1
00:00:12,685 --> 00:00:14,375
What you have here

2
00:00:14,375 --> 00:00:16,668
is an electronic cigarette.

3
00:00:18,435 --> 00:00:19,558
It's something that's,

4
00:00:19,558 --> 00:00:21,501
since it was invented a year or two ago,

5
00:00:21,501 --> 00:00:23,156
has given me untold happiness.

6
00:00:23,156 --> 00:00:24,588
(Laughter)

7
00:00:24,588 --> 00:00:26,747
A little bit of it, I think,
is the nicotine,

8
00:00:26,747 --> 00:00:28,813
but there's something
much bigger than that.

9
00:00:28,813 --> 00:00:34,060
Which is ever since, in the U.K.,
they banned smoking in public places,

10
00:00:34,060 --> 00:00:37,267
I've never enjoyed
a drinks party ever again.

11
00:00:37,267 --> 00:00:39,254
(Laughter)

12
00:00:39,254 --> 00:00:42,397
And the reason,
I only worked out just the other day,

13
00:00:42,397 --> 00:00:44,253
which is when you go to a drinks party

14
00:00:44,253 --> 00:00:46,616
and you stand up
and you hold a glass of red wine

15
00:00:46,616 --> 00:00:48,273
and you talk endlessly to people,

16
00:00:48,273 --> 00:00:50,814
you don't actually want to spend
all the time talking.

17
00:00:50,814 --> 00:00:52,284
It's really, really tiring.

18
00:00:52,284 --> 00:00:54,592
Sometimes you just want
to stand there silently,

19
00:00:54,592 --> 00:00:56,543
alone with your thoughts.

20
00:00:56,543 --> 00:01:00,902
Sometimes you just want to stand
in the corner and stare out of the window.

21
00:01:00,902 --> 00:01:03,653
Now the problem is, when you can't smoke,

22
00:01:04,251 --> 00:01:07,396
if you stand and stare
out of the window on your own,

23
00:01:07,885 --> 00:01:10,346
you're an antisocial, friendless idiot.

24
00:01:10,346 --> 00:01:12,496
(Laughter)

25
00:01:12,496 --> 00:01:16,118
If you stand and stare out of the window
on your own with a cigarette,

26
00:01:16,118 --> 00:01:17,559
you're a fucking philosopher.

27
00:01:17,559 --> 00:01:19,730
(Laughter)

28
00:01:19,730 --> 00:01:23,357
(Applause)

29
00:01:26,561 --> 00:01:29,487
So the power of reframing things

30
00:01:31,362 --> 00:01:33,872
cannot be overstated.

31
00:01:34,513 --> 00:01:37,464
What we have is exactly the same thing,
the same activity,

32
00:01:37,464 --> 00:01:39,864
but one of them makes you feel great

33
00:01:39,864 --> 00:01:43,114
and the other one,
with just a small change of posture,

34
00:01:43,114 --> 00:01:45,610
makes you feel terrible.

35
00:01:45,897 --> 00:01:48,584
And I think one of the problems
with classical economics

36
00:01:48,584 --> 00:01:51,358
is it's absolutely preoccupied
with reality.

37
00:01:51,358 --> 00:01:55,732
And reality isn't a particularly
good guide to human happiness.

38
00:01:55,732 --> 00:01:57,667
Why, for example,

39
00:01:57,667 --> 00:02:00,631
are pensioners much happier

40
00:02:00,631 --> 00:02:03,023
than the young unemployed?

41
00:02:03,023 --> 00:02:06,577
Both of them, after all,
are in exactly the same stage of life.

42
00:02:06,577 --> 00:02:10,296
You both have too much time
on your hands and not much money.

43
00:02:10,296 --> 00:02:13,179
But pensioners are reportedly
very, very happy,

44
00:02:13,179 --> 00:02:17,232
whereas the unemployed are extraordinarily
unhappy and depressed.

45
00:02:17,232 --> 00:02:19,726
The reason, I think,
is that the pensioners believe

46
00:02:19,726 --> 00:02:21,762
they've chosen to be pensioners,

47
00:02:21,762 --> 00:02:26,174
whereas the young unemployed
feel it's been thrust upon them.

48
00:02:26,174 --> 00:02:28,567
In England the upper middle classes

49
00:02:28,567 --> 00:02:30,649
have actually solved
this problem perfectly,

50
00:02:30,649 --> 00:02:33,128
because they've re-branded unemployment.

51
00:02:33,128 --> 00:02:35,405
If you're an upper-middle-class
English person,

52
00:02:35,405 --> 00:02:37,799
you call unemployment "a year off."

53
00:02:37,799 --> 00:02:40,258
(Laughter)

54
00:02:40,258 --> 00:02:43,647
And that's because having a son
who's unemployed in Manchester

55
00:02:43,647 --> 00:02:45,490
is really quite embarrassing,

56
00:02:45,490 --> 00:02:48,787
but having a son
who's unemployed in Thailand

57
00:02:48,787 --> 00:02:51,170
is really viewed
as quite an accomplishment.

58
00:02:51,170 --> 00:02:52,934
(Laughter)

59
00:02:52,934 --> 00:02:55,018
But actually the power
to re-brand things -

60
00:02:55,018 --> 00:02:59,861
to understand that actually
our experiences, costs, things

61
00:02:59,861 --> 00:03:03,030
don't actually much depend
on what they really are,

62
00:03:03,030 --> 00:03:04,847
but on how we view them -

63
00:03:04,847 --> 00:03:07,363
I genuinely think can't be overstated.

64
00:03:07,363 --> 00:03:10,079
There's an experiment
I think Daniel Pink refers to

65
00:03:10,079 --> 00:03:12,735
where you put two dogs in a box

66
00:03:12,735 --> 00:03:15,714
and the box has an electric floor.

67
00:03:17,543 --> 00:03:22,183
Every now and then an electric shock
is applied to the floor,

68
00:03:22,936 --> 00:03:24,764
which pains the dogs.

69
00:03:25,551 --> 00:03:29,614
The only difference is one of the dogs
has a small button in its half of the box.

70
00:03:29,614 --> 00:03:33,223
And when it nuzzles the button,
the electric shock stops.

71
00:03:34,553 --> 00:03:36,976
The other dog doesn't have the button.

72
00:03:36,976 --> 00:03:40,902
It's exposed to exactly the same level
of pain as the dog in the first box,

73
00:03:40,902 --> 00:03:43,488
but it has no control
over the circumstances.

74
00:03:45,222 --> 00:03:47,677
Generally the first dog
can be relatively content.

75
00:03:48,031 --> 00:03:51,170
The second dog lapses
into complete depression.

76
00:03:52,235 --> 00:03:56,321
The circumstances of our lives
may actually matter less to our happiness

77
00:03:56,321 --> 00:04:00,463
than the sense of control
we feel over our lives.

78
00:04:01,555 --> 00:04:03,469
It's an interesting question.

79
00:04:03,469 --> 00:04:06,973
We ask the question -
the whole debate in the Western world

80
00:04:06,973 --> 00:04:08,739
is about the level of taxation.

81
00:04:09,133 --> 00:04:11,338
But I think there's another debate
to be asked,

82
00:04:11,338 --> 00:04:14,350
which is the level of control
we have over our tax money.

83
00:04:14,997 --> 00:04:18,639
That what costs us 10 pounds
in one context can be a curse.

84
00:04:19,682 --> 00:04:22,690
What costs us 10 pounds
in a different context

85
00:04:22,690 --> 00:04:25,385
we may actually welcome.

86
00:04:25,698 --> 00:04:28,885
You know, pay 20,000 pounds
in tax toward health

87
00:04:29,424 --> 00:04:31,642
and you're merely feeling a mug.

88
00:04:31,642 --> 00:04:34,787
Pay 20,000 pounds to endow a hospital ward

89
00:04:34,787 --> 00:04:36,950
and you're called a philanthropist.

90
00:04:38,081 --> 00:04:41,456
I'm probably in the wrong country
to talk about willingness to pay tax.

91
00:04:41,456 --> 00:04:42,896
(Laughter)

92
00:04:42,896 --> 00:04:48,077
So I'll give you one in return.
How you frame things really matters.

93
00:04:48,077 --> 00:04:50,165
Do you call it the bailout of Greece

94
00:04:50,165 --> 00:04:53,946
or the bailout of a load of stupid banks
which lent to Greece?

95
00:04:54,874 --> 00:04:56,927
Because they are actually the same thing.

96
00:04:56,927 --> 00:04:59,065
What you call them actually affects

97
00:04:59,065 --> 00:05:02,588
how you react to them,
viscerally and morally.

98
00:05:02,931 --> 00:05:05,956
I think psychological value
is great to be absolutely honest.

99
00:05:05,956 --> 00:05:09,086
One of my great friends,
a professor called Nick Chater,

100
00:05:09,086 --> 00:05:11,713
who's the Professor of Decision Sciences
in London,

101
00:05:11,713 --> 00:05:14,235
believes that we should spend
far less time

102
00:05:14,235 --> 00:05:16,200
looking into humanity's hidden depths

103
00:05:16,200 --> 00:05:19,333
and spend much more time
exploring the hidden shallows.

104
00:05:19,995 --> 00:05:21,393
I think that's true actually.

105
00:05:21,393 --> 00:05:23,895
I think impressions have an insane effect

106
00:05:23,895 --> 00:05:26,050
on what we think and what we do.

107
00:05:26,636 --> 00:05:30,395
But what we don't have is a really good
model of human psychology.

108
00:05:30,395 --> 00:05:32,233
At least pre-Kahneman perhaps,

109
00:05:32,233 --> 00:05:35,307
we didn't have a really good model
of human psychology

110
00:05:35,307 --> 00:05:40,046
to put alongside models of engineering,
of neoclassical economics.

111
00:05:40,046 --> 00:05:44,070
So people who believed in psychological
solutions didn't have a model.

112
00:05:44,070 --> 00:05:45,840
We didn't have a framework.

113
00:05:45,840 --> 00:05:48,984
This is what Warren Buffett's
business partner Charlie Munger calls

114
00:05:48,984 --> 00:05:51,487
"a latticework
on which to hang your ideas."

115
00:05:52,343 --> 00:05:55,020
Engineers, economists,
classical economists

116
00:05:55,310 --> 00:05:57,856
all had a very, very robust
existing latticework

117
00:05:57,856 --> 00:06:00,830
on which practically every idea
could be hung.

118
00:06:00,830 --> 00:06:04,091
We merely have a collection
of random individual insights

119
00:06:04,091 --> 00:06:06,583
without an overall model.

120
00:06:06,583 --> 00:06:10,577
And what that means
is that in looking at solutions,

121
00:06:10,577 --> 00:06:13,718
we've probably given too much priority

122
00:06:13,857 --> 00:06:17,644
to what I call technical engineering
solutions, Newtonian solutions,

123
00:06:17,644 --> 00:06:20,292
and not nearly enough
to the psychological ones.

124
00:06:20,292 --> 00:06:22,336
You know my example of the Eurostar.

125
00:06:22,336 --> 00:06:24,917
Six million pounds spent
to reduce the journey time

126
00:06:24,917 --> 00:06:29,040
between Paris and London
by about 40 minutes.

127
00:06:29,040 --> 00:06:33,196
For 0.01 percent of this money
you could have put WiFi on the trains,

128
00:06:33,196 --> 00:06:35,867
which wouldn't have reduced
the duration of the journey,

129
00:06:35,867 --> 00:06:39,830
but would have improved its enjoyment
and its usefulness far more.

130
00:06:40,583 --> 00:06:42,547
For maybe 10 percent of the money,

131
00:06:42,547 --> 00:06:45,846
you could have paid all of the world's
top male and female supermodels

132
00:06:45,846 --> 00:06:50,598
to walk up and down the train handing out
free Chateau Petrus to all the passengers.

133
00:06:51,302 --> 00:06:53,791
You'd still have five [million] pounds
in change,

134
00:06:53,791 --> 00:06:56,569
and people would ask
for the trains to be slowed down.

135
00:06:56,569 --> 00:06:59,321
(Laughter)

136
00:07:00,653 --> 00:07:02,322
Why were we not given the chance

137
00:07:02,322 --> 00:07:04,333
to solve that problem psychologically?

138
00:07:04,333 --> 00:07:07,119
I think it's because there's an imbalance,
an asymmetry,

139
00:07:07,945 --> 00:07:12,065
in the way we treat creative,
emotionally-driven psychological ideas

140
00:07:13,169 --> 00:07:17,216
versus the way we treat rational,
numerical, spreadsheet-driven ideas.

141
00:07:17,216 --> 00:07:19,738
If you're a creative person,
I think quite rightly,

142
00:07:19,738 --> 00:07:21,858
you have to share
all your ideas for approval

143
00:07:21,858 --> 00:07:23,958
with people much more rational than you.

144
00:07:24,559 --> 00:07:27,708
You have to go in and you have to have
a cost-benefit analysis,

145
00:07:27,708 --> 00:07:30,587
a feasibility study,
an ROI study and so forth.

146
00:07:30,587 --> 00:07:32,843
And I think that's probably right.

147
00:07:33,438 --> 00:07:35,772
But this does not apply
the other way around.

148
00:07:36,207 --> 00:07:38,210
People who have an existing framework,

149
00:07:38,210 --> 00:07:40,545
an economic framework,
an engineering framework,

150
00:07:40,545 --> 00:07:43,760
feel that actually logic
is its own answer.

151
00:07:44,384 --> 00:07:47,248
What they don't say is,
"Well the numbers all seem to add up,

152
00:07:47,248 --> 00:07:48,839
but before I present this idea,

153
00:07:48,839 --> 00:07:51,034
I'll go and show it
to some really crazy people

154
00:07:51,034 --> 00:07:53,399
to see if they can come up
with something better."

155
00:07:53,399 --> 00:07:56,117
And so we, artificially I think,
prioritize

156
00:07:56,117 --> 00:07:59,873
what I'd call mechanistic ideas
over psychological ideas.

157
00:08:00,334 --> 00:08:02,402
An example of a great psychological idea:

158
00:08:02,402 --> 00:08:04,948
The single best improvement
in passenger satisfaction

159
00:08:04,948 --> 00:08:07,509
on the London Underground per pound spent

160
00:08:07,509 --> 00:08:12,404
came when they didn't add any extra trains
nor change the frequency of the trains,

161
00:08:12,404 --> 00:08:16,008
they put dot matrix display boards
on the platforms.

162
00:08:16,735 --> 00:08:18,283
Because the nature of a wait

163
00:08:18,283 --> 00:08:21,531
is not just dependent on its
numerical quality, its duration,

164
00:08:21,531 --> 00:08:24,994
but on the level of uncertainty
you experience during that wait.

165
00:08:24,994 --> 00:08:28,118
Waiting seven minutes for a train
with a countdown clock

166
00:08:28,118 --> 00:08:29,952
is less frustrating and irritating

167
00:08:29,952 --> 00:08:31,979
than waiting four minutes, knuckle-biting

168
00:08:31,979 --> 00:08:35,167
going, "When's this train
going to damn well arrive?"

169
00:08:35,760 --> 00:08:38,301
Here's a beautiful example
of a psychological solution

170
00:08:38,301 --> 00:08:40,325
deployed in Korea.

171
00:08:40,341 --> 00:08:42,971
Red traffic lights have a countdown delay.

172
00:08:42,980 --> 00:08:46,254
It's proven to reduce the accident rate
in experiments.

173
00:08:46,254 --> 00:08:49,766
Why? Because road rage,
impatience and general irritation

174
00:08:49,766 --> 00:08:52,536
are massively reduced
when you can actually see

175
00:08:52,536 --> 00:08:54,709
the time you have to wait.

176
00:08:54,709 --> 00:08:57,837
In China, not really understanding
the principle behind this,

177
00:08:57,837 --> 00:09:00,601
they applied the same principle
to green traffic lights.

178
00:09:00,601 --> 00:09:03,808
(Laughter)

179
00:09:04,820 --> 00:09:06,218
Which isn't a great idea.

180
00:09:06,218 --> 00:09:07,449
You're 200 yards away,

181
00:09:07,449 --> 00:09:10,117
you realize you've got five seconds to go,
you floor it.

182
00:09:10,117 --> 00:09:12,501
(Laughter)

183
00:09:13,506 --> 00:09:15,944
The Koreans, very assiduously,
did test both.

184
00:09:15,944 --> 00:09:18,777
The accident rate goes down
when you apply this to red traffic lights;

185
00:09:18,777 --> 00:09:21,571
it goes up when you apply it
to green traffic lights.

186
00:09:22,223 --> 00:09:25,012
This is all I'm asking for really
in human decision making,

187
00:09:25,012 --> 00:09:27,031
is the consideration
of these three things.

188
00:09:27,031 --> 00:09:29,931
I'm not asking for the complete
primacy of one over the other.

189
00:09:29,931 --> 00:09:32,169
I'm merely saying
that when you solve problems,

190
00:09:32,169 --> 00:09:35,028
you should look
at all three of these equally

191
00:09:35,278 --> 00:09:37,733
and you should seek as far as possible

192
00:09:37,733 --> 00:09:40,605
to find solutions which sit
in the sweet spot in the middle.

193
00:09:40,605 --> 00:09:43,141
If you actually look at a great business,

194
00:09:43,141 --> 00:09:46,524
you'll nearly always see all of these
three things coming into play.

195
00:09:47,011 --> 00:09:48,869
Really, really successful businesses -

196
00:09:48,869 --> 00:09:51,759
Google is a great,
great technological success,

197
00:09:51,759 --> 00:09:54,985
but it's also based
on a very good psychological insight:

198
00:09:55,630 --> 00:09:58,614
People believe something
that only does one thing

199
00:09:58,614 --> 00:10:02,747
is better at that thing than something
that does that thing and something else.

200
00:10:02,747 --> 00:10:05,487
It's an innate thing called goal dilution.

201
00:10:05,487 --> 00:10:07,824
Ayelet Fishbach has written
a paper about this.

202
00:10:07,824 --> 00:10:10,215
Everybody else at the time of Google,
more or less,

203
00:10:10,215 --> 00:10:11,889
was trying to be a portal.

204
00:10:11,889 --> 00:10:13,493
Yes, there's a search function,

205
00:10:13,493 --> 00:10:16,893
but you also have weather,
sports scores, bits of news.

206
00:10:17,501 --> 00:10:20,138
Google understood
that if you're just a search engine,

207
00:10:20,138 --> 00:10:22,932
people assume you're a very,
very good search engine.

208
00:10:22,932 --> 00:10:24,541
All of you know this actually

209
00:10:24,541 --> 00:10:26,507
from when you go in to buy a television.

210
00:10:26,507 --> 00:10:29,479
And in the shabbier end
of the row of flat screen TVs

211
00:10:29,479 --> 00:10:32,422
you can see are these
rather despised things

212
00:10:32,422 --> 00:10:34,851
called combined TV and DVD players.

213
00:10:35,376 --> 00:10:38,553
And we have no knowledge whatsoever
of the quality of those things,

214
00:10:38,553 --> 00:10:41,823
but we look at a combined TV
and DVD player and we go, "Uck.

215
00:10:41,823 --> 00:10:46,135
It's probably a bit of a crap telly
and a bit rubbish as a DVD player."

216
00:10:46,135 --> 00:10:49,038
So we walk out of the shops
with one of each.

217
00:10:49,038 --> 00:10:53,766
Google is as much a psychological success
as it is a technological one.

218
00:10:54,418 --> 00:10:57,202
I propose that we can use psychology
to solve problems

219
00:10:57,202 --> 00:10:59,701
that we didn't even realize
were problems at all.

220
00:10:59,701 --> 00:11:03,440
This is my suggestion for getting people
to finish their course of antibiotics.

221
00:11:03,440 --> 00:11:05,076
Don't give them 24 white pills.

222
00:11:05,076 --> 00:11:07,847
Give them 18 white pills and six blue ones

223
00:11:07,847 --> 00:11:09,952
and tell them to take
the white pills first

224
00:11:09,952 --> 00:11:12,352
and then take the blue ones.

225
00:11:12,352 --> 00:11:13,857
It's called chunking.

226
00:11:13,857 --> 00:11:16,616
The likelihood that people
will get to the end is much greater

227
00:11:16,616 --> 00:11:19,170
when there is a milestone
somewhere in the middle.

228
00:11:20,005 --> 00:11:22,453
One of the great mistakes,
I think, of economics

229
00:11:22,453 --> 00:11:24,898
is it fails to understand
that what something is,

230
00:11:24,898 --> 00:11:28,074
whether it's retirement,
unemployment, cost,

231
00:11:28,991 --> 00:11:32,969
is a function, not only of its amount,
but also its meaning.

232
00:11:33,252 --> 00:11:36,364
This is a toll crossing in Britain.

233
00:11:37,161 --> 00:11:40,148
Quite often queues happen at the tolls.

234
00:11:40,503 --> 00:11:42,795
Sometimes you get very,
very severe queues.

235
00:11:42,795 --> 00:11:45,494
You could apply the same principle
actually, if you like,

236
00:11:45,494 --> 00:11:47,549
to the security lanes in airports.

237
00:11:47,549 --> 00:11:49,421
What would happen if you could actually

238
00:11:49,421 --> 00:11:51,669
pay twice as much money
to cross the bridge,

239
00:11:51,669 --> 00:11:54,403
but go through a lane
that's an express lane?

240
00:11:54,403 --> 00:11:56,198
It's not an unreasonable thing to do.

241
00:11:56,198 --> 00:11:58,196
It's an economically
efficient thing to do.

242
00:11:58,196 --> 00:12:00,196
Time means more to some people
than others.

243
00:12:00,196 --> 00:12:02,592
If you're trying to get
to a job interview,

244
00:12:02,592 --> 00:12:06,595
you'd patently pay a couple of pounds more
to go through the fast lane.

245
00:12:06,595 --> 00:12:09,203
If you're on the way
to visit your mother in-law,

246
00:12:09,203 --> 00:12:12,417
you'd probably prefer to stay on the left.

247
00:12:14,170 --> 00:12:17,729
The only problem is if you introduce
this economically efficient solution,

248
00:12:17,729 --> 00:12:19,450
people hate it.

249
00:12:19,450 --> 00:12:22,694
Because they think you're deliberately
creating delays at the bridge

250
00:12:22,694 --> 00:12:24,312
in order to maximize your revenue,

251
00:12:24,312 --> 00:12:27,760
and "Why on earth should I pay
to subsidize your incompetence?"

252
00:12:27,970 --> 00:12:30,555
On the other hand,
change the frame slightly

253
00:12:30,555 --> 00:12:32,862
and create charitable yield management,

254
00:12:32,862 --> 00:12:36,165
so the extra money you get goes
not to the bridge company,

255
00:12:36,165 --> 00:12:38,131
it goes to charity,

256
00:12:38,131 --> 00:12:41,305
and the mental willingness
to pay completely changes.

257
00:12:41,807 --> 00:12:44,613
You have a relatively
economically efficient solution,

258
00:12:44,613 --> 00:12:47,124
but one that actually meets
with public approval

259
00:12:47,124 --> 00:12:49,144
and even a small degree of affection,

260
00:12:49,144 --> 00:12:51,505
rather than being seen as bastardy.

261
00:12:52,165 --> 00:12:55,269
So where economists
make the fundamental mistake

262
00:12:55,269 --> 00:12:57,538
is they think that money is money.

263
00:12:58,272 --> 00:13:02,624
Actually my pain experienced
in paying five pounds

264
00:13:02,624 --> 00:13:04,595
is not just proportionate to the amount,

265
00:13:04,595 --> 00:13:07,105
but where I think that money is going.

266
00:13:07,105 --> 00:13:10,138
And I think understanding
that could revolutionize tax policy.

267
00:13:10,138 --> 00:13:12,338
It could revolutionize
the public services.

268
00:13:12,338 --> 00:13:15,149
It could really change
things quite significantly.

269
00:13:15,496 --> 00:13:17,910
Here's a guy you all need to study.

270
00:13:17,910 --> 00:13:20,328
Anybody heard of him?

271
00:13:20,328 --> 00:13:22,533
Good. One or two.

272
00:13:22,533 --> 00:13:24,493
He's an Austrian school economist

273
00:13:24,493 --> 00:13:29,389
who was first active in the first half
of the 20th century in Vienna.

274
00:13:29,389 --> 00:13:31,583
What was interesting
about the Austrian school

275
00:13:31,583 --> 00:13:34,792
is they actually grew up alongside Freud.

276
00:13:35,140 --> 00:13:37,771
And so they're predominantly
interested in psychology.

277
00:13:37,771 --> 00:13:42,253
They believed that there was a discipline
called praxeology,

278
00:13:42,253 --> 00:13:45,144
which is a prior discipline
to the study of economics.

279
00:13:45,144 --> 00:13:49,515
Praxeology is the study of human choice,
action and decision making.

280
00:13:50,237 --> 00:13:51,537
I think they're right.

281
00:13:51,537 --> 00:13:53,594
I think the danger
we have in today's world

282
00:13:53,594 --> 00:13:55,435
is we have the study of economics

283
00:13:55,435 --> 00:13:59,817
considers itself to be a prior discipline
to the study of human psychology.

284
00:13:59,817 --> 00:14:02,647
But as Charlie Munger says,
"If economics isn't behavioral,

285
00:14:02,647 --> 00:14:04,949
I don't know what the hell is."

286
00:14:05,365 --> 00:14:11,056
Von Mises, interestingly, believes
economics is just a subset of psychology.

287
00:14:11,056 --> 00:14:13,245
I think he just refers to economics as

288
00:14:13,245 --> 00:14:16,728
"the study of human praxeology
under conditions of scarcity."

289
00:14:17,098 --> 00:14:19,660
But von Mises, among many other things,

290
00:14:20,460 --> 00:14:25,372
I think uses an analogy which is probably
the best justification and explanation

291
00:14:25,372 --> 00:14:28,924
for the value of marketing,
the value of perceived value

292
00:14:29,178 --> 00:14:32,765
and the fact that we should actually
treat it as being absolutely equivalent

293
00:14:32,765 --> 00:14:34,574
to any other kind of value.

294
00:14:34,574 --> 00:14:36,994
All of us - even those of us
who work in marketing -

295
00:14:36,994 --> 00:14:38,672
tend to think of value in two ways.

296
00:14:38,672 --> 00:14:39,820
There's the real value,

297
00:14:39,820 --> 00:14:43,024
which is when you make something
in a factory and provide a service,

298
00:14:43,024 --> 00:14:44,974
and then there's a kind of dubious value,

299
00:14:44,974 --> 00:14:47,748
which you create by changing
the way people look at things.

300
00:14:47,748 --> 00:14:49,954
Von Mises completely rejected
this distinction.

301
00:14:49,954 --> 00:14:51,689
And he used this following analogy.

302
00:14:51,689 --> 00:14:56,788
He referred actually to strange economists
called the French Physiocrats,

303
00:14:56,788 --> 00:15:00,469
who believed that the only true value
was what you extracted from the land.

304
00:15:00,469 --> 00:15:03,137
So if you're a shepherd
or a quarryman or a farmer,

305
00:15:03,137 --> 00:15:04,669
you created true value.

306
00:15:04,669 --> 00:15:07,526
If however, you bought
some wool from the shepherd

307
00:15:07,526 --> 00:15:10,432
and charged a premium
for converting it into a hat,

308
00:15:10,432 --> 00:15:12,587
you weren't actually creating value,

309
00:15:12,587 --> 00:15:14,546
you were exploiting the shepherd.

310
00:15:15,095 --> 00:15:18,988
Now von Mises said that modern economists
make exactly the same mistake

311
00:15:18,988 --> 00:15:21,048
with regard to advertising and marketing.

312
00:15:21,048 --> 00:15:23,167
He says, if you run a restaurant,

313
00:15:23,167 --> 00:15:25,428
there is no healthy distinction to be made

314
00:15:25,428 --> 00:15:28,013
between the value you create
by cooking the food

315
00:15:28,013 --> 00:15:30,674
and the value you create
by sweeping the floor.

316
00:15:30,674 --> 00:15:33,225
One of them creates, perhaps,
the primary product -

317
00:15:33,225 --> 00:15:35,002
the thing we think we're paying for -

318
00:15:35,002 --> 00:15:36,564
the other one creates a context

319
00:15:36,564 --> 00:15:39,724
within which we can enjoy
and appreciate that product.

320
00:15:39,724 --> 00:15:43,220
And the idea that one of them should
actually have priority over the other

321
00:15:43,220 --> 00:15:44,470
is fundamentally wrong.

322
00:15:44,470 --> 00:15:46,136
Try this quick thought experiment.

323
00:15:46,136 --> 00:15:48,720
Imagine a restaurant
that serves Michelin-starred food,

324
00:15:48,720 --> 00:15:51,529
but actually where
the restaurant smells of sewage

325
00:15:51,529 --> 00:15:54,170
and there's human feces on the floor.

326
00:15:55,029 --> 00:15:57,607
The best thing you can do there
to create value

327
00:15:57,607 --> 00:16:00,848
is not actually to improve
the food still further,

328
00:16:00,848 --> 00:16:03,949
it's to get rid of the smell
and clean up the floor.

329
00:16:05,307 --> 00:16:08,107
And it's vital we understand this.

330
00:16:08,107 --> 00:16:10,493
If that seems like some strange,
abstruse thing,

331
00:16:10,493 --> 00:16:15,027
in the U.K., the post office
had a 98 percent success rate

332
00:16:15,027 --> 00:16:17,571
at delivering first-class mail
the next day.

333
00:16:17,571 --> 00:16:19,458
They decided this wasn't good enough

334
00:16:19,458 --> 00:16:21,593
and they wanted to get it up to 99.

335
00:16:22,843 --> 00:16:26,088
The effort to do that
almost broke the organization.

336
00:16:27,107 --> 00:16:29,337
If at the same time you'd gone
and asked people,

337
00:16:29,337 --> 00:16:32,188
"What percentage of first-class mail
arrives the next day?"

338
00:16:32,188 --> 00:16:36,319
the average, or the modal answer
would have been 50 to 60 percent.

339
00:16:36,975 --> 00:16:39,738
Now if your perception
is much worse than your reality,

340
00:16:39,738 --> 00:16:42,765
what on earth are you doing
trying to change the reality?

341
00:16:42,765 --> 00:16:46,443
That's like trying to improve
the food in a restaurant that stinks.

342
00:16:47,968 --> 00:16:49,222
What you need to do

343
00:16:49,222 --> 00:16:50,660
is first of all tell people

344
00:16:50,660 --> 00:16:54,583
that 98 percent of mail gets there
the next day, first-class mail.

345
00:16:55,419 --> 00:16:56,738
That's pretty good.

346
00:16:56,738 --> 00:16:59,965
I would argue, in Britain there's
a much better frame of reference,

347
00:16:59,965 --> 00:17:01,107
which is to tell people

348
00:17:01,107 --> 00:17:03,315
that more first-class mail
arrives the next day

349
00:17:03,315 --> 00:17:05,049
in the U.K. than in Germany.

350
00:17:05,049 --> 00:17:08,532
Because generally in Britain if you want
to make us happy about something,

351
00:17:08,532 --> 00:17:10,726
just tell us we do it better
than the Germans.

352
00:17:10,726 --> 00:17:12,123
(Laughter)

353
00:17:12,123 --> 00:17:13,658
(Applause)

354
00:17:15,079 --> 00:17:18,016
Choose your frame of reference
and the perceived value

355
00:17:18,016 --> 00:17:21,295
and therefore the actual value
is completely transformed.

356
00:17:21,295 --> 00:17:23,331
It has to be said of the Germans

357
00:17:23,331 --> 00:17:26,071
that the Germans and the French
are doing a brilliant job

358
00:17:26,071 --> 00:17:27,572
of creating a united Europe.

359
00:17:27,572 --> 00:17:30,349
The only thing they didn't expect
is they're uniting Europe

360
00:17:30,349 --> 00:17:33,209
through a shared mild hatred
of the French and Germans.

361
00:17:33,209 --> 00:17:35,719
But I'm British,
that's the way we like it.

362
00:17:37,859 --> 00:17:40,905
What you also notice is that
in any case our perception is leaky.

363
00:17:40,905 --> 00:17:43,741
We can't tell the difference
between the quality of the food

364
00:17:43,741 --> 00:17:45,856
and the environment
in which we consume it.

365
00:17:45,856 --> 00:17:47,880
All of you will have seen this phenomenon

366
00:17:47,880 --> 00:17:50,302
if you have your car washed or valeted.

367
00:17:50,604 --> 00:17:54,332
When you drive away,
your car feels as if it drives better.

368
00:17:55,816 --> 00:17:57,213
And the reason for this,

369
00:17:57,213 --> 00:17:59,680
unless my car valet
mysteriously is changing the oil

370
00:17:59,680 --> 00:18:02,921
and performing work which
I'm not paying him for and I'm unaware of,

371
00:18:02,921 --> 00:18:05,438
is because perception
is in any case leaky.

372
00:18:05,438 --> 00:18:09,394
Analgesics that are branded
are more effective at reducing pain

373
00:18:09,394 --> 00:18:11,256
than analgesics that are not branded.

374
00:18:11,256 --> 00:18:13,665
I don't just mean through
reported pain reduction,

375
00:18:13,665 --> 00:18:15,468
actual measured pain reduction.

376
00:18:15,468 --> 00:18:19,956
And so perception actually
is leaky in any case.

377
00:18:20,752 --> 00:18:23,678
So if you do something
that's perceptually bad in one respect,

378
00:18:23,678 --> 00:18:25,286
you can damage the other.

379
00:18:25,286 --> 00:18:26,876
I'll end very quicky

380
00:18:26,876 --> 00:18:30,078
with something without which
you'd never be happy for me to miss

381
00:18:30,078 --> 00:18:32,152
which is the perfect demonstration

382
00:18:32,152 --> 00:18:35,160
of creating economically
fairly sustainable value,

383
00:18:35,160 --> 00:18:37,088
through doing nothing to the product,

384
00:18:37,088 --> 00:18:40,190
and everything to the way
in which it's consumed and perceived.

385
00:18:40,190 --> 00:18:43,600
(Video) Man:
Shreddies are supposed to be square.

386
00:18:44,203 --> 00:18:47,547
Woman: Have any of these
diamond shapes gone out?

387
00:18:48,667 --> 00:18:51,469
[Diamond Shreddies]
Woman: New Diamond Shreddies cereal

388
00:18:51,469 --> 00:18:54,600
Same 100% Whole Grain Wheat
in a delicious diamond shape.

389
00:18:55,981 --> 00:18:59,203
Rory Sutherland: Very finally,
here's the poster campaign.

390
00:18:59,203 --> 00:19:01,365
(Laughter)

391
00:19:01,365 --> 00:19:04,322
(Applause)

392
00:19:09,466 --> 00:19:11,746
Some Canadians are inherently
very conservative,

393
00:19:11,746 --> 00:19:15,036
and were very annoyed that their
square Shreddies had been taken away.

394
00:19:15,036 --> 00:19:17,703
It was kind of a new-coat
marketing moment.

395
00:19:17,703 --> 00:19:20,528
So after long thought and deliberation,

396
00:19:20,528 --> 00:19:22,494
they arrived at a compromise.

397
00:19:22,494 --> 00:19:23,855
Thank you very much.

398
00:19:23,855 --> 00:19:26,442
(Applause)