Prof. Daniel Kahneman talks Behavioural Economics with Rory Sutherland.

hello and welcome to the IPA and the spiritual home of advertising and welcome home to Rory and what could be more fitting setting than the very place where Rory led his behavioral economics presidential agenda than right here at the IPA but tonight we have an even more prestigious guest for that we really thank Alexis and penguin publishing for making this wondrous occasion become a reality we are extremely honored to have with us tonight professor Daniel Kahneman a man that has inspired a generation of economists and psychologists and here's without doubt the world's leading behavioural economist the winner of the 2002 nobel prize for economics and the author of the current New York Times bestseller Thinking Fast and Slow so yeah we think is relevant because in today's harsh economic times and especially in the UK we believe that Thinking Fast and Slow has never been more relevant there has never been a greater need to deepen our human understanding and never been a greater need to create new models in this era of austerity and there's never been a greater need to change behavior for the better we change we fundamentally believe that now is the time to take these years of learning from Professor Kahneman and apply them in today's world we need to embrace this new thinking and ensure it's implicit in everything that we do across advertising marketing and all forms of creativity by understanding having a better understanding of people we can create products and services and the people want and find easy to use but more than that help people act in their own interests of an interest and society's interests we may be optimistic and idealistic but we hope we can make the world a better place quite simply we need to create little ideas from big thinkers and what bigger thinkers to tackle these issues then Daniel and Rory and suppose the questions that we all want to ask we're also honored to have our host dr. Nick Southgate Nick is the IPAs very own payroll consultant he's on our big thinking panel and he also current teachers at the School of Life so on to the format of the evening for first hour and it will facilitate a conversation with Professor Kahneman and Rory followed by prepared questions from the floor after which we'll retire for drinks for those people who like to catch up with some old friends and just to restate we are webcasting for the first 60 minutes with approval from Rory and Nick professor Kahneman at which point we'll stop at the 60 minutes and the quiz don't have all of your guides approval and and and then we'll open open the floor up for questions and so finally feel free to tweet if anybody who'd like to tweet please feel free to tag with hashtag early change and other I say that without further ado I just like to open proceedings and it's over to dr. Nick South cable so I think Thank You Jess for your introduction thank you all of you for coming thank you socially professor Conover from a cue it's possible I knew that once you were coming Rory would come in hard to keep my eye sir I see tonight's we have a thousand question is my own to ask so I have to start somewhere but I think the first thing I think we useful to talk about is the the two heroes of your book so they are system 1 thinking the fast thinking of the title system 2 thinking the slow thinking of the title and the use of you just as though your life stories are there that abiding sort of mess for the best for you use your career to gloss those but also I think it's interesting you're very clear in the introduction that although they are the heroes in your book they are fictitious heroes and I thought it'd be useful who can explain a little bit about that as well well they're really two kinds of thinking that's very that's immediately obvious so if I say 2+2 a number comes to your mind and and you didn't ask for it you know it just came capital of France the name the word comes to your mind if I say you know a nasty word like crime or vomit you have an emotion you didn't ask for it nothing deliberate it just happens then there is and that's fast thinking that's what I call fast thinking and it's all market that it's automatic I mean it isn't experience that's voluntary it's experience as something that happens to you then there is slow thinking a slow thinking is really there's more variety in what still thinking is but certainly when you try to reason through a problem or a multiplication problem at the example I always use the same two number 17 and 24 and you know when nothing comes to mind oh that's not true but what comes to mind is that you know it's a multiplication problem you might know whether or not you can do it in your head that could come very quickly but you know unless you've really miss spend your youth no number comes to you so that's one kind of slow thinking and the hallmark of that kind of thinking is that it's effortful and it's effort for in multiple senses there is actual mental work and we feel that there is physical work because your body is involved in it and there are signs of arousal and the pupil dilates and all sorts of changes of that of that nature it's also effortful and that's important in that there is what psychologists call limited capacity for effort the amount of effort that you can exert at any one time is limited so we cannot compute 17 7 24 even if we can do it in your head you can't do it you know Wow making in the UK it would be a right turn into traffic and in the u.s. a dangerous one is a left turn into traffic you can't do this because making it turn into traffic is demands concentration and and when you concentrate on one thing you can't concentrate on the other now there is a completely different family of mental operations if you will that also demand effort and they are controlling yourself it's you know it's something in the drug and of psychologists it's executive control and it's everything that has to do with not saying what comes to your mind immediately and checking yourself in in not doing what comes to you you know what what you feel like not always doing what you feel like doing and we know that that is effortful because you can interfere with it so if you know it's not a very large result but but it's a it's a good illustration when you tell people to keep 7 dead rates in them in their mind and then you give them a choice of desserts and when dessert is a luscious chocolate cake and the other is more virtuous fruit salad they're more likely to pick the chocolate cake when their mind is full of numbers then in their normal state and it's because self-controlled in demand some of that mental energy or mental effort which is a limited capacity so that's what I call that system - and and I really like to call them system 1 and system 2 because I think actually when you read the book you'll have to tell me but I know what I was trying to do you're meant to develop a view of these two characters as if they were characters you know they have personality they do things system 1 the the thing system 2 that these things you know core system - lazy because you know we don't like exerting effort or anyway we don't exert much effort those are metaphors and that's what you were saying you know there are no I'm not really making a claim for their systems in the brain they're not even systems I mean the word is wrong because systems are made up of interacting parts and I'm not claiming that well I didn't invent the words I took them from somebody else who by the way as repudiated the terminology in the meantime but but the he quite correctly called them type 1 and type 2 processes I think it works better when you call them system 1 and system 2 because we're very very good at forming personalities images of personality so these character system 1 and system 2 you form ideas you have a sense like somebody you know that that you know what they will do next no that's because they have those personalities those are entirely metaphors and psychologists and you're representing that I think you're not supposed to do it there is a rule in psychology against explaining behavior invoking little people in your head called homunculus it's really it's really a sin and it's only because I'm very very old that I can really afford to commit that sin but some people still really disapprove of that language because I think that's one of the things that makes it actually useful to people in marketing though and people in this community is that we don't need a perfect understanding of psychology we need a way of thinking about where you about the way people think and it gives us a very intelligent way to do that a very perceptive way to do it and I think we do we start to perceive them as personalities and we can work with them pick up on our stock to Joe Rory and this is the you talk in the book which I say mixed optimism about her ability to train system on thinking or to learn over time to make better decisions so I suppose the question is can we learn to make better I'm surprised by the labelled mixed optimism it I didn't think there was any optimism no I'm really not this is definitely not a self-help book so I my I really had to to ideas about possible usefulness one which is really a grand hope is to educate gossip because I think people are fairly good at seeing the mistakes that other people make much much better than it's at seeing the mistakes while they are making them so I think it is not self-help it is really educating gossip now educating gossip I think is a very good thing because one thing that people do when they make decisions is they anticipate gossip and I think that if people anticipated intelligent gossip they would make better decisions than if they anticipate unintelligent gossip so that's one hope and the other one is that organizations I think can do better than anybody two organizations slow things slowly and and they can arrange procedures to think better much much more than individual skin so I say that's one of the things I'll see weight wiki's we hope our belief is that businesses and brand owners might be better at creating those kind of frameworks but people can make better decisions those kind of those right kind of decisions I suppose ready to bring Rorion on this so what what so things are is so your favorite examples where people have designed a better decision it'd be interesting to get some discussion between the two of you your optimism and against the professor's self-confessed less mixed optimism I now realize I'm one of the I mean I suppose one interesting facet of calling them system one and system two is that obviously multiple models of the brain aren't new they go back to Plato and before but in the naming of them before there was always an implicit value judgment there was one part of the brain which was considered responsible worthy and the other part was there effectively to be suppressed by the first part and actually what I think one of your one of the things that arises from this is actually if you can actually create mechanisms or environments where people can make good system-1 decisions very very easily then you can actually benefit humanity and make decisions easier without actually people having to make some cognitive effort which would be frankly better spent somewhere else and the other thing is course there was tended to be a sort of stuck on a Veidt approach to our use of rationality which is that you must you know think more be more you know take more effort think harder and so certain models political science models which predates this understanding of the brain basically required everybody to spend their entire lives making rational thing decisions about everything and first of all it's it's simply just not a good use of intelligence so making things sort of instinctive I mean the marketing example I always give which I have actually no evidence for but the great fun to work in advertising not in academia is you can make outrageous assertions and it's it's considered something of an accomplishment to be honest but actually how did you get people in the old days of supermarkets you had a Trotter a basket and a trolley and the trolley was enormous it could feed a family of ten and the basket was actually inadequate but a lot of people thought well I'll just take a basket and without anyone actually be aware of what was going on they introduced what's called the Japanese trolley which is the one in the middle it's a small shallow trolley you see there's a very very strong system run instinct which is when presented with three options I go with the one in the middle and so simply understanding some of the heuristics people use I mean you might think one that's more benign although you only got a to two in ethics didn't you there's a very funny story which is that without really Nick sort of first did all his philosophy papers except ethics in which he got a to to which part the careers advisors obviously recommend that the advertising industry okay I'll give you this example of my own invention which has not yet been instigated if you want people to finish their antibiotics right through to the end okay we have an example which is the software loading bar which is if there's some mark of progress will persevere a lot longer if you click on a link and nothing happens you give up if there is some little sign that something's downloading you'll personally now if you instead of viewing people twenty four white antibiotic pills you gave them eighteen white ones and six blue ones and said when you've taken the white ones then take the blue ones the likelihood that they'll take to all twenty six rather than giving up early strikes me because of this little milestone as being increased without actually them having to be cognitively aware of the reasons for their new behavior I mean it's it's we will get into an ethical debate here because of course it happens system one often operates without us being consciously aware of usually usually in fact but I mean my view is I'm a libertarian but I didn't get really really angry when people paint white lines in the middle of the road you know I'm temperamentally a bit libertarian but I don't get this is the government interfering with my right to swerve all over the place if you said I mean and actually very very simple unconscious guidance strikes me as you know usefully this is buckminster fuller's point don't stop trying to bully people around using rational arguments and instead design a better environment in which case they can actually just do it automatically yeah I think that's it's better put then then I could do it the certainly there is nothing that then a great system one in the book you know it was not my intention I mean the most highly-skilled mental activities our system one I mean when we become skilled at something we do it automatically so that's that's already you know place of the two systems another and system one is in most ways better at what it does and system two is what it does because system two is limited in terms of short-term memory and ability to do things and it's slow and it's effortful and it's costly and it's lazy and and system one is truly wonderful in terms of the amount of information that he can bring to bear and I I also understanding and that might be an important to advertising I think it's important to communication in general understanding that a lot of the time you're not really talking to system two you're talking to system one and and it is a rule really of thinking but I think you know many people have confirmed that if you sometimes believe conclusions and if you believe in the conclusions then you find the arguments convincing and you believe that the conclusions follow from the arguments but actually it's a conclusion that you believe and you don't believe them because of the arguments I think the rare case where people believe in something because they believe in the arguments for it yes and recognizing this and that this is a fact of human nature and that whether you know it's the Royal Society of the National Academy communicating science to the public they have to know this that they are talking to system one if they want to be heard because that's the way people are euro was the perfect slow-motion example of that wasn't it sorry but actually people wanted a unified currency and then effectively constructed arguments that I mean the I mean the interesting I think it's your brilliant point that the the system to your brain thinks it's the Oval Office in reality it's the press office I mean yeah everything I think is the most eco system to us on many occasions the spokesperson for system warned so your beliefs going to come from something else I mean you know if you ask yourself about the main beliefs you have and where do they come from well many of them come from your childhood you know they basically you believe in what people you like and respect belief and why you like and respect them it's not an argument it's something else but for most of us most beliefs come from there and the arguments are something else but we we build arguments we pretend that that we got to our conclusions from arguments winning in many cases it isn't true so recognizing that it isn't true and that in fact system one runs the show to a very large extent and that that's the one that you want to convince that's the one that you want to move and that creates a ethical problems and it creates responsibility and so on but you know if human nature is like that we'd better know it in the conclusions as you say very clearly we say I often cringe and the work I do with a boss is used to just to say that human beings are irrational I just say that we don't match up to this rational model I thought that definitely puts you at odds with some of the at least popularizing accounts of this work I think well I mean that I correctly odds I would say I think the people who try to paint us as irrational or unkind unhelpful you know I mean obviously then Ariely has written you know he writes book with the rationality in the title now he's an excellent psychologist and he knows his stuff and so on and we're substantively there is very little disagreement between us but he likes the word irrational and I really don't I don't think that this characterizes people appropriately I think that because the association to irrational is something that is you know impulsive emotional crazy yes unresponsive to reason and that's not what people are I mean basically most of what people do is define and describing them as irrational I think just doesn't do them justice now they're not rational by the economists economists definition of what rationality is but that definition is so extreme that it's a very minor indictment that people are ok that's a poem for us as advertising people but so we don't want the headline says advertising people understand your irrationality that's a well it's already bad enough we didn't we didn't need that on top of this this suspicion we had it by what word should we or just well I mean you speak to system one which was you know some people would say is not better because you speak you know if you accept that that people are very little control over their system one then then you are accessing and moving things in people that they they cannot resist because they don't know it's happening so you know the ethical problems are really quite serious it's not that you know that they are made easier by eliminating the word irrationality if you're speaking to system one there is a problem because this is not the way that people like to think of themselves they like to think of themselves as reasoning agents and and even if it is the false image that they have of themselves they really insist them and that being the case so there is a strong reaction to people who openly will declare we are talking to parts of you that you're not aware exist I think there's there's an interesting question because most many people in their working life and obviously it's extreme if you're an accountant or something your status is derived from displaying your system to abilities and no one ever gets fired to use that old IBM slogan for being too rational but there are cases if you're designing for example a bonus scheme or you're designing something which actually involves either individual human behavior or even more complex mass human behavior we're actually the best solution is an irrational one now both Nick and I Nick for longer and probably more suggestively have been on this diet where you don't need any carbohydrates okay now it's the the seem tell if your friend is yeah I got it from him although he doesn't see the practice no no in practices but other things but but interestingly what's written about that is now if you're a family if you're a dietary adviser or nutritionist the logical thing is you say what this is your calorific intake for the day and you should stick to that okay now that's a very difficult thing to do because it requires you constantly to invoke system to to eat meals that are smaller than the meal you want to eat and it's tiring and cognitively difficult and it requires a huge amount of self-policing if you just say I don't eat carbohydrates which is recommended by some people once a week you go to a shop and you don't buy any carbohydrates you need no exercise no further self constraint for the following week because there aren't any carbohydrates in the house so that is not a rational recommendation and you might get fired as a government food scientists for recommending it but behaviorally its enormous ly easier to follow and both Nick and I with something with more success in his book have done this very very easily and pretty painlessly now that's it's just an interesting question that when government the person designing the policy has to look rational in order to justify his policy to everybody else and yet the the actual so what I'm saying in Jonathan heiped the your family our University of Virginia psych psychologists and makes the point that all political science actually predates our understanding of how the brain works so most political systems are actually designed in a belief of potentially infinite rationality for example I think that is quite interesting that actually where do we actually allow a system to and call it in and when do we just run on autopilot okay boys outed me he's after me again - - in ethics just say though that 68 pounds down a year to this day so I know thanks to your book actually so my soon-to-be written book behavioral economics made me thin do sell your next book is a self-help book because they sell tons the really funny story about this is when Das Kapital was published in the United States the publisher marketed itself how book on how to accumulate cash and it was a it was a best-seller obviously nobody read it but then nobody read self-help books anyway they just buy them so very clever sorry about one of the are you going for the point of user communications one of the the phrases you coin in the book is there what you see is we and we react just to what we can see and one of the things we've tend to believe in marketing and branding is that people are consuming communications as part of constructing an argument where that balancing brands are going to each other and this clearly demonstrates people they just see what there is in front of them and they make their conclusion very rapidly without any attempt or very rarely any attempt to add extra information and you know phone so it's not just that we don't think about what we can't know we really can't think about it I thought it'd be worth banding well I mean you what to try to put it as accurately as I can it's when you need information that you don't have you usually are not aware that you need it that is this if you have partial information about something you will make the best story possible out of the information you have and you may not and you will become your confidence will be determined by the coherence of that story now when you're comparing brands to each other it's not that we are instantly moved by anything that is that we see at the moment you may have you know preferences that that are brought in you know by association by memory so it's not only what you see at the moment that rules it is what you see at the moment may make you think of other things and in particularly it make make you think of the other brand so if if the associative system is is set up that way so it's not it it is not the system one is invariably ruled exclusively by what is in front of us there is an enormous amount of influence you know the influence of context is very powerful but it is not all powerful it's easy to exaggerate it I think Rory yes I mean there is an interesting question in the system one in particular if I'm policed will take a very narrow area of comparison from which to make a decision and I was intrigued when I went to the RAC Club to meet someone a few months ago and I asked him being vulgar and Welsh and having no sense of decorum I said how much does it cost to join this club and he said is I think 1,500 pounds here and I said god it's incredibly expensive which is a club of course it is but on the other hand there's an alternative to buying a flat in London it's about half the price of the council tax and you can stay there for 80 pounds night it's got a swimming pool a Turkish bath three restaurants two bars a garden and a staff of 20 and its own post office but but but but it's something good to me that actually if if you would nobody ever looks at do i buy a flat or do I join the club because that's just a little too wide to actually set the comparative net and actually one useful sort of heuristic to train yourself in is when I've got to go and buy something should I try and find something from a completely different category that solves the same problem my wife doesn't like this because she sent me out actually to buy one of those fat toasters and I came back with a bread slicing machine instead on the argument that I said we didn't need a fatter toaster we needed thinner bread but actually as an interesting exercise it's amazing how bad we are at this I know I think finishing we got Charles Andrews from Soper in the audience which is a peer-to-peer lending website in the UK we've worked a bit with streetcar which is the business where you rent cars by the hour and it's very very difficult to get people to move outside on buying a car what car should I buy to a slightly lateral solution to the same problem and presumably we have a comfortable number of things which we're happy comparing and then once we've assembled that comparison said we stopped I mean that that is fascinating it's true it's that how the decision said is constructed you know what are the options that we are going to consider this is really taken for granted in most cases and what you're pointing out is that that is where big changes could be made quite often that is moving back and reformulating the problem rather than trying to make the the best decision among existing alternatives so that here even system two is doing it yes I mean what we are but you're pointing out is that analyzing the options that come to mind is maybe the wrong thing it's analyzing the problem it's going deeper rather than looking at the options you're already considering and your big george pólya fan aren't you of how to solve it the book yeah yeah again good book recommendation written in what 1950 mathematician the inventors dilemma and actually solve solve a bigger problem of which your problem is not all those sort of techniques of interesting people here looks like they might be old enough but in the 70s when I was growing up a policeman came around to our school and showed us a film which warned us not to climb inside abandoned fridges if the door were closed behind us and we would die okay talk to me like I because a mark mark you you've ran the COI you you this does this film exists is this one of yours okay fantastic not quite some of my youthful psychodrama this thing exists now so you've had to invent this film to warn children or town to make light of it because this number of children did die very hardly in this way but there's same time you do carry it just can't scrap your dealers to take the doors off old fridges and they're increasingly small number of 1950 style fridges actually locked as of magnetic sales and now that you don't have them there is no problem you don't have to tell children and it seems to me you could never stop children climbing into abandoned fridges that that's just something children like to do but you could make it so that food we're safe this kind of thinking round things are something we should maybe look at more aggressive I won't of you so there you go through life or there are certain areas of life you think I just sister repeatedly appallingly badly designed and from a sort of professional standpoint why don't they do it like that have you got of pets well it's like that you know the psychology that's being discussed here is like for me I think the best psychology there is that is that in many cases instead of persuasion you want to ask how how could we change the situation or make it easier for people to do what we want them to do so I know you're a fan of nudged yes and so am i and and that is really the fundamental idea which so feels like it's actually possibly the best idea in social psychology that when you try when you want to change behavior I try to train the environment rather than trying to persuade people try to make it easy for them and as you're pointing out we don't do enough of that so instead of that film you know making the door so that they can't be locked you know then there is a problem that doesn't exist anymore yeah so changing the environment to make decisions better now a lot of the nudge techniques that are intended to help citizens make better decisions in their interest there is centrally that they just make it easier for you to evaluate the information and they make it easier for you to make the right decision if you don't want to bother yeah and and all these are environmental changes there you train the structure the failure calls that the architectural decisions and it's that's the idea I think I'm gonna start school I know you're involved in a thing that the greater good is a consultant yes I wanted how like maybe a little about your work with their more well you know I sort of started a third career I mean I have you mica Demi career the first and the four painful years of writing the book as a second and I really need a third now and after so I'm yeah I'm involved in consulting the greatest good is a is a misnomer as it turned out to people one of them is Steve Levitt the author of free economics and the other is and he Rosenfield they had the idea of of founding a firm that would help very very wealthy people in what they called maybe should have called evidence-based philanthropy that is when you are making the decision of how you want to improve the world try to make the decision optimal it turns out that the demand for that service is very very small whereas a business model it isn't working but so we actually deal with large firms and try to help them solve problems because one thing is always interesting about that is that it's in my experience of working with this and maybe ROI as well it's quite a it's hard but you say it's quite hard to reform our own thinking and it's quite hard in organizations I find even to reform thinking as well and you there's a lovely example in the book you give of your which you like water so the story of planning a book a university and a classic example of planning bias oh you should tell the story it's your story I said well okay it's a it's a true story and it's an embarrassing story at multiple levels but a long time ago when I was living in Israel we had the idea of teaching rational judgment and decision-making to kids in high schools without mathematics that was the ambition and so I put together a team and we we were going to do this and improve the world and and that team included quite a number of very good people some experienced teachers and the Dean of the School of Education was the hero that this particular story and we worked for a year and we're really doing very well and and at the end of the year and I really can't reconstruct why I did that but we would meet every Friday and and I had the thought of doing a forecasting exercise with the group and the exercise was can we estimate how long it will take us to complete the book and to hand it hand a draft to the Ministry of Education which had commissioned the effort and and I did it right which everybody fill the slip of paper that's that's the way to do it by the way you don't want to discuss the number first you want to have everybody think about the problem write down their numbers and and then you can have a discussion so that's that part I did right and everybody fill their estimates including me and Seymour with the Dean of the School of Education and and all our estimates were between one and a half years and two and a half years we were really convinced that this was going to be it and then it occurred to me too that Seymour was an expert on curriculum development and he knew really all about the sand and I asked whether he knew of teams that had tried to do essentially what we were trying to do it has develop a curriculum where none existed before and he said he he did I'm still surprised but he said he could think of quite a few and then I asked him well could you if you know so much about them can you visualize them at roughly the stage of progress that we're at yeah II thought he could and then you know ask the obvious question well how long did it take them to complete the book and and he thought for a long time you know I've told that story many times so I in my story he blushed but I really I'm not sure at all that he blushed but but he he was clearly embarrassed because he said you know it occurs to me for the first time that not all of the teams and thinking have actually completed the book and you know that thought hadn't occurred to us and and I asked him what percentage would you say he said roughly 40% and and those who finished how long did it take the money he said I that he couldn't think of any that took less than seven years and he couldn't think of any that had persisted to more than ten so somewhere between seven and ten or failure and giving up in the middle and then I asked him the final question which is well you know when when you compare us to these themes you know in terms of our resources and our ability to carry out our plan where do we stand and he said well he said well below average but not by much so that was now what that this tells you something about the way the mind works because it tells you that all the information was in his head all the statistical information but he wasn't using any of it he was building a story as all of us were because his estimate was within the range of one and a half to two and a half years so he was building a story like all of us were on the basis of our own experience he was extrapolating and and then making adjustments and doing things that appeared reasonable to him the statistics appeared simply irrelevant yeah I mean they didn't occur to him so that that was one lesson many years later I discovered that actually the real idiot in that story is was myself because you know what we should have done and I wonder how many of you have already thought of what we should have done this should have been our last meeting we should have quit I mean we'd just been told that this wasn't going to work and we didn't quit the book actually was completed there was no longer in living in Israel it took 8 years it was that it was never used oh but that the fact that we didn't quit you know is another psychological fact that I think is interesting it we doesn't speak well especially the thing is you know if you if you wrote a humorous piece about this you couldn't do better because we were writing a book about rational decision-making that we were supposed to be doing you know we made that egregious mistake and I didn't understand the mistake for many years thereafter the hero of my story was Seymour you know and and how he had not used the statistics at hand but the fact that I hadn't stopped the project that that was a really stupid thing that took me years to realize and interestingly enough you can examine yourselves when I told you the story you know it wasn't obvious to you you must have quit no we didn't do you think sunk cost bias and narrative bias are kind of related in that no one likes a story that finished halfway through or that has a reversal yeah I mean clearly the song cost biased is that you know you have to admit failure yeah and admitting failure is costly and if you can postpone admitting failure and a vague chance of saving the situation then then you were very biased in favor of doing it so that is really well understood that was my first enlightening moment where I thought this stuff is what I love about this is it's so scalable you can use it to inform government policy but you can use it to inform very small decisions in your life and my little eye-opening moment when I realized this stuff is really useful as I'd bought two tickets to Paris for my wife and me and they're about 150 pounds or something returned and I'd pay for them they were non-refundable and two days before we were due to go I got real with a really bad cold but having papers that take it does absolutely determined to go through with this trip spending another five hundred pounds basically in order to feel absolutely crap in art galleries restaurant hotel and I happened the night before to read one of these articles about sunk cost bias and actually the question is the fact that you've already paid for the tickets is irrelevant that's actually impossible to recapture the question is do you want to go to Paris tomorrow and I threw the tickets in the bin and had a great weekend drinking them sip and watching television and that that was actually you know that was the first absolutely useful because before reading that book it would have been inconceivable to me not to soldier on and go through with that weekend having bought the tickets you know this this story is very much the beginning of behavioral economics and it's the the beginning in Richard failures mind because he had that story and it turns out later he presented it as a hypothetical story that you you have tickets for a basketball game and and then there are two scenarios in one of them you've been given the basketball tickets by a friend and the others you've paid for them and now there is a blizzard you could reach the game but you know it's the blizzard is serious so it's not and it turns out that people have paid for the tickets are much more likely to brave the blizzard then and you know which is silly because the only question as you said you know do I want to go now yes and so that sunk cost fallacy is really a very very big problem it's a very big problem for governments I mean you know being willing to abandon a project having lost and admitting that that money has been lost and so you you lose some more rather than admitting the loss as a challenge that moves on to the the final party of books about happiness which has come a big part of your work but I am so more is example that she's but I'd say towards my my girlfriend she had she had a very bad cold she had tickets to see one of her favorite artists and I made the argument which I felt was substantiating your book as well said you should go because in a year's time you won't remember the cold but you will remember the concert and by large that's my my experience there you yeah I go to that so I said I can I'll go and it's true that so I have holidays where objectively it rained every day and we argued I argue a lot bet that kind of thing I remember lovely mountains two years later all you remember is lovely mountains in and seeing a flock of pelicans I said so the memory starts like selective in that way sometimes I feel you can you can game that selectivity to push through so well I mean you know the real question is whether what's more important the crappy weekend or the memory I mean it's not and and you and quite often and that's what we've learned from this work the two don't agree so that optimizing your experience in real time and optimizing the memory that you'll keep a bit lead you in different directions so the experiencing self and the remembering self are quite often in conflict and the experiencing self is the remembering self there's a wonderful example of I think colonoscopy isn't it whether remembering self is disproportionately affected by how it don't go there he's going to go this is where where your narrative of the past experience is not actually a product of the duration or extremity of the pain of the experience itself but how it ended no because we have we have an interesting debate any certain you know quite a few service brands here including for example British Airways I think InterContinental Hotels and while the interesting questions is one of the things is that people's because of confirmation bias I saw a whole analysis of customer feedback from a stay in a hotel in Memphis I think it was where effectively every single figure they scored was effectively predominantly influenced by what the check-in experience was if they had a bad initial experience there their brain decided I'm going to construct a narrative here of a bad experience they just went around looking for corroborator of evidence that it's crap hotel and if they had a good check-in experience they basically decided to be in a good mood and look for supporting evidence to some you know so this wasn't just you know what do you think of the service which would be reasonably correlated with what your check-in experience was like they thought the ice sculpture and the garden was crap if they'd had to wait twenty minutes in a check-in and so if you if you're an airline or a hotel chain then are there particular sort of moments you need to I mean obviously the the first is crucial yeah and and the end is going to be quite important as well thing it to the extent that the end is separate from the beginning I mean you know if you can but those two are important moments in in many other experiences it's the most extreme moment that counts so this is the one that you're going to be to be remembering you know from that evening the artist you may not remember you know your sniffles or your discomfort you may remember the most extreme but on the rest off spike is that right mean I know from wrist off but I didn't know this bike thing the the chapter whose the telegraph chest correspondent kige Osteen I think the ring keynote he said met he's also a memory competitor and they have the three things primacy recency and this from rest Dorf spike which is that in any list if one thing stands out as being exceptional it's much easier to remember yes I think so an interesting question for service organizations do you actually create what we might call a random moment of truth which is just particularly noticeable and that will actually dwarf everything else quite interesting debate well I mean in terms of predicting what what you will remember I mean there is now a fair amount of knowledge about what you will remember by the way they I think that resolved a main result that we had in in the Quran Oscar be study and in other studies with that the duration of the experience doesn't very much matter what matters is the peak in the end and those count now I think a study was done on the efficacy of advertisement and fifteen seconds or 30 seconds came out about the same so that the duration didn't matter if you provided the same peak in the same end so that's so the use of duration is actually just you need enough space to create the narrative within it but obviously the direction is the same the generation itself duration is that for interesting laws applies I don't believe that Oh that'd be you next time you hear that argument we need a bit we need a sixty love to let it breathe minister V in that that's just not true that's Hauser I look forward to throwing that one back okay so both a little more where the happiness work because that seems to have become so so very important to you in your self latter career I know our use of Jerry can we make ourselves happy or can we trace our happiness well can we make a happier society I would say quite possibly yes to a minor degree I mean you know to it by by reducing suffering I I am a believer unlike you know my friend Lord Laird who believes in improving happiness I'm I'm more inclined to reducing suffering I'd fixed my mo person astok temperament then but it's also I think more socially acceptable as an objective for society to reduce suffering and I think it's feasible because you identify the sufferers and you try to make them better off so that's real then then there are other things that you can do if loneliness is a problem then you can have policies that will help people with a sharona's if if long commutes are terrible and keep people from spending time with the people they love which is the essential condition for happiness then that that suggests policies about commute so there are things that society can do I think that are genuinely worthwhile and worth doing and that justify measurement to identify the sufferers to identify the costs of various things both individuals are more skeptical you know the amount of control in part because a moment-to-moment happiness is so really essentially determined by genetics so that you know identical twins reared apart and put together 40 years later or strikingly similar in their level of mood so that's that we know you can decide to spend your time better that's one of the things you can't really control your mood but you can you know that's very much what you were saying earlier you can decide on your circumstances you can make one decision like the length of your commute that will change your life it's not multiple decision and it will affect the quality of your life this is a very important distinction isn't it between those annoyances or pleasures which effectively normalize after time and those things where the pain never goes away so one of the mistakes is made is that people move further away from their place of work because they fantasize about the advantages of a third bedroom or a fourth bedroom or a larger gun but after six months or so the pleasure of the third or you know the third bedroom starts to dissipate and your general level of happiness returns to its norm yet the pain of the longer commute is with you and unavoidable every single day and there's certain things that commuting and things like noise I think it never you never have gotten to you never I never adapt to pain you never adapt to noise you never adopt adapt to psychological depression so there are things that don't adapt to there are other things you do and and there is the most interesting thing I think that we found in the research on happiness is what I've bought the the focusing illusion which is that anything that you think about you will exaggerate its importance I mean I have a sort of fortune cookie about that which is that nothing in life is as important as you think it is while you're thinking about it so just thinking about anything makes it look bigger and now the focusing illusion is a major problem because it can cause as you it can and and that is an ethical problem for advertisement you can create a need which now looks very important to people and and will cause them to do things that order an athlete's foot and and then it turns out so if there is more focusing illusion for something than for others and that's related to your point so you can think that having a bigger car a bigger house will change your life but in fact it won't but if you train the amount of time per day that you spend with friends you will not get used to that so there is more of a focusing illusion for something than for others and we can make better decisions if we're aware of that so that's do you buy I mean layout goes further possibly than you do the business that actually the benefits of wealth to your happiness in most cases tail off above a certain level of earnings I think well what depends who you are there are very clear results in that you know internationally there is a claim which I think turned out we completely false which is that beyond a certain that there is no effect it cross countries beyond a certain level of income that's wrong that comes from plotting the data against income rather than negates log income it's a mistake but on individuals there is a very clean story and very actually very straightforward and it it's different the impact of household income is different depending on what you measure so if you measure mood you get one set of results and if you measure life satisfaction what people think about their life you get another so full mood it's absolutely clear in the United States and that's the experiencing self but that's the experiencing so young being poor is very very bad and everything is worse when you're poor divorces worse illnesses worse every misfortune in life is to some extent mitigated by money but beyond a certain income which in the u.s. even in expensive places is about seventy thousand dollars per household which isn't a lot of money beyond a certain income absolutely nothing happens it is flat for mood mood no longer improves life satisfaction goes on improving so people are more pleased with their life the more money they have but in terms of emotional will be it's very bad to be low but it really doesn't help beyond a certain point and I you know I am quite sure of this result because I did it in collaboration with my colleague Angus Deaton who is a famous economist and Scots and I'm not sure he would want to be described as an Englishman as once been and and and there is nothing that happens beyond $75,000 so that's very crisp result at the individual level at the level of countries by a lot the correlation is you know very strong and and contrary to what some people have claimed improving standard of living dude does tend to rin to raise the life satisfaction in countries there's something you said staying that way though I have one of the things I was gonna do is create focus on a need that you don't necessarily have and and that you using up as it were some of your mental bandwidth and I think there is this I don't know regulators in this country coming round to it though if your ability to make decisions is finite and hard to grow maybe impossible to grow and people use it up casually badly so for example there the energy market in this country by having incredibly complex terrace and far too many of them no one can work out what the best deal is that those those sort of companies they not only market a product badly but they commit a sort of a sin against the citizen by squandering their mental resources money for that sort of hypothesis that which is we should take that responsibility and look after people's well in the United States a major effort in regulation in the Obama administration is trying to protect the consumer from being faced with deliberately complicated decisions you know because this is really done not for people's benefit but in general attempting to facilitate decisions to present the serums in the easiest way possible I mean I happen to be looking in my consulting world that's at how choices between telephone programs are offered in the UK and it looks very bad it's just needlessly complicated you know if you look at the way that Apple company designs its choice then you know it's for dichotomies yet there are therefore things that you have to decide on and you decide on them in sequence and it's easy and transparent and you're done and if you presented all the options it would be much much more much more complicated and so yeah there are good ways and bad ways of presenting people with choices and it ought to be the responsibility of organizations to try to facilitate that and there is a contribution isn't there that you know you're you're feeling that you have made the right choice that's right will be affected by the nature of the choice you made and therefore your general well-being and satisfaction with a product may be contractually effected there's not enough to make the right choice you want to make a choice you can believe in it's an important yes of experiencing a reasonably sort of happy contented life that seems an important thing oh sorry we had until this point we take some questions I just have one last person for you around that hours is that we're interested in um also a creative industry and we just know how you have ideas throughout the book you actually talked quite a lot about how you've done your work I just want to give you a chance to I'll ask you to talk a little bit because want to talk about the man you dedicate the book to Amos Tversky who you seem to have a very good working relationship with but maybe also a man you have a more combative relationship we're just as productive Gary Klein and you talked about that in the book might be using people to hear about the kind of working relationships you're not going you know not not all academics or like so my story is is really social that is for me work was a social experience and I always had collaborators and I very rarely did anything by myself and when I did I didn't enjoy it so the you know with Amos Tversky this was quite special I mean we were an unusually good pair and in that we've really enjoyed each other's company and honestly and so we there was no boundary between work and play so we would talk about anything and in you know and and think in the meantime and everything was funny including including work and an interesting effect of that is that you tend to do very good work when you work that way because it gives you infinite patience you know you're never bored so you can go on and on and on and argue about words a single word for many hours because it's it's pleasant so that was one experience and it was it was an unusual one and both of us I think recognized that we jointly were better than each of us alone and we also knew you know I'm revealing something here that we couldn't work with a third person because as soon as we were with a third person a competitive element would creep in that was never there when there just the two of us we're in the room but Gary Klein it was a different story I mean that's this is something that I've been interested in in recent years I hate anger I've read this like controversy again and so I've looked at something that I call adversarial collaborations but when people disagree they try to work together not necessarily to reach agreement but to clarify the differences and and I mean so I am a skeptic about intuition you know I find flaws and Gary Klein is well known as the Guru of Britain a beautiful book sources of power on professional and expert intuition and so he was on one side and I was on another and I invited him to work together and and we did in trying to figure out when intuition is good and when it's bad yeah we explicitly does that we define that when you are right and when I'm right I mean let's you know we're both right so let's just find the boundary and it took us you know a number of years and it wasn't easy and we nearly broke up and you know we had a lot of quarrels and so on but in the end we ended up really good friends with a good product I think we actually figured it out when can you trust intuition and when can't you and so that that was a very different kind of experience but also goodwill that was when you get particularly when you have a large amount of feedback you've been doing something a lot and you need to make a decision quickly I mean tennis I guess tennis players when it's you know you need a lot of repetition so there is everybody has heard about the 10,000 now is but you know yeah whatever you need a lot of repetition but mainly you need for the world to be regular yeah so I don't believe in expertise in the stock market because there's just too much noise in that system so you know people can watch it forever and that's not by watching stocks going up and down you're not going to develop expertise there is no expertise in long-term political forecasting there's just too much randomness and so you it can't be done so there are domains in which you cannot develop expertise but when you get immediate feedback and a lot of it and for a long time and the feedback is precise then expertise will develop and you know then ideas will come to your mind and they'll be the right ones and the prime example is chess so the Tres master the first ideas that come to a tres master all the moves are strong ones you know then they will analyze but no weak moves come to their mind so that develops you know 10,000 hours and immediately you know interest it's a perfect example at tennis is another one where you get immediate feedback on the success of what you're doing so yes you can develop expertise MC example I think which is the pilot who landed on the Hudson Sullenberger where he only had about four seconds to decide whether he could make it to Teterboro Airport or make an emergency landing or not and decided it was impossible and went for the river but the interesting thing was he was an amateur glider pilot at the time and so there's a heuristic I think which is you don't need to know altitude rate of descent velocity and the distance to the airport you simply put the plane in a lower possible rate of descent then you look out of the window and everywhere on the ground everywhere in the ground that's moving down you can land and everywhere that's moving up is a place you can't I haven't read that story but yeah he was a glider and you could see it because yeah the film of that was very beautiful at the very end he put the nose up which is something that glider pilots do so it was his glider experience and he was an expert now he was just doing but you know what came naturally to him after making that first decision my real fear as someone who has a doctor on their passport on a plane is that someone would come to and say someone has a heart attack can you help them and I rushed to the front and fortunately they say I'm dying before I go can you explain Russell's paradox at this point as they say we have to lose Lister's on the world service so we can open out to questions for reasons permission and trying to ask which is this is prospect theory into very simple questions I'm sorry and which do you prefer it's a 50% chance of winning half a million dollars or I used dollars not euros do I want the currency to have some actual value or 51 percent chance of winning four hundred and seventy thousand now interestingly no one there's taking a thirty thousand loss for an extra 1% shot but if he wants the person on the right 99 percent chance of winning half a million dollars or 100 percent chance for winning 472 a classical economists you should answer the same way today yeah but nobody doubts your pay a certain a very very high and disproportionate premium for certain does this apply with the brand premium in other words a recognizable famous brand enjoys a sympathy if you take this example this is a Chinese make of television it's you know Rick's in 4% chance of being crap realistically you know at $299 and he would have philips otherwise identical in size the current picture quality I've said in 0.1 percent chance me it's like I'm a collective are there limits my honesty decision when they which is the one man well I mean the examples the example song there is a clear difference within certainty and probability and so people will clearly pay a premium or certainty in and I think almost any shape it takes so if the brand makes you feel safe in the ass sense in any sense at all and the other brand has an uncertainty in it now people don't like uncertainty and they they dislike it even more if they don't know how uncertain they should be I mean so so yes there is the equivalent you would expect the equivalent of the premium to the extent there is an in addition of course there is a big advantage to familiarity yeah that is anything that you've seen a lot more heard of of heard of is going to to feel safer because this is evolution you know if if you've seen something a lot and it hasn't eaten you yet then probably it's okay and so we this is a very general trait that anything that you see a lot of you tend to like better up to a point Ray Kroc the extremely unpleasant but interesting founder of McDonald's or co-founder of McDonald's had a phrase which is people don't want the best burger in the world they want a burger the taste just like the one they had last time which is the kind of evolutionary instinct that if I've eaten it before and I'm still alive then it's ok ok yeah

Channel: Imaginarium

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Keywords: Daniel Kahneman (Academic), Behavioral Economics (Field Of Study), Professor (Job Title), Rory Sutherland (Cyclist), Economics (Field Of Study), Nobel Prize (Award), nobel laureate

Id: ggrwrpq3VAk

Length: 67min 34sec (4054 seconds)

Published: Fri Jan 02 2015