The next revolution will be psychological not technological

it's always good see extensive footage of namesake and body double kefir on the screen a Canadian if I'm right that correct he is actually Canadian isn't yes at mums even better um also I can give you a bit of recommendation we've had these series elementary for a few months in the UK it's fantastic it's a modern day take on Sherlock Holmes set in New York and you'll really enjoy it so I thought I can give you that little bit of advice if nothing else but I've really come here to give TV tips the question I'm asking really is question two which I don't know the answer I just think it's a question worth asking which is what's the next big thing everybody says well it's the internet that was the third Industrial Revolution and we could shall continue to see a massive playing out of spectacular economic gains from the application of connected and network technologies across industry and that might be true now might not be true there's a growing body of opinion I don't know if anybody's read Tyler Cowan's very short ebook cost about $2 called the great stagnation there's another very very good book what actually is a paper written by a professor at Northwestern called Robert J Gordon who suggests that actually the economic gains and the economic growth were effectively expecting from continued economic progress and technological progress may be actually slightly fake in other words we shouldn't Bank bet the farm on it nor should we bank on it one of the reasons he gives us that in many areas of human improvement if you look at the improvements that went on from sort of roughly speaking 1820 to 1870 which was in particular steam power you then look at the other improvements invented roughly between 1850 and 1950 you can't do those twice you know the automobile or to a great extent the Boeing 737 you know it takes you from walking speed to 700 miles an hour roughly a 100 fold increase in speed you can only do that once to do it again it may be feasibly possible but by the time you've got up to that speed it would only be worth doing that if you're going to Australia or the other side of the world so it lead to a slightly strange world where it was quicker to get to the other side of the world and it was to go to a city you know a few hours away that would be weird but also there are whole loads of loads of pieces of progress for example home plumbing sanitation the effect result of antibiotics where to expect the same thing to happen all over again may actually be violating the laws of physics so what is what is actually the next big thing don't know the only thing you can often say about the next big thing is not from coming to a place you don't expect everybody predicting the future in the 50s 60s and 70s didn't really talk the mobile phone was kind of predicted and fantasized about to a degree I think it's fair to say but they weren't really talk about the Internet or connected devices to that extent they were obsessed about flying cars and what people tend to do is when they try and predict the future they look they basically take the most visible form of progress they've seen in their own lifetime or in the last five to ten years and they sort of extrapolate it but what actually happens with progress is it comes from somewhere you're not expecting at all so one of my questions is that do we actually have a possibility that oddly the next burst of economic growth comes from improvements in marketing efficiency and in particular the improvements in marketing efficiency and effectiveness come from advances that are currently being made academically in psychology in the understanding of human behavior in anthropology and behavioral economics now what would actually happen I only ask this hypothetically if for example the general success rate of new product launches was just 10% higher and the failure rate was commenced terribly less if people just understood people and how they decided and what they pay for and how they behaved and how to change their behavior just five to ten percent better than we do now in terms of predictive value what would the economic effect be I didn't exactly I thought I was mad asking this question I was recently reading a little Davros thing where Accenture have made the same point they've argue they think the better understanding of human behavior change can add some 2.6 percent to world GDP or something of that kind so I'm not at least totally insane and asking the question and the way I explained the point about you know is economic value material or can it be psychological is I suppose quoting Benjamin Franklin is always helpful to start with as he quite rightly says there are two ways of being happy or two ways of looking at the world for that matter and you can either diminish your wants or augment your means there's the psychological solution to happiness or the materialistic economic version the result is the same and its reach man to decide for himself and to do that which appears to be easier so you can solve problems in two ways you can actually basically create more stuff or you can make people more content with stuff they already have and they seem equally valid now the most extreme point of view in this in this case is taken by an economics blogger called Noah Smith he actually believes that the next big technology bills become something called D mod which stands for desire modification he thinks it might be drugs or chemicals that actually just actually reduce people's urge to acquire new things and to forever seek more experiences and make people content with what already exists some cynics would say that these drugs already exist and the quite a few people are enjoying them already you could argue that the first person to discover these drugs will then lose all appetite for marketing the more setting then once you've taken the D mod drug himself ego drive invented this fantastic thing I have the opportunity now to create a wills now why bother I'll just watch television so there might be there might be slightly perilous results that emergence you could also take a more lateral Answers this and say that actually you know there have already been desired modification technologies in existence over the last three to four thousand years among them for example religion so that's a natural way of looking at you know Quakerism is emphatically a kind of D mod approach to life but Tim I become a famous I've gotta tell the story unfortunately it's become a kind of albatross around my neck because if I don't tell the Eurostar joke at any public speaking engagements it's a bit like going to see the Eagles and they don't play Hotel California people feel kind of cheating ah so this is this is the point I've always made to say are you you know if you give a problem to a bunch of Engineers they'll always solve it with a lot of engineering because that's what excites engineers the chance to stand around in high visibility tab arms next to a theodolite and to construct massive elaborate structures that's why they went into engineering and so to a bunch of engineers when given the task it's perfectly rational to see that spending six billion pounds reducing the journey time between Paris and London by building new tracks from London to the coast and it reduces the journey time for about three and a half hours to two hours 55 perfectly sensible thing to do that's looking at the thing from a purely pragmatic point of view as if reduction in journey time is a kind of linear benefit that every ten minutes you take off a journey makes it that amount better proportionately better but I don't think that's true I think we've all been on flights that are actually too short you know I used to have a tube journey to work that was too short because you spend all the time you had to do with the journey messing around getting onto the train in the first place and then getting off again but the bit you normally enjoyed which was sitting down reading a book only lasted three minutes so that pain in the ass the pleasure ratio was actually at Roshan now here interestingly when they did live I gave this example I said look for about noir point oh one percent of the money you could have actually put Wi-Fi on the trains it would probably have benefited both business and leisure passengers more for one billion pounds you could have employed all of the world's top male or female supermodels and got them to walk up and down the train handing out free Chateau but ruse to all the passengers you would have saved yourself five billion pounds and everybody on board would have asked for the trains to be slowed down not speeded up but then that's a decision taken with a kind of economist stroke engineers view of the world that you know the really important things to human beings reasoning used numerically expressible and are easy to determine from measuring objective factors in the real world and if you just improve those objective factors people will benefit but people aren't linear like that they're not Newtonian first of all quite a few passengers actually complained on to the six billion was spent and they said they actually preferred the journey when it was a bit longer you know you've just been to France after all so you've earned yourself a bit of a sit down to recover ooh controversial joke in Canada got a part that one sorry um but it's really it's a very interesting approach to things that you assume that um the improvement in life and the improvement in economies comes from systems improving the efficiency of things and this will automatically result in a commensurate improvement in the human condition now a beautiful parallel example of this when I presented this someone came to me and they said they've been involved in a call center and the whole job was dealing with calls my rate people who hadn't received their insurance claim check by post and they were going to spend a huge amount of money and at some cost try and completely improve the procedures for paying out insurance claims so people didn't didn't complain because the assumption was the faster you sent the check the better it was for the people okay very simple not most of us on the run myself included might not have questioned that logic that's a good idea why didn't you send out the checks faster one very good market in the room said but do you ever tell them when to expect the check no okay okay so how long does a check take to arrive typically about eight days right when people make a claim tell them to expect their check in twelve days they'll be delighted when they get it met because our happiness or anxiety with anything is largely determined actually by our expectation not by the reality so if you can change the expectation the actual experience massively improved there's a whole airline in the UK called Ryanair which actually survives off this basis which is your expectation of your journey is so bad when you fly on it that when you're not all herded into a room and pistol-whipped by Serbian mercenaries you actually put it down to your own good fortune and you actually find yourself being really quite grateful to Ryanair for sparing you then sort of discomfort and so what they did was everything instead of actually reworking all their systems they just said told everybody expect your check in ten days they sent them out in eight the phone calls immediately disappeared apart from a very small trickle of telephone calls which continue to come in from people saying thank you for sending me my check so quickly the idea that psychology is naturally a product of the natural world in some absolutely perfect relationship is one of the most dangerous misconceptions very often people respond to the same things in opposite ways for instance you know slow is an advantage in certain things it's a huge disadvantage in others the idea that there's this kind of linear way of improving the world through engineering and through economics is just very very dangerous and marketing our job as marketers is simply to turn human understanding into business advantage or social advantage if you're working on a pro bono or government account that's all you have to do as a marketer that's that's the job description and the way we do this is basically by working as translators by explaining the people who are obsessed with numbers and hard measures then actually you have to translate these things they don't translate directly so this is my genuine belief about where I think a lot of improvement can come from it's what I call the sweet spot and the overlap between these three things economics generally a hard science technology generally dominated by technologists again a hard science and why the market has always had such a grim time of it there are a few reasons but it's partly and this is actually increasingly problematic I might make this point when I first came into advertising about 15 20 years ago two-thirds of advertising expenditure on British television and elsewhere in the world was basically for packaged goods beers detergents washing powders that kind of thing and those were companies where the marketer existed in quite um strong marketing culture you know if you work at P&G or you work in Unilever there's a fair chance that the CEO is a former marketer there quite a few senior people who have extreme appreciation of and experience of marketing that's completely changed in the last 20 years now of actual ad spend comes from everything else and that's getting people to change their broadband provider change their cable provider possibly give up smoking at IT finance now those areas the culture of the organization is dominated by finance and engineering it's a very very Newtonian linear mathematical culture and marketing within those organizations has a much tougher time and I'll explain a few more reasons gay for but as I explained psychology is not the same clear distinct perfect hard science that you find in those other areas it is ambiguous it is fluffy but that doesn't mean it can't make significant progress not least as I'll explain in the vocabulary we marketers use to explain human behavior and preference to people who aren't marketers and a bit more of that later but genuinely if you can get the overlap between all three so you can use technology to make money but you can use technology to some extent of course that was Steve Jobs is genius if you're absolutely hardcore technologist you actually they actually slightly despise Apple because the products necessary aren't necessarily on the leading edge it's the way in which the product relates to the human that is so powerful about that brand and it is the overlap between technology and psychology if you want another example of where you could actually completely get it wrong if you ignore psychology take for example mobile telephony where billions are being spent all over the world upgrading to 4G and other faster things what's impressive about 4G is download speed and everybody thinks well if I dribble the download speed this will create massive happiness and joy amongst all consumer there's a slight problem the human perception of speed on any network or connection is not really a factor of the download speed it's a factor of the latency which is how quickly the device responds when you push about now one of the reasons we love using tablets is because they fake low latency actually the download speed on the actual latency may be quite slow but when you touch a tablet app something happens immediately so your brain goes this is pretty good I pressed the button and immediately something appeared on my screen now behind the scenes things maybe groaning away exactly like that strange insurance company sending out the check but my brain has been dude it's a bit like having a servant which goes right away sir and then he disappears and goes down the pub for an hour before he actually does what you're supposed to do okay but nonetheless in our brains that works and so you can have billions and billions of pounds spent on improving technology in a way that has no noticeable appreciation of the human enjoyment of something that's increasing download speeds and mobile you can play a trick on people with the tablet app which gives them the impression of high speed and they're not really bothered about the measure that you're seeking to improve at all once you've actually convinced them that something is happening anybody who knows the software loading bar is the greatest psychological trick of all time you click on something if you can see movement on the loading bar you're perfectly happy for almost any length of time in fact there's a mild pearly pleasure just watching the loading bar fill up if you click on something and nothing happens after one and a half second you got stuff this I'm out of it okay the brain fundamentally does not judge the world as the perfect piece of scientific equipment it uses all sorts of heuristics and strange thing anybody here use halo that mobile phone app which is comes from London one person two three four five it originated in London it's a little app on a smartphone where you can book a cab it uses your geographical location you just go book a cab it takes your credit card details and you can watch the cab approaching on a little map so you can stay in the pub watching your cab driver approach rather than standing around in the rain waving your arms about getting absolutely nowhere now it's a tiny thing in one sense but I would argue I use it quite a lot in London you can I used it this morning to get here and I was very impressed that I could just use it you know on another continent and fascinating I would say that it could improve your life getting about a city as much as a few billion pounds spent on infrastructure or a new tramway or a new tube line and it governments aren't nearly enough looking in these places for how to prove love if if you want to get people on trains the real issue may not be actually the duration of the train journey it may be just the irritation of getting out of a car and onto a tray which automatic ticket barriers and goodness knows what else have made it just painful and irritating experience in general so this is actually what's to some extent hat if you watch Mad Men it's a popular advertising serious set in a slightly dysfunctional country to the south of here but what you'll notice is that back in the late 50s early 60s psychologists were kicking around out agencies all the time there were these strange people with sometimes genuine Viennese accents who would come and explain various aspects of consumer behavior in while wearing a bowtie typically some of them are very good ideas by the way it was an Austrian woman who I think practiced in Vienna at the same time as fraud huko effectively gave rise to the slogan plink plink fizz for our KO seltzer she simply said to alka-seltzer most people just use one alka-seltzer when they have indigestion if you just create the impression that the social norm is to use two then your cell twice as much alka-seltzer and the whole campaign clink clink fizz was exactly designed to give the impression that that's the normal thing to do there are opportunities I think the creating social norms in consumption behavior does any man know how frequently you're supposed to replace the razor blade I have no clue you know the other brilliant case of creating a frame in social behavior possibly the greatest of all time was that extremely evil one by De Beers for engagement rings which simply said how else is a month's salary how else can a month's salary last a lifetime I think most men took that to mean a month's salary after-tax but but nonetheless what a brilliant way of setting a frame so that anything less is actually considered slightly dubious but what this is how really and this is from Robert rivers a brilliant biologist and Darwinian psychologist this is really how science should properly work this is why marketers have such a bad time by the way okay if you want to know what's happened is a whole belief in economics and in the finance community that markets were perfectly efficient which you probably didn't believe up here so much as they did the 49th parallel but the belief that markets were perfectly efficient meant that you could therefore take the behavior of money to be a perfect proxy for human behavior you didn't need to look at what people did or why they chose because they were maximizing their own utility and the economists here so money could be treated as actually you know effectively a perfect description of human behavior and this was actually sent to a friend of mine who was a marketing director by his finance director I don't need to know anything about the consumer because everything I need to know about the consumer I can tell from looking at a balance sheet was actually said quite literally seriously now what should be the case is that economics should actually be based on psychology and some very intelligent people not least people like Keynes and the Austrians and so forth fundamentally believe that's why Keynes both were animal spirits but economics to be honest and as taught in business schools and as generally practiced in most finance departments instead of saying okay we're fundamentally a behavioral science so we should rest on psychology which rests on biology would rest on chemistry reject on physics which kind of rest on maths it basically cheated and it said if we pretend that complete people are complete automata just like building blocks or bricks or levers or comms if we pretended other words the people aren't people at all we can basically create a form of economics that looks like physics and because it looks like physics we can use lots and lots of numbers and maths and no one will question us because no one does question you if you use numbers anybody else notice this and there are actually experiments in behavioral economics suggesting that if you put completely spurious mathematical formulae in a scientific paper most people rated as a much better paper even though the formulae are both wrong and have nothing to do with the subject at hand and in the business world that applies massively if you present any recommendation in numerical form basically everybody nods along and passes it through okay if you use abstract nouns it's frankly embarrassing okay but an awful lot about human behavior cannot be conveyed properly in simple mathematical formula because people simply aren't like that that's like trying to treat for example meteorology as if it were physics complex system with interactions and feedback loops and the most obvious feedback loop which of course makes markets inefficient is that people are affected in their behavior by what other people do that's the problem with the property market if you have a property boom at some point if 70% of your friends are all buying houses and they're all going up in value you reach a point where you don't have any choice but to join in okay once you have a standard feedback loop you understand that actually modeling economic behavior is nothing like physics at all and should indeed properly rest on psychology complexity and a few things like this so the model that economists have of a human being is basically of a completely rational Vulcan it's someone who makes every decision dispassionately based on complete logic there's interesting biological I'll give it against this by the way which is Vulcans probably wouldn't work in any realistic ecosystems anybody know why but it's actually in large areas of human behavior the worst thing you can be is completely rational why because if you're completely rational assuming such rationality exists your behavior becomes completely predictable and when you're completely predictable people can take advantage of so one of the worst things you can be as army general as a military strategist is very very rational because your opponent knows exactly what you're going to do and therefore sets astruc the trap for you similarly very interesting question philosophical question it is not in consumers interest when they buy consumer goods to be rational why because they get much worse products ok how is this if consumers are rational let's say they have a formula for how they choose something on how they buy something the manufacturer can gain it you all know the business of gaming metrics affecting your engine so I'll give you an example of gaming metrics for example and in Britain doctors are rewarded on how many of their patients they see within one day of requesting an appointment as soon as this metric was introduced doctors simply refused to make appointments for you in advance they'd say bring back tomorrow and we'll give you an appointment there as a result they have a 100% satisfaction rate on this metric and if you want to book a medical appointment two days in advance you can't that's exactly the example of gaming the and if consumers were rational I suppose you could say that you know there were cases for double digital cameras where for a time people basically said how many megapixels did it have but if you notice nobody does that anymore they've moved on to other measures first of all the number of megapixels wasn't all that important except for a short time in the development of the digital camera but Signia though there are other things sensor size the nature of the CMOS this that and the other which are actually important as well if people bought cars on a mathematical formula all car manufacturers would meet would produce cars would look fantastic against that formula but we're disastrous in every other respect so consumers have to be irrational it for game theoretic reasons in order to get the best value possible out of manufacturers does that make sense more of this later just to make a point that not all economists are the same and they're not all guilty the Austrian school and this is where it comes to my idea that you can actually create value through better psychology just as much as you can through better psychology ludwig von mises who is one of the sort of eminence degrees of the Austrian school they were kicking around vienna at the time of Sigmund Freud they included as well as one Mises Hayek for example Schumpeter and a few current American people who call themselves Austrian he makes the point that since value is subjective the value created by marketing is no different from the value created by manufacturing the way he described that it says there's no sensible distinction to be made between the value created in a restaurant by the person who makes the food and the person who sweeps the floor that one of them produces the food the other one creates the environment in which the food is enjoyed and appreciated to make a distinction between those two forms of value is completely erroneous and von Mises absolutely chastises economists for attacking marketing and advertising for this reason by the way if you want to make wine better do you know the best trick just tell people you give it to that it's really expensive this is proven not just by their reported enjoyment of the wine if you actually attach electrodes their head they will enjoy wine better if they believe it'd be expensive they will also find analgesics much more effective if they're either expensive or indeed branded branded analgesics are actually better reduced pain that unbranded ones this isn't just reported pain relief actual pain to placebo effect but who cares I think receivers are brilliant and they have very they're cheap they have very few side effects what's the problem more of them please a few other things about Austrian economics it believed that economics should be subordinate to psychology it believed there was a discipline called proxy ology which is the study of human decision-making and behavior how humans act and decide again values subjective they also were obsessed with looking at individual human action they weren't in favor of attributing for example you know intention to capital or labour they merely said a person in such a situation they were the direct marketers of the of the economic world in many respects now you've all heard of this man man it's bet the interesting thing I didn't know about Drucker I was assumed he was German he was actually Austrian not only that but he hung out with Austrian economists all the time his father had taught yourself Schumpeter and he was actually best friends with sean better and saw him about a week before he died now you start to understand what Drucker saying here I never had the courage to report that there are only two things which make money and business innovation and marketing everything else is a cost but that's what an Austrian would believe now think about it there are two ways you can fundamentally create value in a business you can either find out what people want and ingeniously work out a way to make it or you can find out something you can make an ingeniously find out a way to make people want it but to some extent innovation and marketing are exactly the same thing they're the same thing or flip sides of the same coin or the same thing just happening to take place in a slightly different order does an interesting question to be asked at this point once you understand that marketing is innovation they're fundamentally the same thing and then you can just as easily innovate by getting people to do something they weren't prepared to do before or to think of something in a different way to the way they thought of it before as you can by producing something that was difficult to make before you have to ask a secondary question which is how many technological problems are really marketing problems in disguise also how many technological successes are really marketing successes where the engineers are taking the credit now let's take something like the car which we all obviously think is well there was no marketing involved in creating the popularity for the car you know people you know people had to go by horse and then they wanted to go by car so obviously they went by car and when we look back on it we tell of any rational story about why people switch to using cars but there was a 10 to 15 year period where the level of expense and unreliability and general nuisance in automotive transport made it worse than a horse the reason the first 10 to 15 years of innovation in the car market existed was because people were convinced that cars were cool it wasn't practical utility there are large numbers of things we assume that no sane person would get a large flat-screen TV before they had indoor plumbing as it men might disagree with that actually men might say that's a perfectly sensible priority big telly first we'll worry about the indoor lavatory in 2015 in China this is quite common behavior we assume that everybody got plumbing in indoor laboratories and flushable laboratories because of absolutely practical logical reasons I think most of it was driven by status to Epsilon in the early days then it becomes a social norm it becomes embarrassing not to add in lavatory but we always assume all these things are just technological successes in which marketing had no part I'm not sure that isn't rewriting history to make people look more serious and and sensible but they really are and to make engineers look like the heroes not mark but equal the other interesting problems there are few people who believe that this thing the electronic cigarette can save sort of literally 500,000 lives a year in the US if you've got every smoker to switch to II smoke II the technology is more or less already there the problem is people are embarrassed using them if you can solve that problem if you can make it completely cool and happy for a smoker of conventional cigarettes to switch to go electronic that's the challenge videoconferencing the technology is already there you just can't get anybody to adopt it and I think half the world's technological problem challenges are actually marketing and psychological challenges in disguise so when I say that actually marketing and innovation are the same thing and arguably better psychology will drive innovation just as much as better material science or better technology can from Austrian perspective I think that's probably a fair thing to say now a few people by the way agree with me on this just to prove I'm not alone this is I think Paul Krugman I think saying basically economists fell in love with maths the math was so neat and cute they just got stuck to it um here is Hayek when he was receiving his Nobel Prize in 74 the failure of the economists to guide policy is their propensity to imitate as closely as possible the procedures of the physical sciences they wanted to pretend that economics was like physics basically it's not it's like meteorology and this is the scene Taleb that makes the point the number of things you can actually solve through neat mathematical science is a very small portion of the things we have to decide in real life in real life we don't have perfect information now bear in mind that all economists in neoclassical economics positive world in which the consumer the person making the decision has completely perfect information perfect trust and can make a perfect decision on how to maximize their own utility by buying either A or B two interesting things about that one it's a situation that never exists in the real world ever secondly what the economists are doing interesting Lee is imagining a perfect world where marketing doesn't exist because you already know everything ok so if you have troubles with your finance director bear in mind that his mental fantasy world is a strange world of equations and mathematical neatness where there is no need for marketing at all and this is talent point in most of real life we don't know everything the future is uncertain we have to rely on certain instinctive heuristics which more later to make a decision and also market as I haste around have done a lot of harm to ourselves because we have the world's worst vocabulary and a colleague of mine says marketing vocabulary is exactly like the vocabulary of a stralla gee it's absolutely fine if you're talking to fellow believers but it's a disaster if you're talking to anybody else so marketers to talk to fellow marketers about grand iconography or or what it whatever they want to talk about at other marketers not long ago yes you're so wrong but bear in mind that you know it's like that's the problem of the stralla G if you say to a fellow that's s rajab Li but my boyfriend's playing up he was born on the cusp ooh typical okay if you're talking someone who doesn't believe in the astrology they've basically left the room because they think you're a loon okay and so what you have to understand about this is that going to your finance director and talking about brand iconography in marketing language is the same as going to the head of thoracic surgery at Sam Mary's Hospital in London and saying we must trust to the healing power of the crystal basically it sounds that way so one of my optimistic hopes from behavioral economics is we can at least borrow the cab you Larry to give marketing the semblance of a scientific vocabulary things like loss aversion for example you know in making a purchase decision people are twice as motivated by fear of bad things as they are by hope of good things or for example there are other phrases like hyperbolic discounting that people tend to be much more sensitive to changes in the very near or mediate future than they are to long term things that's of a Camry you can use to talk to finance guys the marketing vocabulary is genuinely hopes it sounds more like the vocabulary of a cult other than anything else we should also remember psychology didn't do anybody any favors it's only in the last 20 or 30 years that there's some foundational science behind them so why am i hopeful just to make this point why do I believe this can happen now and it didn't happen before well there are few think of psychophysics which I'll show you in a minute behavioral economics which some of you will know about through books like dan Ariely nudge of course by failure and Sunstein cornermen is very identification in Thinking Fast and Slow of system 1 and system 2 decisions and the acknowledgement that an awful lot of our decision-making takes place outside consciousness that we've actually already making a decision without being aware of it in our conscious brain effectively just post rationalizes game theory a branch of mathematics that only appeared in 1975 very very recent addition to it only got serious 1970 phone but many social scientists say without game theory you can't understand human behavior game theory has revolutionized the understanding of things like Darwinian genetic behavior and the Darwinian psychology heuristics the idea that there are simple rules of thumb that are sometimes better in the real world than complex mathematical calculation and then lots of other developments all happening once neuroscience complexity theory computer modeling you know arguably human behavior is lots of people interacting where their behavior is affected by the behavior of others again something that you know confounds neoclassical economic theory but computer modeling might be able to replicate the behavior of markets much better than silly models and if you take neoclassical economics for example um even the most basic assumption of neoclassical economics is at best the generalization so if price goes up demand goes down okay that's basically an axiom of neoclassical economics it's probably true of most people most of the time but that's about as far as it goes you might also say that when you drop your prices the people who leave because you become cheaper were more valuable than the new customers you get so the second question to be asked there just to give you an example of how it isn't necessarily true um Disney decided they wanted to discourage people from using the most popular rides at various events I think it was Disney not Six Flags so they started giving out tokens and there were certain rides which required six tokens and certain ride had to the problem became much worse than before because everybody thought the two Koko rides are probably cheap because they're crap and everybody spent all their time queuing for the sixth token rights so the idea that price and demand work in this beautifully linear way which is the most basic assumption is probably only true at the aggregate level and not always true then by the way um economists also hate that they get very obsessed about irrationality so they got terribly upset the fact that people prefer 50 percent extra free to 33 percent off anybody in sales promotion remember that one an economist got terribly upset about this but it's not our job first of all there are actually game theory reasons you should prefer 50% extra free 33% off which is a bonus is a different behavior to a bribe if you have to bribe people to buy their product it's not an unreasonable assumption that the product may be a bit crap okay so but leaving that aside I mean you know if I hold job and the planet was to be rational we would have banned golf years ago so so I genuinely believe there are areas of progress in the sciences both mathematical sciences and the social sciences which should lead us to be more optimistic about not having a perfect predictive model of how people behave and choose but at least being able to ask better questions than we did and test things that we never tested because economics told us not to and all of marketing relied on its understanding of people for two things really one implicit economic assumptions from neoclassical to so much neoclassical economics if you put the price up demand will go down often enough when you put the price up demand goes up okay that's the first part is how much economic value has been destroyed by the assumption that you shouldn't put the price up how much economic value has been destroyed by people competing with the iPad by producing a tablet that's 30 pounds cheaper if you produce a tablet that's 50% cheaper that's a different game but merely undercutting someone by a bit probably since I have a far worse signal than it creates desire it says I'm the poor man's version of X so genuinely if we just start to ask better questions the other assumption going partly the assumptions of economics which are dangerously wrong the second one is market research which can be very valuable but is also extraordinarily dangerous because most of the time people don't know why they do things and they wouldn't even say if they did because to a great extent we act instinctively and then post rationalize to justify our past action as the wonderful wonderful anecdote for this which is a behavioral scientist who is torn between buying a house next to the faculty on the university where he was serving and it had slightly small garden and it was a bit ramshackle but it was right next to the faculty or you can buy a more modern house on a lot an hour's drive away which was quite close to a lakh and he was desperately torn between these two options and eventually blood for the modern house half an hour away next to the leg after he moved there three weeks later he came home and he bought a canoe and his wife started laughing at him what's so funny that you're a behavioral scientist all you're doing is buying a canoe desperately to convince yourself that you did the right thing by buying a house next to a lake how'd you know that for sure it's Minnesota and it's January how much you see you going to get out of a canoe so this is what the to a great extent a lot of our behavior is actually undertaken to avoid and a lot of our opinions are undertaken to avoid cognitive distance we want to feel good about ourselves and we desperately go around constructing stories that prop up that belief very occasionally you get someone in market research who is genuinely honest very rarely in groups because in public how much you going to reveal about yourself in front of other people we didn't have someone once you confessed after half an hour's research or online book buying that he didn't really like books very much but if you pretended to read some good novels it helped you pull a better class of girl you do occasionally get that sort of candor but it's pretty rare so I genuinely believe that advances in the social sciences coupled with more interesting mathematical and computer based techniques can create this kind of improvement but I'm not alone entirely I just always been this isn't just some mad theory here's Charles Darwin who genuinely believed there was a possibility for Darwinian psychology that actually psychology will be based on a new foundation that of the necessary requirement of each mental power and capacity by gradation Traverse from the preface to the Selfish Gene very interesting man this chat Robert rivers he's just written a book on deceit and self-deception called why we deceive ourselves the better to deceive others he believes that self-deception has evolved that if we need to fool other people we're not very good at fooling other people so we've evolved the capacity to fool ourselves first and that way we can convince other people we're sincere read the book it's fantastic but he says Darwinian social theory gives us a glimpse of an underlying symmetry and logic and social relationships which when more fully comprehended by ourselves to revitalize our political understanding and provide the intellectual support for science and medicine psychology in the process it should give us a deeper understanding of the many roots of our suffering now I do know that this is true what I'm saying is I genuinely believe that it's possible so does of probably what the will the a very famous Canadian everybody read Pinker Steven Pinker also believes exactly the same thing he thinks that actually in the book the blank slate he says if you have an understanding of what part of us is instinctive and what part is you can actually you know massively improve both the human condition and I would argue the efficiency of a lot of business activity by directing it towards those things that really make a difference to our minds not those things that make a difference to some numerical measure which may be a very poor proxy for mental value so making a train journey to France forty minutes shorter there are a few questions to ask you know does that really improve the enjoyment of the journey no the bad thing about travelling by train isn't the train journey once you've got a nice seat it's getting on the train in the first place finding a place to park buying a ticket going through customs etc etc that's the bad bit that's where you should be focusing your efforts in reducing pain not in reducing duration that's kind of economists view of how to improve things and secondly the other question to ask is well what's our competition it's the airlines ok if you're going to the center of town to the center of town the railway already wins to an extent so why don't we do all the things that airlines can't do on a plane like Wi-Fi and very good meals and very large tables and differentiate ourselves from aircraft rather than competing in the one field in which aircraft ultimately win which is being fast ok so just very quickly watch this large base psychophysics it seems easy enough to separate sounds we hear from the site there's one engine the reveals this isn't always woody here ba-ba-ba-ba can we change the patient and yet the sound hasn't changed in everything you are aluminum bomb with a beep it's an illusion also traces on the left of the screen the illusion occurs because what you're seeing flashes we hear it being illusion what we see overrides what we hear so the mouth movements we see as you look at a face and actually influence what we believe we're hearing if we close our eyes you can actually hear the sound as it is we look at our eyes we actually see how the mouth movements canceled its over here ah it's a the point about that is that inside the brain we don't perceive an objective view of reality massive amounts of data compression go on massive amounts of error correction go on in this case beneath our consciousness the brain in the ears contradict it simply says it's much more likely that I've misheard that I've missed seen and therefore I'll assume it's an ass because that's what his mouth did and there's nothing you can do to override that fact that's just how we perceive the world because our perception has evolved for Darwinian reasons of what's important in survival not what's important in objectivity okay and this is what Trevor says the conventional view that natural selection favors nervous systems which provide ever more accurate images of the world must be a very naive view of mental evolution and there are other experiments you can do for example where you read out sentences which are things like the wheel was on the axle the heel was on the shoe and you blank out the work or the Hut with white noise people don't even hear the white noise they think they heard the word wheel or heel depending on context even though they've only heard eel preceded by a bit of white noise it's not even you're not even conscious of the white noise you automatically fill in the thing that makes plausible sense and our brain is doing that all the time because it has to use shortcuts to make sense of the world if therefore you're using the accountants practice of changing objective reality as if this therefore adds to human happiness or enjoyment or appreciation you're making a fundamentally you know serious error in terms of where you're directing your economic activity just another example of this is this if you see the square marked a and the square marked B all of you will say the square mark day is significantly darker than the square mark be it if I change the context a little bit they got a bit closer there I think don't they you'll actually see they're exactly the same color but this is one of those funny optical illusions where you go silly me now I see it how silly of me if I go back to the original it's impossible for you to see that as anything other than a light square and a dark square so first of all our perception has evolved to be massively relativistic it's not like a Geiger counter where it measures some absolute thing it measures contrast now for marketing that might be one of the most important decisions first of all it's weirdly contextual relativistic in the two pounds fifty is a reasonable price to pay for a cup of tea on the street but actually at home we pay two or three pence within a context there's just a fair price for something now it's not fair as I think that that kind of tea that you get on the rice is a hundred times more enjoyable it's just we have a context with it the Nespresso machine is spectacularly lucrative um because we don't know what a cup of coffee costs at home we don't know when we buy ground coffee or instant coffee we don't put in too little cling film raps like drug dealers and count it out on the shelf so we have a little cloak so when we buy a 2016 Nespresso capsule how many people have those marbles machines I love mine like a child and none of this by the way makes me like my espresso machine any less ok but we put the 26p thing which is probably 20 times more expensive than coffee we made at home in the machine and i only frame of reference is starbucks we go well it's 26 cents but it would've cost me 3 or 4 dollars at starbucks the machine is practically making me money knowing this effect by the way Maserati and rolls-royce stopped selling their cars of car shows they look really expensive they sold them at yacht shows and aircrafts shows because you've just decided not to renew your Gulfstream or Learjet that year having spent the whole time wandering around looking at fifteen million pound aircraft and on the way out you think well there's a recession on I'll make the Learjet last another year I don't know where you see a Maserati Quattroporte for say $200,000 you go I'll have a couple of those at a car show they look expensive now this can be demonstrated a very good company called Mountain View in the UK I hope that's legible if you only offer people the one-pound Stella and the two-pound Budweiser 67% of people buy the Stella 33% by the buff out of Tesco value lager thirty pets as I once jokingly said I hadn't realized you buy lager for 30 pence a can if I did I wouldn't be here um but um it nobody buys it but it changes the frame of reference it changes the relative perception so the whole category moves down market so now 47% of people buy the Carling and 53% of people buy the bar get rid of the tesca value lager popping at four pounds a bottle Cronenberg 10% of people buy that 90% of people buy the bud and no one buys the the Karma so one things I said to British Airways is do not measure the profitability of first class simply by how much revenue you get from first class and how much it costs you to offer it the existence of first Chuck class changes people's readiness to travel in business plus it probably makes it more difficult for company procurement departments to force you to fly an economy too if you think about it's a procurement come upon person saying you know or travel management person saying you can't fly at the front of the plane is very different for I'm saying you've got to fly at the back I presented this actually to BP I suggested to BP they should produce a third fuel as well as BP standard and BP ultimate they should be used a third fuel called BP super blingtastic ultimate + which cost $20 a litre and then I've already go that's a bit expensive I'll just have the ordinary ultimate okay amusingly the BP client actually came from Carling where she said the reason Carling became the number-one lager in the UK was nothing to do with anything they did it was simply because the supermarket's brought in lots of low price own brand lagers which drags everybody's natural middle most people most of the time like to buy in the middle fundamentally it's a sort of Goldilocks effect I think it's called you know where this one was just right which is Goldilocks most fairytales getting a bit rusty a few more this is a Dan Ariely example brilliant from The Economist um which is when they simply had online only $59 online plus print one hundred and twenty five people's frame of reference was well I'll save myself sixty six dollars I'll just have the online edition they added a dummy choice in the middle print only no online access one hundred and twenty five dollars the same price as print plus web so many people go but if I get the bottom one I'm basically getting the first one for free in the first instance the response rates are about the same in the first instance two thirds of the people chose the top one in the second instance where you have the middle dummy choice nobody actually chose you unless you're real Luddite you wouldn't but two-thirds of the people chose the one on the bottom the more expensive one simply because the frame of reference flick and you've all known this you're going to buy an economy ticket somewhere on a plane and you're expecting it to be about seven hundred eight hundred dollars and when you get to the website you see it's actually a thousand dollars and you might go oh it's more expensive I thought I don't think I'll go however if the airline has been clever and put premium economy eleven hundred dollars next to it suddenly your brain does a backflip it goes what it's only a hundred dollars extra to go premium economy I've got myself a bargain and you ended up spending three hundred dollars one hundred dollars more and walking away punishing the air because you've got a great deal the idea that we have an absolute measure of value is one of the most dangerous misconception of the effect business and economics the other thing is in any service business in customer experience in anything of this kind the idea that we have this Luke measure of pain or pleasure is very dubious this is just one example from a hotel in Memphis where they discovered in all their customer satisfaction questionnaires that virtually every answer was colored by how good the check-in experience was when they checked in the hotel and this is a thing called confirmation bias if you arrive at the hotel not knowing whether you liked it or not and you have a bad experience of check you immediately decide this hotel is pissing me off I'm going to dislike it and you go around looking for confidence that it isn't a good hotel if you have a great experience as your first experience your first impression you do the opposite you go I like this place and you go around looking for complimentary reasons to corroborate your decision to like it so if people had a bad check-in experience it didn't just affect their perception of what might be related questions like what do you think of the quality of our service or do you think this is would you recommend your friends to stay here again totally unrelated questions like did you enjoy the food and did you like the ice sculpture and the garden were colored by how quickly the people were served when they arrived to check it people who'd had a sort of two-hour delay on check-in we're basically taking the Box take your ice sculptures okay alright so understanding that the way to improve customer service is about dealing with expectation and dealing with absolutely crucial points in the process more than just actually trying to actually improve everything evenly seems to me a useful potential inside this is just a little bit of a little bit of air traffic control to get illustrate the heuristic cause if frozen is frozen ever I've explained it very beautifully this was the man in the miracle of the Hudson flight captain Chesley Sullenberger he's told first of all he suggested he's had a double bird strike he's got no engine power at all he's told return to LaGuardia he replies in one sentence unable which is something I have learnt in my dealings with other people at work it's a great work if people say we'd like you to go to this client meeting at 8 a.m. on Friday don't come up with an elaborate explanation of why it'll be difficult just go unable well it works every time ok so there's a lot we learn from pilot language but there's another interesting detail about this which is that um he's then told what about Teterboro and they clear a runway they clear a landing for him for an emergency landing at Teterboro which is in New Jersey over to the right and within 25 seconds he comes back and says I won't be able to make it you'll find me in the Hudson how does he do it that quickly now in theory if you're being rational as economists believe we are you'd have to know your speed your altitude your rate of descent and the distance to cheaper Airport and you'd have to perform a laboratory attic equations to determine whether you could make it or you can't do that in 30 seconds Sullenberger is a glider pilot I mean he's a glider pilot now but he's a glider pilot in his spare time without you know without 200 passengers writhing around in terror at the back so it reminds me a very good Tommy Cooper joke I don't know if anybody knows that it says when I die I wanted to be quietly in my sleep like my dad not streaming out in terror like his passengers but Jeff but he's a glider pilot and all glider pilots know a heuristic and a heuristic is a simple rule of thumb which is not perfect but it's very quick very reliable and for most purposes works now some of the worst aspects of human irrationality emerged when we use the wrong heuristics to solve the problem or we use a heuristic where it really doesn't do a very good job and sometimes in very important cases in for example medicine where the way you present statistical likelihood around for example cancer tests or prognosis can cause doctors to make very very bad judgments just based on using the wrong heuristic but in this case the glider pilot heuristic is this you put the plane into as low as possible a rate of descent as shallow as possible a glide slope without stalling and you look forward out of the window it helps if it's not dark okay basically everything on the ground that's moving up in your field of vision is a place you can't reach and everything that's moving down is a place you can and guide the pilots all know this because they're constantly searching for possible landing sites because you don't have an engine Sullenberger through his glider pilot experience instinctively would have known to do this he may have done it consciously but he certainly knew to do it instinct and he can do that in 20 seconds whereas the mathematical calculation will by the time he done that it would have been too late so heuristics are what the brain uses most of the time I'll give you a few examples um when you catch a high flying baseball or cricket ball if you're English or whatever um everybody has a different story about how they catch a ball what they actually do because observation shows this is they look up at the ball calculate the angle of gaze and move towards the ball at whatever speed keeps that angle of gaze constant it's not quite perfect but as it causes you to move in a slight arc not in a straight line but equally it is in a sense perfect because the information you need never mind the fact that great baseball outfielders and cricket players aren't always brilliant theoretical physicists okay and they don't carry a scientific calculator as part of their uniform but also you don't know the information you need anyway if you want to solve that problem rationally you've got to know the velocity and angle at which the ball left the bat well the batsman is not going to oh that's easy okay you don't know so you rely on other signs to do the best you can with the information available which is most of human life us making the best we can of the information we have available there's also a school of thought a pioneered by people like GERD gigerenzer in Germany which says that in many real-world situations heuristics show themselves better than really complicated mathematical models based on you know regression analysis and everything else I'm a huge fan of heuristic target audience definition take the single variable that best differentiates your target audience from other people's and use that as the thing to focus on because it's much more useful to tell a creative team basically we're talking to everybody who owns a laptop or everybody who there's a brilliant heuristic the definition of targeting which is shiba a premium cat food is anybody who buys their cat and birthday present okay they refined it it became um first of all they asked the question do you spend more on your cat's birthday present or on its Christmas present if you answered Christmas or birthday or about the same you're in the target audience for Shiva if you said the bloody thing lives out in the barn and it's lucky if it gets a rats to eat on its birthday you are not in the target audit now it's a much that's a great way of defining a target audience now if I sound mad suggesting it I can give you a very very good case study where it worked very well which was in deciding who was to be the few fighter pilots for the Battle of Britain in 1940 in 1939 how do you decide have all the people gained the services who should be a fighter pilot and they've got lots of psychologists in and they did loads and loads of evaluation and they realized you could actually narrow it down to two questions and it have you ever owned a motorbike and do you own one now and the people who became fighter pilots answered yes no and the reason you wanted those people is they were brave enough to ride a motorbike in the first place but sane enough to have given it up and so the few in the Battle of Britain were actually chosen from the ranks of retired motorcyclists now sometimes those very simple questions first of all they're unbelievably cognitively easy to do you can target and find people who meet those criteria very easily secondly if you read Giga Rennes that he will show that in many cases there are medical examples where in terms of triage of patients just asking three questions and ignoring all other variables actually provides you with the best result so that's not always not heuristic sometimes they're great but most of the time people are acting on heuristics and the point we need to do as marketers is understand the heuristics and that people are adopting when they decide something fortunately one of them is broadly speaking products that are heavily advertised a less likely to be crap than products I've never heard of this is not an irrational assumption I'll explain why a little later but one of the reasons for advertising is nothing to do with what the advertising says there are other reasons for the advertising to say good things which is that people have a strong sense of identity and like to buy products that cohere with their identity I'm not I'm not saying that all advertising should merely say I spent fifty thousand pounds on this ad so you can trust me but a very large part of the efficacy of advertising comes from that and so the herbs to make advertising perfectly efficient through digital micro targeting can be a mistake the reason we trust advertised brands is because the act of advertising requires expense and therefore commitment and therefore it's reasonable evidence that the person has faith in their product that their product will sell widely and over time because if you're trying to pull a fast one you don't have that belief and therefore you don't have the time if you think of the difference in game theory terms of buying a carpet in a souk okay when you're on holiday in Marrakech okay now the guys selling of the carpet and you know this has no prospect of a repeat sale because the following day you're going to be on the easy jet flight back to Luton and you'll never be able to buy a carpet from him again secondly you can't do a much reputation or damage because you're not gonna go back to Luton and say by the way if you ever find yourself in the souk in Marrakech don't buy a carpet from the third guy long because the carpet he sold me was crap now if you're a heavily advertised brand or if you're very famous train those two things don't buy one it only pays to advertise if you're expecting repeat business because that's when you build a brand that's called repeat game theory and the strategy you adopt when you're playing repeat game theory is much more altruistic and much more uncooperative than the strategy adopt for one-off exchanges so why bother if you wanna have a really crap meal just go to a tourist restaurant you want a really crap meal go to a tourist restaurant with a view right but if they basically there's no point in them doing good meal for you because then you're never going to come back realistically tourists only go to a meal once now TripAdvisor may actually have changed this which is kind of fascinating so TripAdvisor may actually have an effect that the quality of the world's one-off restaurants will improve as a result so there might be an argument invest in their restaurant hotel category on the assumption that the market failures that were often occasion in hotels which is too much uncertainty now no longer apply which i think is very very interesting anybody know paper called a collabs the market for lemons read the paper anyway it's a very interesting Nobel Prize winning economics paper so that's my that's my point here that actually you know the heuristic is in a sense it's a bit lazy arguably you should evaluate every product but you can't know what's a great product so the brand to some extent encompasses social proof they'd only use mass advertising if they're planning to sell to a lot of people and it's also a commitment device and I'll explain this little more in a few minutes other human biases to know about are the trade-off bus most of the time you make people buy more of your product by making it easier to buy but sometimes the opposite applies sometimes there's a thing called the effort reward heuristic which is we enjoy things more and appreciate them more if we put a little effort upfront that's why all sororities and fraternities have hazing rituals because having gone through hell to join the thing you're more and more determined not to leave yeah that's why initiation rites exist in religions it's the game theory explanation for circumcision much okay but if you paid a high price to join you're less rely that's likely to defect okay um a smaller level you could call it's the Protestant work ethic you know it's okay to enjoy a small glass of wine but only if you've gone through hell first that's the basics of Scottish anybody here with Scottish ancestry you'll know all about that trust me I've got a Scottish father half Scottish father and it's okay to have fun but only after an extraordinary amount of commensurate suffering pick your own strawberries it's not the same as cheap strawberries there's a trade-off you know put in a bit of effort get cheaper strawberries it's not the same as cheap strawberries we tend to believe something different those the pistachio nut is an example of the effort Lord heuristic have you ever bought pre shell pistachio nuts they're not very nice if you could just give into a bag and fill your face with pistachio nuts they're actually a bit rubbish it's the whole business trying to peel open the case of each one and something since IKEA works this way which is it's so much pain to go to the shop in the first place and to meander your way through that unbelievably convoluted path that you are determined not to leave empty-handed to come home to my dear to be asked what you get nothing it's really the retail opponent of coitus interruptus you know it's just it's not going to happen okay so there are cases where one of the best things you can just add an egg being a very famous marketing example where they made the instant cake mix a little more difficult because they felt people who appreciate it more IKEA genuinely believes I think right the fact that you assemble your own furniture makes you appreciate it more so there are cases this is why it's so difficult being completely rational about human behavior because often we respond to the same thing in two opposite ways Amazon Prime would be another example of the commitment device I pay out front but as a result I become disproportionately more likely to stick with Amazon and there all sorts of psychological and cognitive biases that explain this I better have got time Jekyll go on yeah got friendly the great reframing Germans wouldn't eat the potato Fredrik wanted them to eat the pager because if you have two big sources of starch and carbohydrate bread and potatoes the risk of either rapid food price escalation or famine decreases an emperors hate food price escalation because it leads to insurrection which is bad for Emperor's so you thought that if you get the Germans on a kind of two you know on a two-carbon footing where it's a mixture of a mixed economy of bread and potatoes but Germans refused to dit they said the thing looks disgusting we can't even get our dogs to eat so further the great created a Royal potato patch outside his palace declare the potato Royal vegetable and said only members of the royal family could eat it and he had guards posted around it who are instructed to guard the potato patch night and day but not to guard it very well till an 18th century peasant this food's too good for the likes of you suddenly they want to Nick it that was the most brilliant psychological reframing taking something that nobody wanted and adding scarcity value and exclusivity value to it I've talked about the thing with the loading bar and software if you want people to complete the course of antibiotics don't give them 24 white pills and say take these three a day give them 18 white pills and six blue ones and say when you finish the white pills take the blue ones the blue pills don't have to be in any way different from the white pills in what can they contain but if you tell people to do that they'll finish the course of action any path of behaviour which has a milestone in it we're more likely to finish and in the order stipulated one more example this is the case the opposite just make it easier that's me this is all the assumption of economists that we all save rationally we sit down and go I need to save this amount but we don't spend rationally we spend entirely driven by mood and impulse so why on earth should we not try and get people to save the same way if you think about it if you had a pin where you have you know every time you use the cash machine you took the money out and said do you want to move a simple you know do you want to move everything into your pension the amount you would have put into your pension by now would be fundamentally different and a lot of the models of economics on human behavior are based on a kind of doctor mr. Spock model which is completely deranged and the real challenge now in financial services is the whole isn't a whole discipline called behavioral finance which understands how people really save and act financially not based on that absurd assumption of complete rationality where you have no time preference and everything is about forward planning a case where I think behavioral science or reframing could have actually avoided riots we had riots in London because we introduced student loans why do they call it a student loan that means you're constantly reminding people when they're a student that they're forty thousand pounds in debt they don't need to know that if you'd called it a graduate tax the financial mechanism could have been exactly the same now imagine you're a fairly poor person in a household wondering whether to go to university or family's most valuable possession is a car worth let's say two thousand pounds and you're told if you go to university you have to borrow seven thousand pounds a year that terrifies you right if you tell the same person if you go to university and you end up earning fifty thousand pounds a year you'll have to pay another two percent on your income tax your reaction is chance to be a fine thing the economic outcomes are exactly the same the framing is totally different no one would have rioted if you proposed to graduate tax not a very relevant case study for Canada wait I think I answered you only right when it's hockey related is that true that were the only thing that the only instances of rioting in Canada are basically hockey related so - no use to you that example but I thought it might interest you anyway game theory I'll just talk about this very briefly this is the most ridiculous sport in the world anyone who's seen this this is the world championships of a particular cycling event with I think is it Bradley Wiggins there Chris Hoy's so Chris Hoy is for the UK now they're racing they're off I could actually cycle faster this is the World Championship final we've just got time to sit at the end where I think you need to know how to ends now don't you after this nail-biting excitement in some races people actually grind to a halt and just balance on the bikes without moving we're not going to go over excited now really now it goes I might as well let it play out to the last here we go there you go that the reason for all that the absurdity is game theory which is that there's thing called drafting which is if you ride in the wake in the slipstream of another cyclist at any speed you gain a huge advantage because he's expending much more energy than you are so nobody wants to be in front at the beginning of the game unless they're going very very slowly so that's why it results in this utterly peculiar kind of well but that's actually a much better analogy for business where what you do and what decision you take depends on what your competitor is do then most of the assumption that we must always drive efficiency so to get our prices down there's a very good friend of mine who's an Austrian believer in Austrian economics says first of all markets aren't perfectly efficient markets and discovery mechanisms they discover what people will willingly pay for at prices and he says price production is not a strategy there's an appropriate level of cost for your business for the market niche you seek to fill a no luxury goods manufacturer tries to bring down price because they know it's the kiss of death and actually the assumption that to some extent the power of the spreadsheet has given the finance function and therefore some quite bad economic models control over the levers of power within business is actually a very dangerous effect but the other point that made by John Elster who's a very brilliant social scientist is that you can't really understand human behavior unless you understand game theory because most of our mental evolution is how to second-guess other people it's all dependent on what other people do the physical world is relatively cognitively undemanding we don't need a huge brain this size to cope with you know how to catch a ball or a rock dogs can do that in fact dogs use exactly the same heuristics to catch frisbees that humans do to catch cricket ball the reason we have this complexity is because we're a social species who has to second get is this guy lying to me all that kind of stuff how can I trust this guy what's to stop this guy from ripping me off and the world is full of game theoretic devices once you understand game theory the engagement ring I'm sorry now I don't think women actually do this ration okay I don't think women go I'm very glad my fiance has bought me an extremely expensive engagement ring because the size of his upfront financial commitment is proof of his long-term intention okay I don't think it actually works I think instinctively people know that a big engagement ring is proof of commitment that it's a very expensive way of getting one-night stands going around and just handing out engagement rings so intends to suggest some sort of permanence to the relationship okay there's another game theoretic reason why women particularly like being bought flowers and jewelry by men which is because men aren't remotely interested in flowers and jewelry sorry but it's true okay so when you buy a woman some flowers or some jewelry you've actually bought something that's of no interest to you with your own money that makes her really happy that's a genuine sacrifice okay where is thy contrast if you buy your wife a radio-controlled helicopter Christmas there is a strong suspicion of self-interest yeah darling it's the quad bike you always wanted isn't a phrase that's going to go down brilliantly well you know I know you've always wanted a jet ski and so okay mm jewelry have a game theoretic value precisely because they show genuine sacrifice not just possible disguised self-interest and instinctively we're game theorists and one of the ways we use game theory as we go this person has advertised I'll give battery quickly this person who spent some money on advertising so patently they have long term hopes for their brand they haven't just got a brand they're milking but they're just not planning to do anything with than that they're unambitious for and where the prospects for the platform's walk this is a person who has high ambitions for their brand therefore from that person I can expect a good product equally you could take the logic of nothing kills a bad product nothing kills a bad product faster than good advertising therefore why would you do good advertising for a bad product therefore if there's good advertising it won't be a bad problem now I believe generally instinctively we've come to make many of these links but they never come out of research because just as women don't go the size of the engagement ring is effectively proof of long-term commitment using game theoretic devices but nonetheless without game theory I don't think you can understand that now now my point about jewelry and flowers has a very important bearing on customer service and customer experience because every time in marketing you're asked to do something something says what's the RoR but if the consumer is a game theorist they won't appreciate things you do which have an ROI because that's like buying your wife a radio-controlled helicopter right the things consumers really notice are the things that don't have an obvious ROI so here's an example of a British Gas Act where you can submit your meter reading using your iPhone know people it's in British Gas is interest they want you to submit a digital meter reading it saves the money it's cute we like doing it but it's still stealth interested but a little thing that doesn't have an ROI fills our hearts with delight they added a little switch because most people's gas meters in Britain are under the stairs covered in cobwebs in a horrible dark corner and the little switch on the app turns on the light on your iPhone's flash camera so you can use your iPhone as a torch to see what the meter reading is now there's no our eye on that that's precisely why it's so brilliant do you see what I mean it's exactly like buying flowers when you yourself don't benefit from flowers and so one of the dangers is if customer experience becomes purely self-interested and I'll explain this a bit more details a few minutes you're actually destroying customer experience because everything becomes basically a self-interested transaction I tried this experience that goodness sake don't do this at home okay I did try this monsters experiment I'd bought some flowers my wife okay and when I brought them home through the door as a mischievous behavioral scientist obsessive I actually said if you sleep with me tonight you can have these flower okay barely spoke to me for a week do not try this experiment at all okay but as there are large numbers of human transactions which aren't supposed to work in that direct synchronous exchange they're about reciprocation and so obviously you give the flowers then wait a day gonna come but but but the idea that you're trying to get an ROI on the flowers is a fundamentally mistaken way of understanding you it's like an see absolute horror as a part of every female faces the audience I really apologize that but I have to do it in the interest of science you'll understand that right you okay now there are different kinds of exchange they're sharing most of you when you're at home you share plates and mugs and forks and knives with the other members of your family particularly is he with blood relatives we tend sher very comfortably all manner of genetic reasons for this there's bata where you say I'll give you a knife if you give me three chickens that's just an immediate exchange there's tit-for-tat asynchronous exchange where you do someone a favor in the expectation that they will return it when they get an opportunity to do so so that might be someone who's had a good day's fishing give some fish to someone who's had a terrible day's fishing on the expectation that the opposite will happen three weeks later when the situation's are reversed and obviously societies that evolve to do that tit for tat exchange would be much richer and more successful than societies which were completely selfish but all those first three things and arguably religion the fifth one which is I will do good acts unquestioningly on the assumption that I will be rewarded ultimately that at the end of my life karma is a similar concept I will do good things on the assumption that at some point perhaps after my death accounts will be settled in my favor is another form of if you like mental device where we understand altruism in XJ now all those four things are probably millions of years old buying things with money which is the only one of those exchanges that economists understand is probably you know a few thousand years old maybe eight thousand years old at most and what economists do is they think that all human relations are about the fourth one now to a completely rational economist after you have for example made love to a woman ah voluntary I'm gonna have 6% et cetera she would be even more pleased if you were leaved a bundle of money on the bedside table okay because not only as you had an enjoyable reciprocal experience but she's also now it trust me it wouldn't work like that okay because what you've done is you made the fatal mistake which is confusing one type of exchange for another and if we understand these different sorts of exchange we will be much better marketers if you think about if you went to a dinner party it is acceptable to go to a dinner party and take a bottle of one it is acceptable probably to not take anything and then return the favor later on what is not acceptable is to say here's 50 quid for the food okay if you do that little friends dinner party it will create general horror it will be a massive social gap now we still have these reciprocal instincts and one of the things you've got a watch is that big data and what you know about your customers doesn't just give you an advantage over them it gives them an expectation from you now if you take the airline frequent flyer scheme okay I fly a lot with British Airways and I'm much prefer flying with British Airways because I fly a lot with British Shell why because there's a thing called a frequent flyer scheme and that means that I know that British Airways knows that I fly with them a lot and I kind of expect if there's only one seat left from a flight out of Helsinki and the snows about to come down they'll give it to me not some random student who happens to be backpacking around Scandinavia okay just as when you go to your butcher if you're a write regular loyal customer of your butcher you expect a better turkey come Christmas as a result you expect these various things to be reciprocated and therefore one of the dangers is people use data and they forget the fact that it's not just we know our customers who have valuable customers they know that we know now they will repay you I much prefer buying books from Amazon I feel less anxiety because I bought a hell of a lot of books from Alison and I know that they know that so if a book doesn't arrive I can ring them up and I know they can see I bought a hundred books without pretending they didn't arrive so they can probably give me the benefit of the doubt on 100 and first if I go to a completely different online bookstore I don't have that mental reassurance so all these sort of exchanges of trust are going on unconsciously all the time but economics is completely blind to them because it only notices the financial level and I notice or interesting thing in Sevenoaks where I live in Kent you used to have a pay and display carpark and you went and stuck a sticker in your windstream and every now and then you'd forget and you get fined and you'd pay the fine you go well there's nothing you can do they switch to a mobile phone app where you actually go to put in the little number of the space and your registration and then press Buy and I'd done that about 50 times over the course of a year or so once a week I'd paid a pound or two for partner subject and one time something went wrong with my phone and it took me eight minutes to log in and by the time I had actually done it I got a tick now interesting I was much more angry because my gut was you can see from my account now you now know my parking history I don't think it's unreasonable having parked legally in Sevenoaks 50 times you let me off one 10 minute mistake now were the old sticker in the window thing I didn't have the same expectation is how were they to know I was just some random person passing through do you understand what I mean if we must we must remember when we have data on our passengers it effects undoubtedly their willingness and actually probably makes them more loyal because we like buying from people we buy from a lot for all manner of reasons but it does place you under an obligation that you know when the chips are down they're expecting you to respond so that's just a real real muck don't get these muddled up and we need to understand all of them as marketers because they're all psychological influences economists only understand the fourth one final thing I think is very important I've talked about game theory I've talked about behavioral economics I've talked about the effort reward heuristic and so forth these are just three of maybe 50 concepts which can all be of huge use both in enriching marketing and explaining marketing to finance the other really important thing is really small things have big effects we tend to assume that human behavior is like a kind of Newtonian system where big effects require big inputs this is a great case as a 300 million dollar button where merely changing one word on one button in the checkout procedure and adding a small sentence of copy added 300 million dollars to their annual sales so very very small interventions can have huge effects which means as marketers we can't always predict what will work but a huge amount of the value will be created through these small experiments one experiment we've done with website design for example produce 38 million of extra revenue just by changing the choice architecture of different options what you put it alongside fundamentally change what people paid for and the other thing to remember is that we were we weren't inverter this psychology will never become an exact science where you can predict exactly what people will do under certain circumstances partly because I think we've evolved to be unpredictable for the reasons we've explained before that sometimes as we do exactly what you'd expect and sometimes we do the opposite and their whole arguments that we have to be unpredictable that hairs have evolved a kind of random behavior mechanism so that wolves could never quite tell what they're going to do when they chase them so there is within a hair a kind of subconscious random number generator which just goes jump left now jump right because a rational hair would very quickly get II um but equally even though we won't make this into a perfect science because as I said it may be impossible just abandoning some really bad assumptions that by putting the price up demand will go down for example and just testing whether that assumption is valid in a particular circumstance can be worth a huge amount in itself if you think about the main reason China's rich isn't because they've discovered the secret or some brilliant solution that nobody had done capitalism before it's just they had a very dumb idea for 40 years about how to run a country and then they abandoned it and we give them a huge credit as if it's an incredibly virtuous country but the main reason for the economic growth in China is they've stopped doing some really stupid things vital point is the two things that we tend to use logic neoclassical economics and research don't tell us a lot of the things that we need to test so if you take Red Bull the reason they could charge one pound 50 for a can when a can of coke was only 50 or 60 pence was probably because the cannon was smaller and we looked at the small can and went wow that stuff must be so powerful they can't put it in a normal coke can because I'd go do lolly therefore it must be like an amazing different category of drink which commands a different price pot okay but logic isn't going to tell you that and no one in a market research group is going to go and say I wouldn't pay 1 pound 57 for a can of redbull but only if you gave me less of it okay nobody's ever going to say that um so other things we need to understand is that the idea of heuristics if you if you're involved in government behavioural change programs like dieting or quitting smoking crikey running would later okay okay scientists will tell you the rational thing to do which is only eat this many calories a day only drink so many units a week okay the point about those is they are perfectly rational the scientist will never be chided or fired for giving that recommendation but it's impossibly difficult for people to stick to and people have Nassim Taleb in his book anti fragile are starting to say no really good behavioral advice is binary if you notice you feel bad about a red traffic light in a way you don't feel bad about breaking the speed limit one of them is a yes no good bad instruction the other one is a quantitative recommendation right and we do even at 3 o'clock in the morning when there's no one around if we run a red light we feel really bad about but if you go 35 in a 30 limit hey what the hell you know it's just you know are there special circumstances now if you look at individual things the best way to give up drinking is maybe don't drink three days a week you want to restrict your drinking just say I won't drink three days a week and if you want you know if you want to cut down on calories talib actually believes it you know the business about you know carbohydrates is much easier to stick to you only need to actually manifest your discipline when you go shopping you don't need to worry about how much you eats just don't eat any of certain kinds of food and the reason it so is is just if you can obey that rule when you go shopping you won't need any of that food anyway because there's none in the house now just to prove how it's fairly obvious that a lot of mistakes that we made in government policy by telling people they must do this much of this and this much of that it's very difficult to stick to it's very difficult for communities to police it if you have a rule that you don't drink in January your wife or husband will spot if you drink in January your wife and husband isn't going to walk around behind you every day with a notepad not noting down your alcohol consumption and telling you to stop when you hit 24 units okay unless she works with a Stasi or something and just likes doing that now interestingly if you look at religious law it's all binary there's no such thing as 50% kosher okay you can either eat it or you can't and the laws that endure the Fringe try this crazy thing ever 35 hour work week a quantitive measure on how much people work never worked how do you spot someone who's cheating they just say overslept that's why I'm working no you don't something hit 35 hours get now I'm going to stop equally Leisure's most valuable when everybody enjoys it simultaneously so four thousand years before the French did that you know the Old Testament prophets invented a thing called the Sabbath on the seventh day you don't work it's a much better way to restrict and control your behavior than these absurd quantitative things so that's where rationality and what you might call cognitive ease come into conflict which is exactly my point I'm making if we can understand the cognitive aspects of our lives better we can actually design a far better reality around them so that's pretty much all just baby I'm saying the next big thing isn't the technology at all it's psychology Accenture it seems kind of tend to agree with me they think there's huge economic growth from just understanding how people can change their behavior in various ways and the final thing I'll end up with is if nothing else try looking at every problem you have through this lens it won't always solve the problem nothing ever does but it might give you a completely different insight are we desperately trying to reduce the time we take to send out these checks when all we got to do is sell on the phone expect your check in 12 days time and then send it in 8 and then the final thing I'll leave you only need to read about 8 books to get 80% of the benefit of all this fantastic science and I think I've provided most of them here thank you very much indeed you

Channel: ICA

Views: 75,375

Rating: 4.9610705 out of 5

Keywords: ica, 1920x1072, Rory Sutherland, Revolution, Advertising, Behavioural Economics, FFWD, Marketing (Industry), Advertising (Industry)

Id: jEVCFS3YEpk

Length: 94min 7sec (5647 seconds)

Published: Tue Feb 19 2013