
Ayelet Fishbach has written[br]a paper about this.

0:10:07.824,0:10:10.215
Everybody else at the time of Google,[br]more or less,

0:10:10.215,0:10:11.889
was trying to be a portal.

0:10:11.889,0:10:13.493
Yes, there's a search function,

0:10:13.493,0:10:16.893
but you also have weather,[br]sports scores, bits of news.

0:10:17.501,0:10:20.138
Google understood[br]that if you're just a search engine,

0:10:20.138,0:10:22.932
people assume you're a very,[br]very good search engine.

0:10:22.932,0:10:24.541
All of you know this actually

0:10:24.541,0:10:26.507
from when you go in to buy a television.

0:10:26.507,0:10:29.479
And in the shabbier end[br]of the row of flat screen TVs

0:10:29.479,0:10:32.422
you can see are these[br]rather despised things

0:10:32.422,0:10:34.851
called combined TV and DVD players.

0:10:35.376,0:10:38.553
And we have no knowledge whatsoever[br]of the quality of those things,

0:10:38.553,0:10:41.823
but we look at a combined TV[br]and DVD player and we go, "Uck.

0:10:41.823,0:10:46.135
It's probably a bit of a crap telly[br]and a bit rubbish as a DVD player."

0:10:46.135,0:10:49.038
So we walk out of the shops[br]with one of each.

0:10:49.038,0:10:53.766
Google is as much a psychological success[br]as it is a technological one.

0:10:54.418,0:10:57.202
I propose that we can use psychology[br]to solve problems

0:10:57.202,0:10:59.701
that we didn't even realize[br]were problems at all.

0:10:59.701,0:11:03.440
This is my suggestion for getting people[br]to finish their course of antibiotics.

0:11:03.440,0:11:05.076
Don't give them 24 white pills.

0:11:05.076,0:11:07.847
Give them 18 white pills and six blue ones

0:11:07.847,0:11:09.952
and tell them to take[br]the white pills first

0:11:09.952,0:11:12.352
and then take the blue ones.

0:11:12.352,0:11:13.857
It's called chunking.

0:11:13.857,0:11:16.616
The likelihood that people[br]will get to the end is much greater

0:11:16.616,0:11:19.170
when there is a milestone[br]somewhere in the middle.

0:11:20.005,0:11:22.453
One of the great mistakes,[br]I think, of economics

0:11:22.453,0:11:24.898
is it fails to understand[br]that what something is,

0:11:24.898,0:11:28.074
whether it's retirement,[br]unemployment, cost,

0:11:28.991,0:11:32.969
is a function, not only of its amount,[br]but also its meaning.

0:11:33.252,0:11:36.364
This is a toll crossing in Britain.

0:11:37.161,0:11:40.148
Quite often queues happen at the tolls.

0:11:40.503,0:11:42.795
Sometimes you get very,[br]very severe queues.

0:11:42.795,0:11:45.494
You could apply the same principle[br]actually, if you like,

0:11:45.494,0:11:47.549
to the security lanes in airports.

0:11:47.549,0:11:49.421
What would happen if you could actually

0:11:49.421,0:11:51.669
pay twice as much money[br]to cross the bridge,

0:11:51.669,0:11:54.403
but go through a lane[br]that's an express lane?

0:11:54.403,0:11:56.198
It's not an unreasonable thing to do.

0:11:56.198,0:11:58.196
It's an economically[br]efficient thing to do.

0:11:58.196,0:12:00.196
Time means more to some people[br]than others.

0:12:00.196,0:12:02.592
If you're trying to get[br]to a job interview,

0:12:02.592,0:12:06.595
you'd patently pay a couple of pounds more[br]to go through the fast lane.

0:12:06.595,0:12:09.203
If you're on the way[br]to visit your mother in-law,

0:12:09.203,0:12:12.417
you'd probably prefer to stay on the left.

0:12:14.170,0:12:17.729
The only problem is if you introduce[br]this economically efficient solution,

0:12:17.729,0:12:19.450
people hate it.

0:12:19.450,0:12:22.694
Because they think you're deliberately[br]creating delays at the bridge

0:12:22.694,0:12:24.312
in order to maximize your revenue,

0:12:24.312,0:12:27.760
and "Why on earth should I pay[br]to subsidize your incompetence?"

0:12:27.970,0:12:30.555
On the other hand,[br]change the frame slightly

0:12:30.555,0:12:32.862
and create charitable yield management,

0:12:32.862,0:12:36.165
so the extra money you get goes[br]not to the bridge company,

0:12:36.165,0:12:38.131
it goes to charity,

0:12:38.131,0:12:41.305
and the mental willingness[br]to pay completely changes.

0:12:41.807,0:12:44.613
You have a relatively[br]economically efficient solution,

0:12:44.613,0:12:47.124
but one that actually meets[br]with public approval

0:12:47.124,0:12:49.144
and even a small degree of affection,

0:12:49.144,0:12:51.505
rather than being seen as bastardy.

0:12:52.165,0:12:55.269
So where economists[br]make the fundamental mistake

0:12:55.269,0:12:57.538
is they think that money is money.

0:12:58.272,0:13:02.624
Actually my pain experienced[br]in paying five pounds

0:13:02.624,0:13:04.595
is not just proportionate to the amount,

0:13:04.595,0:13:07.105
but where I think that money is going.

0:13:07.105,0:13:10.138
And I think understanding[br]that could revolutionize tax policy.

0:13:10.138,0:13:12.338
It could revolutionize[br]the public services.

0:13:12.338,0:13:15.149
It could really change[br]things quite significantly.

0:13:15.496,0:13:17.910
Here's a guy you all need to study.

0:13:17.910,0:13:20.328
Anybody heard of him?

0:13:20.328,0:13:22.533
Good. One or two.

0:13:22.533,0:13:24.493
He's an Austrian school economist

0:13:24.493,0:13:29.389
who was first active in the first half[br]of the 20th century in Vienna.

0:13:29.389,0:13:31.583
What was interesting[br]about the Austrian school

0:13:31.583,0:13:34.792
is they actually grew up alongside Freud.

0:13:35.140,0:13:37.771
And so they're predominantly[br]interested in psychology.

0:13:37.771,0:13:42.253
They believed that there was a discipline[br]called praxeology,

0:13:42.253,0:13:45.144
which is a prior discipline[br]to the study of economics.

0:13:45.144,0:13:49.515
Praxeology is the study of human choice,[br]action and decision making.

0:13:50.237,0:13:51.537
I think they're right.

0:13:51.537,0:13:53.594
I think the danger[br]we have in today's world

0:13:53.594,0:13:55.435
is we have the study of economics

0:13:55.435,0:13:59.817
considers itself to be a prior discipline[br]to the study of human psychology.

0:13:59.817,0:14:02.647
But as Charlie Munger says,[br]"If economics isn't behavioral,

0:14:02.647,0:14:04.949
I don't know what the hell is."

0:14:05.365,0:14:11.056
Von Mises, interestingly, believes[br]economics is just a subset of psychology.

0:14:11.056,0:14:13.245
I think he just refers to economics as

0:14:13.245,0:14:16.728
"the study of human praxeology[br]under conditions of scarcity."

0:14:17.098,0:14:19.660
But von Mises, among many other things,

0:14:20.460,0:14:25.372
I think uses an analogy which is probably[br]the best justification and explanation

0:14:25.372,0:14:28.924
for the value of marketing,[br]the value of perceived value

0:14:29.178,0:14:32.765
and the fact that we should actually[br]treat it as being absolutely equivalent

0:14:32.765,0:14:34.574
to any other kind of value.

0:14:34.574,0:14:36.994
All of us - even those of us[br]who work in marketing -

0:14:36.994,0:14:38.672
tend to think of value in two ways.

0:14:38.672,0:14:39.820
There's the real value,

0:14:39.820,0:14:43.024
which is when you make something[br]in a factory and provide a service,

0:14:43.024,0:14:44.974
and then there's a kind of dubious value,

0:14:44.974,0:14:47.748
which you create by changing[br]the way people look at things.

0:14:47.748,0:14:49.954
Von Mises completely rejected[br]this distinction.

0:14:49.954,0:14:51.689
And he used this following analogy.

0:14:51.689,0:14:56.788
He referred actually to strange economists[br]called the French Physiocrats,

0:14:56.788,0:15:00.469
who believed that the only true value[br]was what you extracted from the land.

0:15:00.469,0:15:03.137
So if you're a shepherd[br]or a quarryman or a farmer,

0:15:03.137,0:15:04.669
you created true value.

0:15:04.669,0:15:07.526
If however, you bought[br]some wool from the shepherd

0:15:07.526,0:15:10.432
and charged a premium[br]for converting it into a hat,

0:15:10.432,0:15:12.587
you weren't actually creating value,

0:15:12.587,0:15:14.546
you were exploiting the shepherd.

0:15:15.095,0:15:18.988
Now von Mises said that modern economists[br]make exactly the same mistake

0:15:18.988,0:15:21.048
with regard to advertising and marketing.

0:15:21.048,0:15:23.167
He says, if you run a restaurant,

0:15:23.167,0:15:25.428
there is no healthy distinction to be made

0:15:25.428,0:15:28.013
between the value you create[br]by cooking the food

0:15:28.013,0:15:30.674
and the value you create[br]by sweeping the floor.

0:15:30.674,0:15:33.225
One of them creates, perhaps,[br]the primary product -

0:15:33.225,0:15:35.002
the thing we think we're paying for -

0:15:35.002,0:15:36.564
the other one creates a context

0:15:36.564,0:15:39.724
within which we can enjoy[br]and appreciate that product.

0:15:39.724,0:15:43.220
And the idea that one of them should[br]actually have priority over the other

0:15:43.220,0:15:44.470
is fundamentally wrong.

0:15:44.470,0:15:46.136
Try this quick thought experiment.

0:15:46.136,0:15:48.720
Imagine a restaurant[br]that serves Michelin-starred food,

0:15:48.720,0:15:51.529
but actually where[br]the restaurant smells of sewage

0:15:51.529,0:15:54.170
and there's human feces on the floor.

0:15:55.029,0:15:57.607
The best thing you can do there[br]to create value

0:15:57.607,0:16:00.848
is not actually to improve[br]the food still further,

0:16:00.848,0:16:03.949
it's to get rid of the smell[br]and clean up the floor.

0:16:05.307,0:16:08.107
And it's vital we understand this.

0:16:08.107,0:16:10.493
If that seems like some strange,[br]abstruse thing,

0:16:10.493,0:16:15.027
in the U.K., the post office[br]had a 98 percent success rate

0:16:15.027,0:16:17.571
at delivering first-class mail[br]the next day.

0:16:17.571,0:16:19.458
They decided this wasn't good enough

0:16:19.458,0:16:21.593
and they wanted to get it up to 99.

0:16:22.843,0:16:26.088
The effort to do that[br]almost broke the organization.

0:16:27.107,0:16:29.337
If at the same time you'd gone[br]and asked people,

0:16:29.337,0:16:32.188
"What percentage of first-class mail[br]arrives the next day?"

0:16:32.188,0:16:36.319
the average, or the modal answer[br]would have been 50 to 60 percent.

0:16:36.975,0:16:39.738
Now if your perception[br]is much worse than your reality,

0:16:39.738,0:16:42.765
what on earth are you doing[br]trying to change the reality?

0:16:42.765,0:16:46.443
That's like trying to improve[br]the food in a restaurant that stinks.

0:16:47.968,0:16:49.222
What you need to do

0:16:49.222,0:16:50.660
is first of all tell people

0:16:50.660,0:16:54.583
that 98 percent of mail gets there[br]the next day, first-class mail.

0:16:55.419,0:16:56.738
That's pretty good.

0:16:56.738,0:16:59.965
I would argue, in Britain there's[br]a much better frame of reference,

0:16:59.965,0:17:01.107
which is to tell people

0:17:01.107,0:17:03.315
that more first-class mail[br]arrives the next day

0:17:03.315,0:17:05.049
in the U.K. than in Germany.

0:17:05.049,0:17:08.532
Because generally in Britain if you want[br]to make us happy about something,

0:17:08.532,0:17:10.726
just tell us we do it better[br]than the Germans.

0:17:10.726,0:17:12.123
(Laughter)

0:17:12.123,0:17:13.658
(Applause)

0:17:15.079,0:17:18.016
Choose your frame of reference[br]and the perceived value

0:17:18.016,0:17:21.295
and therefore the actual value[br]is completely transformed.

0:17:21.295,0:17:23.331
It has to be said of the Germans

0:17:23.331,0:17:26.071
that the Germans and the French[br]are doing a brilliant job

0:17:26.071,0:17:27.572
of creating a united Europe.

0:17:27.572,0:17:30.349
The only thing they didn't expect[br]is they're uniting Europe

0:17:30.349,0:17:33.209
through a shared mild hatred[br]of the French and Germans.

0:17:33.209,0:17:35.719
But I'm British,[br]that's the way we like it.

0:17:37.859,0:17:40.905
What you also notice is that[br]in any case our perception is leaky.

0:17:40.905,0:17:43.741
We can't tell the difference[br]between the quality of the food

0:17:43.741,0:17:45.856
and the environment[br]in which we consume it.

0:17:45.856,0:17:47.880
All of you will have seen this phenomenon

0:17:47.880,0:17:50.302
if you have your car washed or valeted.

0:17:50.604,0:17:54.332
When you drive away,[br]your car feels as if it drives better.

0:17:55.816,0:17:57.213
And the reason for this,

0:17:57.213,0:17:59.680
unless my car valet[br]mysteriously is changing the oil

0:17:59.680,0:18:02.921
and performing work which[br]I'm not paying him for and I'm unaware of,

0:18:02.921,0:18:05.438
is because perception[br]is in any case leaky.

0:18:05.438,0:18:09.394
Analgesics that are branded[br]are more effective at reducing pain

0:18:09.394,0:18:11.256
than analgesics that are not branded.

0:18:11.256,0:18:13.665
I don't just mean through[br]reported pain reduction,

0:18:13.665,0:18:15.468
actual measured pain reduction.

0:18:15.468,0:18:19.956
And so perception actually[br]is leaky in any case.

0:18:20.752,0:18:23.678
So if you do something[br]that's perceptually bad in one respect,

0:18:23.678,0:18:25.286
you can damage the other.

0:18:25.286,0:18:26.876
I'll end very quicky

0:18:26.876,0:18:30.078
with something without which[br]you'd never be happy for me to miss

0:18:30.078,0:18:32.152
which is the perfect demonstration

0:18:32.152,0:18:35.160
of creating economically[br]fairly sustainable value,

0:18:35.160,0:18:37.088
through doing nothing to the product,

0:18:37.088,0:18:40.190
and everything to the way[br]in which it's consumed and perceived.

0:18:40.190,0:18:43.600
(Video) Man:[br]Shreddies are supposed to be square.

0:18:44.203,0:18:47.547
Woman: Have any of these[br]diamond shapes gone out?

0:18:48.667,0:18:51.469
[Diamond Shreddies][br]Woman: New Diamond Shreddies cereal

0:18:51.469,0:18:54.600
Same 100% Whole Grain Wheat[br]in a delicious diamond shape.

0:18:55.981,0:18:59.203
Rory Sutherland: Very finally,[br]here's the poster campaign.

0:18:59.203,0:19:01.365
(Laughter)

0:19:01.365,0:19:04.322
(Applause)

0:19:09.466,0:19:11.746
Some Canadians are inherently[br]very conservative,

0:19:11.746,0:19:15.036
and were very annoyed that their[br]square Shreddies had been taken away.

0:19:15.036,0:19:17.703
It was kind of a new-coat[br]marketing moment.

0:19:17.703,0:19:20.528
So after long thought and deliberation,

0:19:20.528,0:19:22.494
they arrived at a compromise.

0:19:22.494,0:19:23.855
Thank you very much.

0:19:23.855,0:19:26.442
(Applause)