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Advertising impressario Rory Sutherland has given TEDTalks on the general life lessons to take from advertising, and the incredible importance of seemingly small details for producing big results. Now, he’s released “Rory Sutherland: The Wiki Man,” a collection of essays and interviews on the art, science, and life of advertising. TED’s Ben Lillie called him in London to talk about his take on new developments in psychology, and how his insights can be applied to the current state of the economy.
You’re a big fan of the new science of behavioral economics.
Enormously, yes.
Given how complicated and hard-to-understand humans are, how do you tell that the new science is, in fact, doing a better job? Is there a real way to tell that?
Well, first of all, I suppose you might argue that if all it does is challenge the old science, it’s worthwhile in that.
Because what it will do, it will prevent what I call dumb assumptions being made. In many cases, I think that people in business assume that people behave in ways defined by neoclassical economics, with individual rational actors going around and trying to maximize utility. Now, that leads to a definition of value creation that has very little to do with what people actually value. And that may cause extraordinary misdirection of investment, expenditures, and so forth. If you can just encourage people to actually consider the psychological angle a little bit more, and consider the behavioral economic angle …
If you think of the billions, for example, spent on the high-speed rail, it’s based on an assumption of value that may actually have nothing to do with what human beings actually value about taking a journey, or what discourages human beings from taking a journey. It’s based on an assumption made by a load of engineers—who secretly, you know, actually like engineering solutions, we have to be candid here—if you’re an engineer, you’re more likely to come up with a solution that involves building enormous great train tracks than you are to come up with a solution that involves, say, some sort of neat psychological manipulation, or better customer service, or better ordering processes for train tickets, all that.
So you get to what I think is the dangerous point, which is that, in a way, the people, you know—we’ve developed a society where actually, people are allowed to define human problems without, actually, any reference to human beings at all. And that, that rubs me a little bit.
My contention is simply that what you’re doing by spending 24 billion is you’re reducing the duration of the only part of the journey which isn’t crap! Everything about a train journey is crap: getting to the station is crap, getting through the station is shit, buying your ticket is fucking awful; everything about it is awful except for when you actually sit on the train and look out the window. That bit’s okay. You know, if you put wi-fi and TV on, that’s pretty much what you’d be doing at home anyway. Okay? I don’t really have a problem with that bit at all. It doesn’t really matter if it’s three hours or one-and-a-half. Really. Who cares?
My second example is, if you take the train travel example, okay. If you work in any sort of creative industry: if you’re a copywriter, or you’re, you know, an inventor, if you’re in any kind of creative process, it’s absolutely assumed that you have to present your thinking to people who are much more rational and practical than you. Does it stack out, what are the cost benefits, blah-de-blah-de-blah. Okay?
Now, that’s kind of all right. However, what’s interesting is, it never happens the other way around. If you’ve got a bunch of rational people, like engineers, sitting there, deciding, “What I think we’ll do is spend 24 billion to increase the speed of trains through London and Birmingham.” What interesting is that no one ever asks those people and says, “Okay. Well, you’ve done all your rational work, but before we allow you to go and put that into practice, let’s just show your solution to loads of wacky crazy people to see if they can come up with something better.”
So what you have is evidence of a double standard. You have an example where you have a double standard where crazy people have to present their work to rational people, but this does not apply the other way around.
Do you buy that argument, that you should just as soon temper rational thinking as you do crazy thinking? The same should apply backwards.
Absolutely. And I’m wondering if you see this changing, with more attention focused on the creative design aspects of technology, with Apple and companies like that.
Well, the way I look at it is, the real sweet spot, which is if you find something which has a valuable economic insight, a psychological insight, and a technical insight behind it — if you can marry those three, you can really produce things Apple-style, which are remarkable. One of the best examples, which would embrace all three, is in the London Underground: the idea of putting dot matrix display boards to tell you how long you have to wait for a train. That’s an use of technology which is also extremely economical, in terms of improving the passenger experience, but it’s based on sort of brilliant psychological insight, which is that the pain of waiting for a train is more about the uncertainty than it is about the delay.
I think that’s a very important point, because I think you could easily go to someone, and they would have solved this problem by effectively making trains more frequent. Now, by the way, I’m not dismissing the engineering approach entirely; I think it has valuable potential. Let’s face it, engineering has done great, great things for humanity over the last few centuries. But if you look at the typical board of directors nowadays, that is pretty much a group of people who are extraordinarily adept at reading a balance sheet. There is no one on a board of directors who represents what you might call the psychological side of problem solving.
And by psychological people, are you looking for people trained in behavioral economics, or more flat-out artistic creative types?
To be absolutely honest, I think that I would favor a few very good academics from a behavioral economics background. There’s a—possibly the first person you might put on the board is a good marketing director, who has a very good understanding of behavioral economics. Someone should be there on board level whose job is to question the assumptions of the prevalent financial, logical model.
Let me continue a point: Actually quite a lot of things are counterintuitive, in many ways. Metrics are also dangerous because, in particular, with relation to humans, very few metrics are linear. If you have anything involving either groups of people or networks of people, or just human stuff in general, you may, for example, notice that there’s a huge difference in personal satisfaction, in changing a train service from hourly to half hourly. You may also notice there’s a big improvement in satisfaction between getting it down from half hourly to, let’s say, every 20 minutes. However, what you will probably find, then, is that beyond that point, not necessarily that point, but beyond some point, it becomes pretty much irrelevant. See, quite a lot of metrics in terms of human psychology and satisfaction and value, are actually non-linear. I’m very intrigued to see that actually a lot of companies are spending a fortune on things they believe to be valuable, which consumers don’t value very much at all. I did a very interesting exercise here, which—do you stay in hotels much?
Sometimes, yeah.
If you ask a room full of 200 people, “Do you know that business where you go to an expensive hotel and they try and take your luggage from you when your car arrives? Or as soon as you get to the door, the doorman tries to take your luggage? How many of you hate that?” About three-quarters of people hate it. The hotel’s presumably doing it partly so you can give a tip to the doorman, but partly really thinks that people value that. In reality, people don’t like it.
I think a lot of service organizations actually do fairly elaborate shit that, actually, people don’t want! The possibility, I think, to use new technology like smartphones and apps and so forth to absolutely streamline customer service to leave a hotel where you check in yourself, and they don’t bother you unless you specifically ask.
It’s very interesting to see how many really successful businesses and business ideas depend on some sort of psychological insight. McDonald’s had this great insight that people don’t want the best burger in the world; they want a burger that’s just like the one they had last time. We value consistency, predictability, and avoidance in disappointment more than we value perfection. I think that’s a very, very valuable insight, that in some ways gave rise to McDonald’s. The other thing that McDonald’s realizes is that, even though when you talk to people in research about food, they talk endlessly about the quality of the food, actually the speed of delivery is probably more important than most people would say. Instant gratification is more important to us than we’re willing to admit. I think that’s another McDonald’s insight.
You could equally look at something like yield management, which is one of the most important ideas in the past fifty years. Which is the business where you have perishable goods, in particular airline seats, train seats, etc., and you sell them off at highly variable prices in order to marry demand with supply and maximize the value.
The interesting point about that, is that requires technology: Yield management’s been made much more possible by the web, because I can actually look at forty-seven different possible flights and decide which combination of departure time, departure date, and price suits me best. I couldn’t do that, really, over the phone, talk to a travel agent. The conversation would become unbelievably tedious, you know. You’d have to be on the phone saying, “And would it be all right if I went on Wednesday via Pittsburgh.” Basically, at that point, human embarrassment is going to take over a problem. It also depends on human permission. Forty years ago, or even twenty-five years ago, if you were sitting on a plane next to somebody, and you discovered they’d paid less than you had, you’d blame the airline. Now you blame yourself.
Now, that in itself is a very, very important business process that’s been made possible by, to some extent, psychological progress into the human understanding of price. Originally, the system was the later you book, the less you paid. Now, of course, it’s the earlier you book, the less you pay— it’s actually not as simple as that by any means, but because there’s a certain rule to it that’s individually transparent and comprehensible, people tend to accept it.
You talk in your book a lot about how a lot of these problems are basically social anxieties.
I think social anxiety’s vastly underestimated in its importance. Because we never talk about it ourselves, I think that’s probably the reason. For example, I prefer Dr. Pepper to Coke. But I never ask for Dr. Pepper, because if I ask for Dr. Pepper, and the restaurant hasn’t got it, it is my fault for asking?
Right.
But the magic of Coke is that, if you ask for Coke or Diet Coke and they haven’t got that, it’s their fault for not stocking it. Because Coke enjoys this spectacular competitive advantage over other non-alcoholic soft drinks in that, it’s one drink you could ask for without extensive signage and reasonably expect the answer, “Yes, it’s coming right up.”
I think the Internet is hugely significant partly because it allows people to transact without the usual pain and embarrassment and awkwardness that comes when you transact face-to-face.
I think the whole virtue of eBay is I can buy things from people without having to actually see what they look like. I probably don’t want to see them. I don’t want to meet their kids! I don’t want to be their best friend, I just want to buy a hat! And that whole idea that this thing is actually about community, well, that’s actually bullshit, in a way. What’s it’s actually about is the miracle of capitalism, that you can, using the medium of money, you can trade with the people you don’t like! I’m sure a third of the people I’ve bought things from on eBay, I’d probably hate in real life. Well, there were one or two people I sort of made friends with, if you’re making real hobby-like purchases. But there were not very many, to be absolutely honest.
We had a talk recently by Richard Wilkinson on social inequality. One of the things he mentioned was that as social equality increases, social anxiety goes down. Do you see, country by country, very different branding issues associated with these kinds of anxieties?
Very, very interesting question you have here. I think you’re talking about, in economic terms, is negative positional externality. That’s when other people are richer than you or flashier than you or whatever, even though it may be beneficial to them because they have a bigger, better car which makes them feel better, actually, it makes everybody around them feel slightly worse—because their own position declines slightly, relatively.
Now, part of the problem is in Darwinian terms, we’re a positional species; we’re out looking for relative advantage as often, or possibly more often, as we’re looking for absolute advantage.
I think that education is becoming, increasingly, a positional good—where Harvard plays a small role in actually producing valuable minds for the future, and a very valuable role in filtering out who should get an interview at Goldman-Sachs. Now it’s a terrible, flaming waste of Harvard, to be absolutely honest. But I think, increasingly, a lot of things like education are becoming positional goods. Are you familiar with Robert Frank, The Darwin Economy?
No.
He does a very good thought experiment, which is that you ask yourself, in honesty: “Would you rather live in a society where everybody has a six-bedroom house, but you have a four-bedroom house, or would you rather live in a society where you have a three-bedroom house, and everybody else has a two-bedroom house?”
Most people say, “Well, I’d actually have a three-bedroom house and everybody else has two.” What that’s starting to suggest, is that property, certainly above a certain size, is becoming a positional good, not an intrinsic good, an absolute good. Now, you can take the same question you ask at vacation time, at holiday time, “Would you rather live in a world where you have four weeks off holiday and everybody else has six, or would you rather live in a world where you have three weeks’ holiday and everybody else has two?” Most people say, well, they’re a bit pissed off in the first world, but they say they’d rather have four weeks’ holiday than to have three. So that suggests that holiday time, vacation time, is not a positional good, whereas property size is becoming a positional good.
And those things are very complicated. Cars are both really. Most people who buy an expensive car do, it’s fair to say, derive probably more pleasure from the intrinsic engineering excellence of the thing than they do from making their neighbor feel a bit shit – although it’s complicated.
We have to have a really complicated debate about this, because it’s worth remembering that a million years ago, a cave was a positional good. A hundred years ago, not smelling was a positional good. That an awful lot of human progress has come from positional goods which, over time, become normal and actually become standard goods. My father can remember in the U.K. – it was much earlier in the U.S. – but a car was a positional good in the U.K. in 1960. My father ended up being in a shop where, if he said, “Do you need a bag?” or “Do you need any help carrying that?” and you said, “No, it’s okay. I’ve got my car outside,” that was bragging. It was a bit like saying, “No, I need it for my yacht.” I suppose mobile phones went through a five-year period of being positional goods to a great extent. Now everybody has them.
Equally, you could argue that a huge amount of the world’s great art and music started that way— the Taj Mahal was a shocking positional good in some respects. A Leonardo was a positional good, but it did lead to some pretty decent art.
There are things like travel. To what extent is foreign travel positional? You can also go even further and say, well actually to some extent of course, boasting about your lack of need for positional goods is itself a form of positional status-seeking. I mean it’s exactly like self-handicapping in animals where you say basically, “I’m so secure in my status and so successful in other fields, I don’t need a gold Rolex to actually establish my own position.”
What does this kind of thinking apply to the Occupy movement that we’re seeing now?
Well, I think they’ve captured a very, very important insight.
I don’t know if you can do anything about the world spraying money around so unequally, at some level. You could argue of Henry Ford that he was insanely rich, but equally, he created employment – essentially blue-collar employment for a couple of million people. The whole car thing created a huge amount of wealth. Most of it didn’t accrue to Henry. By contrast, when you create Facebook, you create about eight billionaires and then you create about 250 other jobs. It doesn’t generate employment in the same way as Ford did. So we seem to have a winner-takes-all economy. I’m less bothered by that.
If you ask me what really sickens me about the economy over the last 30 years, one is the extent to which the wealth has disproportionately accrued to one sector, which is the financial sector. I left Cambridge in 1988. With one single exception, every single person who went into banking and finance from my cohort at Cambridge ended up richer than every single person who didn’t. Now I think 48 percent of Princeton graduates in 2007 went into finance. That is not a good application of human intelligence. And what we’ve done is we’ve created a caste of people who can talk finance who are the equivalent to people in 1070 who could speak Norman French. You’ve actually created a language where speaking that language is the only real route to insane wealth. Whether you’re on the board of a large company or on a city entity, the language of finance is a prerequisite. Speaking that language seems to have become a prerequisite to actually paying yourself a six-figure salary or more, more or less. Now that seems to me to be deeply unattractive, because you’re creating a kind of weird cabal of people.
Now an interesting question: It’s all very well for Eric Schmidt of Google to say, “Oh, but look, the UK doesn’t have a proper engineering culture,” blah, blah, blah, “you should venerate engineers more.” Well, what I want to know is, when he presides over Google’s purchase of Motorola, how much of that money, in terms of seven-figure, eight-figure payoffs, will go to people who are basically the Motorola finance directors, and how much will go to the engineers who created those patents in the first place?
Is this the kind of problem that can be addressed with these detail-oriented solutions, or is this the kind of problem that is going to take a full-frontal assault?
I don’t know. I think there’s something going on, which is that all businesses create a lot of value which is difficult to attribute to any person within a business. Suddenly however, those people who can speak finance find a way of rigging the system so it’s assumed that all that value is attributable to the actions of the CEO, the board of directors, a load of city analysts who piss around with the stock. What you have is not what Marx anticipated, which is that capital rips off labor. Instead you’ve created a weird intermediate caste of people who rip off labor and capital.
Let’s face it, after the shareholder value movement got started, there hasn’t been much shareholder value created. Most of the value has either gone to city firms who flip stocks and generally piss around with them, or in a remuneration to the top.
The problem in banking is, if 50 percent of Princeton graduates are going into banking, what that means is in 1944, you couldn’t have put the Manhattan Project together because J. Robert Oppenheimer would have been too busy developing high-speed trading algorithms for Citibank. That no one’s actually going to find the next DNA, because the Watson and Crick would have been lured away by some insane hedge fund. It’s not a great use of human intelligence. But equally, if you’ve got that kind of talent, it’s pretty difficult to turn down 500,000 a year, isn’t it.
No, absolutely. You’re saying we’ve driven ourselves into a situation where there’s a massive inefficiency in the intellectual market.
Yes, I think there is. No one when I was a kid believed that actually making money was virtuous. They believed it was something you did if you could, but they didn’t think it was proof of virtue. The over-reliance on the efficiency of markets has caused people to believe someone who is making two million a year is twice as valuable to society as someone who is making one million a year. Now that is such a dangerous over-extrapolation of capitalism. Markets aren’t efficient. Markets do a pretty good job of creative disruption. They do a pretty good job of rewarding entrepreneurialism. They do a pretty good job of weeding out failure, which is important – a much better job than the government, the public sector, in terms of killing your losers.
I think that’s one valuable thing they do—channeling people’s greed and self-interest into something that’s vaguely beneficial to society. It’s probably worth remembering that the CEOs of FTSE 100 companies, if they’d been born in Russia 50 years ago, would have ended up running the secret police. It’s the one thing capitalism does is, it’s a fairly good way of redirecting some relatively unattractive human urges into pretty harmless activities.
In terms of the things that piss me off in the economy, the other one is that property is so under-taxed. Property is in many ways the worst thing that you can consume, because it’s a positional good and it’s also rivalriously consumed. That is, when you buy a flat, that’s a flat someone else can’t own. It’s completely unhealthy, and it doesn’t generate any employment really. If I buy a Rolex, I have kept some pretty skilled Swiss watch people in employment in some form. If I buy a BMW, I am generating some sort of economic activity down the line. Whereas property is economically stagnant.
Is this why the fallout of the housing bubble was so bad?
Well I don’t think it’s been bad enough, to be honest. I would like to see a 20, 30 percent fall. I think what will happen in the UK, to be honest, is properties will stay the same, and then inflation will kick along at 5 percent in the next 10 or so years. And there’s so much behavioral economics here. People are so reluctant to sell their house at a loss, that one way to get people to move on, in terms of property, is to just to have inflation and get people to sell it at the same dollar amount, and they go away quite happy.
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