Intro. [Recording date: September 16, 2019.]
Russ Roberts: Today is September 16, 2019, and my guest is Advertising Executive and author Rory Sutherland. He is the vice chairman of the Ogilvy Group, U.K., and writes the Wiki Man column at The Spectator. His latest book, which is the subject of today's conversation, is Alchemy: The Surprising Power of Ideas That Don't Make Sense. Rory, welcome to EconTalk.
Rory Sutherland: It's a great joy and honor to be on this. I think they say this in the British talk radio: 'Long time listener, first time caller.'
Russ Roberts: Yeah, we say that in America too.
Rory Sutherland: Okay.
Russ Roberts: Now, I found myself in a peculiar position reading your book. It takes a lot of cheap shots at economists. Some of them deserved, of course. But, there is a great deal of insulting of economists and exalting of the insights of Behavioral Economics and Psychology, two fields that I am somewhat skeptical of. But I liked this book a lot anyway. I would describe it as a book to help you think outside the box, and in particular, to become aware of what motivates others as well as yourself. And in that sense it's very much in the spirit of Adam Smith's Theory of Moral Sentiments. The book helps you look--
Rory Sutherland: That's high praise. I wasn't really expecting that. Thank you very much indeed.
Russ Roberts: The book helps you look below some of the lazy models of economists that focus exclusively on monetary incentives and thereby ignoring much of the human experience, if we are not careful. Is that a fair summary?
Rory Sutherland: Yes. I think--
Russ Roberts: Maybe an overly generous one.
Rory Sutherland: I'll be honest. Part of the reason for the cheap shops at economists is that, if you work in marketing or advertising, it's worth remembering that the assumptions of economic models, which is that people have perfect information and make decisions in an atmosphere of perfect trust, are creating a kind of fantasy world where marketing and advertising needn't exist. You know, if everybody knew simply what it was they wanted and how much they're prepared to pay for it, and that their desire for the object was independent of context or meaning. Then patently in such a world, you wouldn't need any marketing activity at all. Things would simply sell themselves.
And so, if I have a certain animus towards the economists, it's not really towards you or towards eminent economists. It's towards the extent to which a kind of shallow economic thinking has permeated Business School curricula, for example, and has enabled people to treat what is something which exists in economic theory as a default decision-making frame.
And that seems to me extraordinarily dangerous. I mean, apart from the else, once you get into understanding human perception, it's very, very clear that human perception is not remotely objective, and therefore, the assumption that you could only improve the world by more consumption, for example, rather than more meaning seems to me deeply dangerous.
Russ Roberts: Yeah, I couldn't agree more. I would say that some of your view on economists is something of a straw man. I think, certainly, most good economists understand that people have imperfect information, are imperfectly rational. And, you know, I think the difference in our profession right now--this is not the focus of your book, but it's worth mentioning--are the people who think that, because of those imperfections, we need some top-down intervention. Or, rather on the other side, those imperfections are often smoothed out by markets; and, despite the irrationality of individuals, life works surprisingly well through the market process. And I'd say you're pretty aware of that, despite--
Rory Sutherland: Oh, no, no, no: There's very little that's anti-free-market in the book. In fact, I'd go so far as to say that one of the things that annoys me about in economics is that it likes markets for the wrong reason. Which is, that it likes free markets because they're notionally efficient, whereas I like markets because they're inventive. And, the two narratives--you know, it's a perfectly--you can understand why free market people leapt on this idea of efficiency through competition. In fact, competition seems to be deeply wasteful if you look at it in a short time horizon. What's magical about markets, of course, is that they solve problems through a process of kind of market-tested innovation.
Russ Roberts: Yeah: trial and error.
Rory Sutherland: Trial and error. It is, absolutely trial and error. But it's a bit more than that too, because I think one of the extraordinary things markets do--which, I think this is one of the reasons I'm uncomfortable about economics trying to model itself on Newtonian physics--is quite often what markets find is more than one solution to the same problem. And I think if you approach business problems with the mentality of someone who is trying to make it look like physics, then one of the dangers is that you're always trying to optimize something or find the single overarching solution that works for the average. And in many cases, I think markets and business do something much more ingenious than that. They solve the same problem for different people in a different way.
Russ Roberts: I think that's quite deep. I actually want to go back to the first thing you said though, which I really love, which is that--and it's a problem I think with economics education--is that we often teach our students what makes markets great is that they're "efficient." And, that's usually summarized by some jargon-filled statement like maximizing the sum of consumer and producer surplus.
And then another group of economists comes along and says, 'Oh, but that's only on the blackboard. They don't really work that way.' And my answer is, 'Well, of course, they don't.' What a horrible and foolish idea it would be to assume that they literally do that at every moment.
It's a tool. And if you take the tool as a perfect description of reality, you will be grossly misled.
If you take it as a general point that markets allow people to exchange with one another in ways that are mutually beneficial, and then add your point, which I think is very deep and so often forgotten in the classroom and in casual conversation, which is that it's inventive. It's not just: we're sitting around in a room swapping stuff. New stuff's getting created, customization is being allowed. People are being given the chance to find what works for them as opposed to what works, as you say, for the average. And that profusion of choice and experimentation is what makes markets really delightful.
Rory Sutherland: And actually, the process of invention does not only apply to goods themselves but to the marketing and presentation of those goods, by the way.
Russ Roberts: Yeah, we'll get to that. I think that's another part of the book that's very--
Rory Sutherland: In the process of writing the book, I became quite Austrian on this topic, but the idea from that Ludwig von Mises' quote that 'there's no useful distinction to be made between the value created in the restaurant by the man who cooks the food and the value created by the man who sweeps the floor'--I mean, I'd extend that to the man who designs the menu or the man who designs the signage. Actually, in order to create an enjoyable eating experience, food is only part of that, and context, expectation, a whole load of psychological factors are just as important.
In fact, and I occasionally go in and mischievously kind of write the opposite of a Harvard Business case study on things like Uber, where I argue that Uber is very largely a brilliant psychological innovation which changes the nature of waiting. So that if you can watch a car approach, the experience of waiting 10 minutes for a car is inordinately less frustrating than if you're in a state of ignorance. And that's as significant to Uber's success as anything to do with kind of scale or economies or the standard kind of narrative that you get in a conventional business school write-up.
Russ Roberts: Yeah. It's a fantastic example, and you talk about it in the book. With respect to Uber, when I would describe Uber, say, to my parents who hadn't tried it, I would tell them how great it was--you don't have to call anybody, you don't have to pay--and you talk about how the non-exchange of money directly is an important part of the experience also. But after I'd summarize all those things, I'd often say with utter delight and way more exuberance than the other things, 'And while you're waiting, you can see the car getting closer!' And I realize from your book that that is not just like, 'Oh, that's pleasant.' It's an enormous part of what makes the product attractive, even to the point where, as you mentioned in a number of examples, it may not even be accurate, may not be true. It could just be a little thing--
Rory Sutherland: [?, crosstalk 00:09:24] up but it still works.
Russ Roberts: It could be screenshots, photo-shopped or whatever, but it's really comforting to see that. And it's two things, of course. One is: Okay, you can see it getting closer. The other part, of course, and this is, I think, the deeper part, is that the variance is visible. When you're waiting for a cab, you think it's going to be 10 minutes. But there is this haunting fear in the back of your mind, or my mind, and I thought I was abnormal, turns out there's two of us, me and you, a haunting fear in the back of your mind that, 'What if it's 25?' And the Uber--eight minutes for your driver--
Rory Sutherland: Even worse, 'What if they canceled me?'
Russ Roberts: Exactly, and I don't know.
Rory Sutherland: I said something very similar to British Airways, which is, when you have a departure board, if you can give any kind of estimate of time of departure, even if it's slightly pessimistic, it is inordinately better than the single word 'Delayed,' in terms of our psychological wellbeing. 'Delayed' effectively makes me think, 'It's probably canceled but they're trying to break it to me gently.'
Russ Roberts: Yeah. Well, when I'm on a plane and we're sitting and there's some uncertainty--sometimes it's a repair, sometimes it's a traffic issue in the control tower--but a lot of times they'll just say, 'We're on hold right now. We'll keep you posted.' I'm thinking, 'That's not good. Just give me a range, even. Give me an idea. Give me some idea of what's going to happen.' And reading your book reminds me and forces me to understand that most of that is about my absurdly human need for control, which I sometimes think I'm the worst one in that area, but turns out, as I said, there's two of us. You also have this issue. There might be three.
Rory Sutherland: And there's an interesting point by Luca Dellanna, which I think is called something like The Control Heuristic, which suggests that a very deep part of human motivation is attempting to maintain a sense of certainty. We have an incredible human urge, we really, really hate being in a position of uncertainty. Which may explain weird behavior economic findings, which is that, you know, people prefer known bets to unknown bets. What was it--this great fallacy, isn't it, named after the chap who published the Pentagon Papers?
Russ Roberts: Daniel Ellsberg.
Rory Sutherland: The Ellsberg paradox, isn't it?
Russ Roberts: Yeah.
Rory Sutherland: Now, interestingly--I don't know if you've come across this guy at the London Mathematical Laboratory, but a guy called Ole Peters and a bunch of collaborators are arguing that in a non-ergodic environment where utility is to some extent multiplicative, not additive, variance reduction, of course, is perfectly rational.
Russ Roberts: And it's true. I know his name. I've been told to interview him.
Rory Sutherland: You must interview him, yeah. He crops up in the book, because I'd always have this vague hunch that things like sunk cost bias and, indeed, loss aversion, under certain circumstances couldn't really be described as a bias--because, first of all, evolution would have corrected them surely if they'd been that consistently bad. And so there's something there, which is, if you think about it--if you think of fortune as being intertwined and path dependent, then the avoidance of significant misfortune is a perfectly rational fear.
Russ Roberts: No'nd--I think this is--I think many of us have trouble with who are analytical. And it's certainly a problem that economists have. You don't call it this in the book, but the way I would call it is an obsession with expected utility and expected[unexpected?] with the average outcome--which you do talk about--and a mis-appreciation of the costs of the downside.
And, one example in the book, which I just love and I think it's extremely--it's trivial on the surface and very deep actually--which is: If you ask 10 people to hire one person for your company, you get an extremely different result than if you ask one person to hire 10 people. In both cases you're going to get 10 new employees, but they're going to be a very different mix. Explain that.
Rory Sutherland: Yeah. So it seems to me that when we make a single hiring, our instinct for variance reduction is very, very high, or blame avoidance, you might say, in a corporate setting. And so we're going to make a very conservative hire. If you have 10 people, you're going to go much wider and you're going to look for complementarity rather than conformity. At a very simple consumer level--I make no apology, by the way, for looking at trivial consumer behavior: my argument being, you know, nobody criticized Darwin for looking at finches' beaks.
Russ Roberts: Fair enough.
Rory Sutherland: The very, very small trivial things can be highly revealing of far more significant things.
And a very simple example is, if I forced you with your available resources to buy one house, you'd probably buy a pretty conventional suburban house, not too close to work, not too far away. If I gave you the option of buying two houses, what you certainly wouldn't buy is two suburban houses that were very similar. You'd possibly have a crashpad right next to your place of work and a place on the beach.
And similarly with cars. One of the problems, I think, for car manufacturers is that when two- and three-car households became the norm, the saloon car[?sedan?], which was the kind of default catch-all vehicle, suddenly became vastly less popular. People wanted more extreme cars.
And the same thing happens to mid-market retail. When people shop more frequently, they go up market and down market more and the mid-market retailers get squeezed.
And so understanding that dynamic seems to be important, particularly with hiring, if you want to actually create diversity without quotas, if you simply change the choice architecture within which people appoint employees. And interestingly, talking to a large consulting firm, they said that their graduate intake, which they hire in groups, is spectacularly diverse, and their partnerships, which they appoint one at a time, is fairly conformist. I think it looks a bit like front row of the Nuremberg Rally in terms of ethnic diversity.
That might be partly explained by simply the mode in which we're choosing. And it'd be perfectly natural, on anything, for humans to have that as an inbuilt instinct. In diet, for example, you know: the more choice you have available, the more you're going to eat widely; and all sorts of things, like foraging behavior, I think you'd probably find the same thing manifesting itself.
And it struck me as a really interesting point, which is just that we tend to be blind to the affect that choice architecture has over the choices we make. We seem to have evolved, in fact, a kind of 'make the best shot we can.' Daniel Kahneman, I think called it, 'What You See Is All There Is,' or WYSIATI.
And I mentioned this because one of the things I discovered in this is it takes quite a lot of mental effort to spot when the design of a choice path on something like a website is actually stupid. And the example I cited, I think in the book is, most airlines sites will ask you, 'Where do you want to go? When do you want to go? And what class of travel do you want?' Now, if you're a business traveler, you can answer those three questions. Asking consumers what class of travel they want before they know the price difference is, when you think about it, utterly insane. I mean, if it's £5 more going in business class, I'm sitting at the front, right? If it's four times as much, I'm going to be in 23D or whatever. But, as a consumer, to ask that question--and consumers don't go, 'That is a stupid question. I do not have enough information to make a decision.' They simply go, 'I better put "Economy" down.' Because this was actually costing one airline we worked with, about 15 million pounds a year--was the fact that people put 'Economy' down. Because, you can't really, as a consumer, pay for business class or premium economy until you know the ratio of that price to the economy price.
Again, an economist would say that the amount you're prepared to pay to travel in premium economy should be a fixed amount proportionate to length of flight. I don't think it is. I think it's actually a proportion of the economy price we're happy to pay, but we'll have that argument separately.
But the interesting thing to me was that, you asked that question. They were simply presented with the economy prices; they booked an economy ticket, and in many cases, they weren't thinking, 'Well, this is absolutely stupid. I need to go back now and check the business class price.' People don't do that. What was actually happening is airlines were throwing away premium revenue by asking a question before people have enough information to answer it.
And the strange thing is consumers react to that by going, 'Well, I'm just going to make the best fit to this. I'll put Economy down for now.' And it's very interesting that we don't actually say, we very rarely say, when asked the question, 'I need more information to answer it.' I think that's what Kahneman spotted when it came to making recommendations about who to hire and so forth.
Russ Roberts: So I just want to mention one British-ism, which is a saloon car.
Rory Sutherland: Oh, sorry. Sorry.
Russ Roberts: I was going to say, in America, I think it's a sedan.
But it brings up a point I want to expand on, which is the change--I've talked about this before on the program--as people acquired more televisions, as we got wealthier and a house had more than one TV, in the early days of television, the whole family would gather around the single TV set. Everyone would watch it. That eventually changed. A lot of people had enough money to--and the price of TVs fell in real terms so that people could have more than one television.
And so what happened is, is that people could watch their own shows. And this simple change changed radically what was available to watch. Because, in the old days, you had to make something that was neutral enough that no one would veto it. Then suddenly you could customize material to what people wanted to watch. And as you say, you get highbrow and lowbrow and you get everything in between, but you don't just get the middling choice, the average sort of dull choice. And that's happening across the economy all over the place, but especially in digital entertainment.
Rory Sutherland: It's a little more complicated than that in a funny kind of way, in that the sudden arrival of the large flat stream plasma TV slightly recentralized viewing again because you gathered in the place which had the massive television.
Russ Roberts: Yeah, that's true.
Rory Sutherland: And then what happened, of course, is people got an even bigger television and they moved their old television into the second room. Now what happens, by the way, if you're in the television manufacturing market, is you have a huge problem because people's main television is now so huge that there isn't really a second room where it belongs in a British household. And so you've hit a kind of weird stalemate where it's very difficult to get people to upgrade their televisions.
But that's a fascinating thing. It's very similar I think to something I mentioned in the book, which is Nassim Taleb's idea of minority rule, as well. That, if you think about it--I always have the recommendation: Unless you're by the sea, don't open a fish restaurant because there's always one person who doesn't feel like eating fish out of any party of six.
Russ Roberts: It's a bit of a strong recommendation.
Rory Sutherland: No, no, no. But if you think about it, one of the reasons pizza is so successful as a food is not only that people love it; it's that very few people veto it.
Russ Roberts: Correct. I agree with that.
Rory Sutherland: And so, well, I mean, it's a notable phenomenon. For example, all of New Zealand lamb is actually halal simply because there's an asymmetry of choice in that non-Muslims aren't particularly bothered by eating halal food--technically devout Sikhs are an exception to that, but I'll park that one--whereas Muslims will only eat halal food. So therefore, for purposes of simplicity, you make the entire supply halal.
Russ Roberts: As long as the costs aren't too high.
Rory Sutherland: And so now that's an interesting one, which is that your point in television is that you have to make something that was broadly acceptable to everybody.
And of course, if you think about it, I always described that as, in restaurant terms, there's what you might call McDonald's versus KFC [Kentucky Fried Chicken]. McDonald's, broadly speaking, unless you're vegetarian or vegan, everything on the McDonald's menu is kind of reasonably acceptable to you. There's nothing that is wildly polarizing like chicken on the bone, for example, or very highly spiced foods, which some people don't like. Whereas, KFC is slightly differently. In a sense, it's much more authentic as a fast food but it has that slight discriminating thing, which is, it's harder to find a large party who will all agree to go there because there'll always be one or two rejectors.
And by the way, that applies extraordinarily to comedy and political correctness, Because, if you think about it, it would be very, very hard--it's one thing to say, 'All right, we're going to set up a restaurant, and obviously people who come here will be happy to eat some of our food.' What I think political correctness is sometimes demanding of comedy is that you can't serve any food to which someone somewhere might be allergic. Now, if you think about it, that restricts what you can serve to an extraordinary degree.
Now, I would say of comedy, 'Look, you've come to a comedy club, you have to accept that the context is different in a comedy club and that people would accept things said in a comedy club, which wouldn't be acceptable in a job interview. And therefore your standards of kind of anal fussiness need to vary according to context.' But the universalism of political correctness more or less says, regardless of any context, no one can say anything in any space where, even theoretically, someone might object to it.
Now, that seems to me, when you think about it, an extraordinary curtailment of free speech. Because, if you imagine the same parallel applied to food where people went into restaurants and said, 'You're serving peanuts here'--by the way, I've always found it weird that airlines do serve peanuts.
Russ Roberts: They're cutting back, they're cutting back.
Rory Sutherland: I like peanuts. But I'm happy to forgo peanuts for the duration of a flight, on the grounds that I totally sympathize that someone who may have a fatal anaphylactic shock doesn't want to experience that at 35,000 feet.
So in some cases, I regard that as a bit weird, but at the same time, I don't think you can demand of airline food that you can't serve anywhere on the plane anything to which anyone on the globe might be sensitized, because that seems to me, utterly, you have to ask the question, 'Well, where does that end?'
Russ Roberts: So, I want to take another example from the book which I loved, which is related to this, this idea of choice and variety and also consumer uneasiness. You gave the example of just ordering the Economy seat because it's just the safer choice. But you have a wonderful example, later on you say,
Many apparent paradoxes of consumer behavior are best explained by similar mental mechanisms. A few years ago, we discovered that men were reluctant to order a cocktail in a bar, in part, because they had no foreknowledge of the glass in which it would be served. If they thought there was even a slight chance that it would arrive in a hollowed out pineapple, they would order a beer instead.
I loved that line. You say,
One remedy was to put illustrations or pictures of the drinks on the menu. Some trendy venues have since solved the problem by serving all cocktails in mason jars. The same sort of mental calculus explains why it is so difficult to get people to move their current account from one bank to another paying a higher rate of interest or to shift their broadband provision. A 1% chance of a nightmarish experience dwarfs a 99% chance of a 5% gain.
And I just think that point about avoiding the worst case scenario is extremely important and it goes back to our point about probabilities.
Rory Sutherland: I think--excuse me--it's very often a non-ergodic environment. And it's perfectly rational in my view. If you think about it in very childish mathematics, 2 x 2 x 2 x 2 x 2 is a bigger number than 1 x 3 times 1 x 3 times 1 x 3. If you're adding, variance doesn't matter. If you're multiplying, it does.
It's also worth remembering that in a non-ergodic environment, two or three bad outcomes in a row are significantly worse than spaced misfortune.
There's a wonderful case--which it's very hard to say without swearing, because I know it's a family show. There's a guy, I may not mention him in the book, called Francis Fulford, and his family have occupied the same, I think, it's 10,000 acres in Devonshire that was given to them in something like 1240. And he's inherited this, and the family still owns it, and they still own the house there by direct descent over about 800 years. And they asked him how on earth he'd managed this achievement. And he points up to the ancestral portraits and says--he's a very sweary man, so I can't report him verbatim. He said, 'Well, if I go back to my ancestors, we've had loads of idiots. We've had drunken idiots, we've had gambling idiots, philandering idiots, idiots who get in prison for treason,' he said, 'But we've never had two in a row.'
Russ Roberts: Heh, heh, heh, heh, heh.
Rory Sutherland: And he spoke, I think, to that very central fact in misfortune that, of course, when we appear to be irrational, worrying about a downside outcome, we're not just factoring in the risk of that outcome but the risk that it's accompanied by several other downside outcomes.
In fact--one of my weirder things; I don't think Ole Peters dreamt for a second that he'd be used to justify this, and I apologize to him if he doesn't like it--but one of the arguments I make is that we use brands very heavily as a form of variance reduction in making purchases.
Russ Roberts: Absolutely. For sure.
Rory Sutherland: Well, I don't think when we buy a Samsung television, I don't think we actually think this is guaranteed to be the best television in the world that I can buy with $600 or $1,000, simply because no manufacturer can be that good forever. But what I think we are paying a premium for is the fairly reliable certainty that however good it turns out to be, it won't be dreadful.
And if you think about it, two other driving human behaviors, which are habits and social copying, also make perfectly good sense once you accept the fact that people are trying to reduce variance of outcome.
And so I suppose it wouldn't be a surprise if the human brain that evolved always to accompany every question with a kind of unspoken, 'What's the worst that could happen?' And obviously, you're ordering a drink--it's a drink you rather like the sound of; and you order it and it turns up in a hollowed out coconut. Well, you now have to enjoy 20 minutes of ridicule from all your friends.
Russ Roberts: Shame, yeah.
Rory Sutherland: That will outweigh any possible enjoyment you might've had from a more adventurous drink.
One thing, by the way, at the risk of being irrelevant: There are things that you see with behavior which have always baffled me, which is, when you think about it, the martini is an extraordinary macho drink. I mean, it's basically a neat spirit with a bit of an olive in it. Now, there's nothing remotely kind of effeminizing the drink as it stands. Yet strangely, it's served in a glass where, unless you're auditioning for the next James Bond film, no guy can stand at a social event comfortably holding a martini glass and not feel slight social awkwardness. So one [?crosstalk 00:29:23] to bind that glassware with that drink is a mystery to me.
Russ Roberts: But we know the answer to that.
Rory Sutherland: Go on.
Russ Roberts: It's in your book. It's the same--it says the same idea of many examples that you give. It's that, 'I'm so comfortable in my masculinity, I can hold this glass.'
Rory Sutherland: You think it's costly signaling?
Russ Roberts: Yeah.
Rory Sutherland: Yeah. It's a hell of a cost, isn't it! But, I think costly signaling might be the only possible explanation: that it's something that you have to be extraordinarily self-confident in order to do it.
Russ Roberts: But I'd also add that for most of us, we've never thought about that. And the habit of that martini glass is so safely ensconced as a James Bond/Sean Connery thing, we're okay.
Russ Roberts: But I want to come to what seems to be a counter-example to your story, which is Starbucks. I'm a semi-coffee drinker--meaning I have a cup of coffee every once in a while. My wife is a serious coffee drinker. My sons are very serious; my daughter very serious. When they go into a Starbucks, it's actually a little bit like--I was going to say it's like a surgeon going into an operating room and knowing what everything is for. That's not quite true because, for them, Starbucks is a little bit of an easy environment.
But when I go in, I don't know what any of the things on the wall are. There's a macchiato, there's a frappuccino, there's an Americano, there's a Cortado, and I have no idea. Like you say, half of those are going to come in the equivalent of a hollowed out pineapple, and I'm not going to like 'em, either, which is another negative. So I just get a cup of coffee.
Rory Sutherland: Your problem will be solved. Don't worry. You'll only have to wait. Your problem will be solved when the United States discovers the flat white.
Russ Roberts: Yeah, no, we have that. We have that. That's on the list. I don't know what that is exactly. It doesn't sound good either, by the way.
Rory Sutherland: Because you didn't have to stipulate size. It's just a micro-foam topped large Cortado effectively, I suppose; it's probably the best way to describe it. Less milky than the Cappuccino, far less milky than the Latte, and with micro foam on top rather than froth. And it is a pretty good, what you might call fullback default in the coffee-ordering stakes because there are no followup questions when you order a flat white [?Australian lingo?]
Russ Roberts: But it's not just the followup. It's the complexity. I think there's a faux sophistication that Starbucks is selling for the customer who goes in and can navigate the complexity of those choices. In other words--
Rory Sutherland: I mean, there is a thing which of course, Freud called the Narcissism of Small Differences.
Russ Roberts: Yeah, there we go.
Rory Sutherland: And there must be a little bit of that going on with oat milk and other forms of, you know, lactose free dairy.
That the extent of making stipulations serves to suggest yourself highly sophisticated. And, I mean, having said that, of course, it's worth remembering that we still cope making those choices even though, I think someone calculated that the number of variants you could order at a Starbucks is more than 80,000, if you took every single combination of flavoring and size and base coffee.
Now of course, if you presented Starbucks coffee like a Chinese restaurant menu numbered one to 80,000, none of us would be able to choose. But we'd do it by, I guess, out of elimination by attribute. And we'll probably choose hot or cold. I mean, the order could vary, hot or cold, milky or not, big or small, and we'd kind of go through some sort of checklist and arrive at something which is at least tolerably close to what we wanted.
Russ Roberts: Fair trade versus incredibly exploitative. [?] because of [?] the incredibly exploitative Colombian bean.
Russ Roberts: There's a great life hack in the book, which--you don't present it that way, but you have a couple of life hacks I really like. I love your point that if you want everything in your kitchen to be dishwasher safe, just put everything in to start with and whatever survives is okay.
Rory Sutherland: Is dishwasher-safe by definition. Dishwasher Darwinism. Can't go wrong.
Russ Roberts: I love that.
But there's another--there's a bunch--I think, deeper one, and a little more practical. You're talking about perception versus reality, and that makes it sound like it's a trick. It's not a trick. It makes it sound deceptive. It's not deceptive. You say the following:
Making a train journey 20% faster might cost hundreds of millions, but making it 20% more enjoyable may cost almost nothing.
And I think, unbelievably--again, on the surface, it seems kind of obvious and simple. It's not. I think it's quite deep. So talk about that. And I can tell you're a big train lover.
Rory Sutherland: No, I mean, it's interesting, because, in a sense I became accidentally famous from a kind of joke I made at a TED [Technology, Entertainment, Design] Conference, which was merely to say, if you have a £6 billion budget to improve what was then the London-to-Paris Eurostar train journey, the six billion was spent effectively on a faster track between London and the Channel Tunnel. And, my only argument was there was a hedonic opportunity costs there. By assuming that all of that money had to go into journey time duration reduction, you are making an assumption about what benefited humans. Which I think suffered very badly from quantification bias. It's very, very easy to quantify and model time and duration.
Now, I'm not suggesting, by the way, that speed doesn't matter at all, but I'm suggesting that speed matters in a very nonlinear way.
I was in Austin, Texas and I discovered--I wanted to get into San Antonio and I discovered that there was one train a day to San Antonio from Austin, and it made the 85-mile journey in something over three hours. Which is--you know, I mean, the Donner Party will be faster than that, you know, for chunks of their trip. Now, I'm not suggesting that there isn't room for improvement there in speed. I think there's huge potential to join two city pairs like that in the United States with a reasonably fast rail service so you could do it in an hour. Okay.
If you think about it, I mean, Austin is what? The 11th largest city in the United States. San Antonio is the seventh, I think.
So I said, jokingly, 'Look, putting WiFi on the trains,' which would have cost literally 0.1% as much money, 'would probably have had as great an effect on people's inclination to go by train rather than by aircraft.' And then I joked and said, 'Well, actually, you could take a billion dollars of your budget, hire all of the world's top male and female supermodels and get them to walk up and down the train handing out free Chateau Petrus to all the passengers,' and not only would you have saved £5 million pounds, but people would ask for the trains to be slowed down.
Russ Roberts: Exactly. I love that.
Rory Sutherland: You must remember, cruise ships, if you think about it, liners used to compete for the blue ribboned. Okay? Suddenly, Boeing and the jet engine essentially made the blue ribboned as a transatlantic metric irrelevant. And so, Cunard, to some extent, invented the cruise ship industry because they said, 'We basically can't sell on speed anymore. We have to find some other comparative strength.' And what advertising does, of course, is it focuses you on the comparative strength rather than the comparative weakness. An advertising campaign that said, 'The Queen Mary, it's so fast,' would be a ridiculous advertising campaign.
Russ Roberts: Or, 'We made it 5% faster. Come try us out.'
Rory Sutherland: Essentially, what that means is you're getting worse value for money. Because, I'm paying for the trip as much for the journey as for the destination.
So, what advertising does is it affects what we pay attention to--the original Latin is about that. And then what we pay attention to becomes, in our minds, more important because we're paying attention to it.
And so advertising can perform this kind of alchemical trick of turning--literally--turning a weakness into a strength by telling a different story about it. That would be Avis, for example, 'We're Number Two, so we try harder.' If you think about it very simply, 'We're number two in rental cars,'--Avis is Number Two in rental cars--is an ad for Hertz. Certainly in, you know, 1960, if you were thinking about availability of cars, number of outlets, the ability to service obscure airports, that's a Hertz ad. But you add four words that say, 'So we try harder,' and make the distinction about customer service and effort rather than about scale, and suddenly you've turned a weakness into a strength.
Russ Roberts: 'With a name like Smuckers, it must be good jam.'
Rory Sutherland: Brilliant. Exactly. I'd forgotten that one actually. And we had 'Reassuringly expensive,' was the Stella Artois' lager brand in the United Kingdom. And Salman Rushdie, would you believe it, when he was a copywriter for Ogilvy, wrote the line, 'Fresh cream cakes. Naughty but nice.' So he obviously understood this effect.
Russ Roberts: But I want to stick with trains for a second because it comes back to our point about control.
You have a minor suggestion in the book, which is particularly apt for trains, and particularly apt for trains in the United Kingdom. And I think in the United States, it's incredibly frustrating that you show up in the United States and it works like this. You have a train that leaves from Penn Station at a certain time. If you miss it, you're cooked. Which is odd, because unlike San Antonio to Austin, New York to Washington, trains leave every hour or more often, and yet for some reason your ticket for that one train is crucial. And yet there are empty seats on a lot of trains that are going from those two cities during the day. And it induces--
Rory Sutherland: In yield management practice, if someone turns up early and goes and sits in an unoccupied seat, you're actually improving the capacity of the line.
Allowing people to travel late is slightly dubious, because obviously, you don't want that to happen because you're selling a perishable good, which is a train seat.
But if--and I had the bizarre experience of being in Houston on a continental flight back to London; and I had a 24-hour layover in Houston. I just said, just for interest, 'You got any capacity on the flight back this evening?' And they said, 'Oh yeah, we've got loads.' 'Oh, brilliant. Okay, I'll go back this evening. How much is it?' '$6,000.' Now, I quite enjoyed my 24 hours in Houston. I rather like the city, in fact.
Russ Roberts: Fabulous city, isn't it?
Rory Sutherland: Absolutely wonderful place. And actually, some of the best meals I've ever had, too. Fantastic.
But, the interesting thing, to me, was that if you had those seats--and they were patently being going to be sitting empty because 30 people weren't going to turn up in the next 25 minutes and [inaudible 00:40:47] business class seats on the Houston to London flight--why wouldn't you at least meet me halfway and say, 'Well, we'll tell you what? Pay $300, and you can go now.'
And so there's something about pricing--and, by the way, there's also something about pricing, which I think is ridiculous, which is: if you do miss your train, the fact that the value of your ticket immediately goes to zero, I think humans perceive as an injustice.
And so there's something about pricing--and, by the way, there's also something about pricing, which I think is ridiculous, which is: if you do miss your train, the fact that the value of your ticket immediately goes to zero, I think humans perceive as an injustice.
Russ Roberts: But it's worse than an injustice. It induces this anxiety, that you point out. And people would be happy to pay a little bit more for a more flexible ticket.
Rory Sutherland: Strangely, by the way, it's even like that on the Japanese Bullet Trains where there is a train leaving for Kyoto pretty much every five minutes. And they demand that you absolutely specify in advance which train you're going on. Now, that's partly because of allocated seats. But in an age of mobile phone apps, you'd think you'd be able to switch trains pretty much with three or four clicks on a mobile phone screen.
Russ Roberts: Well, I'm going to turn tables on you here because I want to make sure we get in a reference to the Chesterton Fence.
Now, I've mentioned the Chesterton Fence. I knew nothing of the Chesterton Fence until a few months ago. Now, it's become, though--it's soon going to, I think, be a revised version of the EconTalk drinking game, if there is one, because it seems to haunt me. It's a beautiful and deep idea: This idea that if you come across a fence that seems to have no purpose, the fool, the reformer says, 'Oh, well, this doesn't have a purpose. I'll just take it down.' Whereas Chesterton points out, 'You know, there's a reason it's there. It may not be obvious, it may not be obvious to anyone alive even. But, it may have turned out that there's a good purpose it serves that it stuck around for so long, and when you tear it down, you're going to find that out and you'll be sorry.'
So I do want to raise the possibility that even though these ideas would seem to improve train travel, the fact that they haven't been implemented suggests that maybe there's a cost to them that you and I haven't thought of.
However, I would also point out that in the United States, and I suspect in the United Kingdom and probably in Japan: they're not very competitive. And so, the ability to expect that trial and error will lead to an evolutionarily satisfactory structure for the travel is maybe not so reliable.
Rory Sutherland: There's also a thing, however, which I suppose you could almost say is the obverse of the Chesterton's Fence, which is: I don't know if you're familiar with this extraordinary Soviet-era problem-solving methodology called TRIZ [Russian acronym, Theory of Inventive Problem Solving].
Russ Roberts: No.
Rory Sutherland: I think it was someone called Altshuller [?Genrich Altshuller?] who was a Stalinist era scientist who was tasked with looking at problem solving. And unfortunately, some of his problem solving caused him to suggest that Stalin era politicians could do slightly better, which earned him, as a reward, 25 years in the Gulag.
But, one of his interesting observations is a thing which we occasionally call in my business, lateral category analysis, which is: that problems have mostly been solved somewhere else, but no one's transferred them from one domain to another.
And so there is something very strange.
I mean, one of the interesting things is, now, is biomimicry: that quite often you can study really obscure pieces of nature and you can discover solutions to physical problems. The strange beak of those Japanese bullet trains I just mentioned is modeled on the kingfisher, because an engineer who was very keen birdwatcher notice that when kingfishers dived into water, they barely created a ripple. And so they borrowed that actually to stop the trains making a hideous noise when they went into a tunnel, which was disturbing nearby residents.
And so interestingly, if you think about it, there are categories where, for example, the airline industry, which is highly competitive; it has solved the problem very well, and the rail industry has yet to catch up.
I mean, it's strange that just before I came on, I posted a tweet to ask French people why the French motorway system doesn't think of charging differentially by the time of day? So you have a flat fee for traveling between, say, Callais and Lyon, which doesn't vary whether you go at 2:00 in the morning or at peak time. And that seems an extraordinarily missed opportunity to me to borrow yield management from the airline industry and apply it to French motorways.
Russ Roberts: Yeah, there might be a cultural reason for that; but, who knows?
Rory Sutherland: And there often is. Yeah, that is true.
Russ Roberts: It could just be they haven't thought of it, which is--in economics, the oldest economics joke in the world are the economist walking down the street with someone and says, 'Look, a $20 bill,' and the economist says, 'Don't bother picking it up. If it were really there, someone would've picked it up already.' But of course, someone has to be the first person to pick it up, and so sometimes there are $20 bills lying around and entrepreneurs pick them up. In less competitive environments, they can sit around for a little bit longer.
Russ Roberts: Rory, I want to talk about your marriage.
Rory Sutherland: Blimey.
Russ Roberts: Well, you say in the book,
If you want a simple life unladen by weird decisions, do not marry anyone who has worked in the creative department of an advertising agency. For good and ill, the job instills a paranoid fear of the obvious and fosters the urge to question every orthodoxy and to rail against every consensus. This becomes tiring, especially when the same willfully perverse thinking is applied to everyday household decisions.
And I just want to confess that as an economist, I can ruin a lot of movies for my wife, and I have--where I'll say, 'That's not the way it really works.' Or, 'That wouldn't have happened in the real world.' Most movies that have some application of economics are deeply troubling to an economist. I'm just curious if there's any--why you wrote that sentence or that paragraph.
Rory Sutherland: I'm sure you could ruin most movies by actually taking an economist with you. I remember doing it once. I think it was the late 1980s film, Betty Blue, by pointing out that their decision to open a piano shop in a remote area of France was patently ridiculous--
Russ Roberts: Yup, there you go--
Rory Sutherland: since the catchment area or the likely market within that catchment area for buying a grand piano probably enables them to sell at most one every year. So that was me being the economist ruining a romantic French art house movie by pointing out finding out the eminent economic foolishness of trying to sell a declining product in a completely inappropriate location. So yeah, we can all do that.
Now, it's interesting in that that thing which is instilled on you if you work at a creative department at an ad agency, what you are encouraged to do and the muscle in your brain that gets very heavily exercised is the business of looking at everything the opposite way around. Of course, in a sense, a lot of problems are solved that way. Our communities in the bath[?] is a case of stop fixating on the crown and look at measuring the volume of stuff that isn't crown, for example. That actually TRIZ makes this point that, in fact, a very common problem solving technique is simply to focus on not-x rather than x.
And so it does instill in you, even in your private life, a slight obsession with looking at everything backwards. The worst case of which was of course just after we'd had young children, my wife sends me out to buy a wide slice toaster and I come back with a bread slicer arguing that what we need isn't a wider toaster, it's narrower bread. Now, for all sorts of reasons, this was a totally ridiculous thing to do. I mean, having two very young children around with a sort of effectively a circular saw device sitting in the kitchen was never going to be the best idea to begin with, but it does force you to do that a lot.
And of course, it's an interesting question, which is--I mean, I was asking people about this just the other day, 'How should you use the London Tube Map to buy a house?' And there are two answers to it in a way, 'I want to buy a house near the Tube,' or 'Everybody else uses the Tube Map when deciding where to live in London. So what I've got to do is actually look at what isn't on the Tube Map.' And, in many ways, if you think about it, South London--without becoming a sort of London transport bore at this point--South London's rail network is very, very well supplied with trains, none of which appear on the Underground Map. And you can probably buy insanely undervalued property next to a railway station south of the river, which is actually half the journey time into work versus, say Fulham, which is on the Tube. Okay? And the reason you're getting that bargain is partly because you're using a different model of choice to everybody else. And so you're looking for what's undervalued.
And I think there's something really interesting as a general rule about this with all models, and I would include economics in this, that when you develop a model of something--okay. There are a few cases, there are a few paradigms in the world, like Newtonian physics, where what's true is universally true regardless of context or time or setting. Okay. With a lot of models, the more people start using them, the more you'll find gains, not in looking what the model tells you, but in looking what it leaves out. I think there's enormous potential to--I often call what we do 'the science of knowing what economists are wrong about.' If you've got a decision to make and you say--this was in KFC Australia, actually--'We've got a product that isn't selling. What would an economist do? He'd drop the price.' And I said, 'Well, try doing the opposite. Try putting the price up.' Weirdly, when you put the price up, demand went up.
Now, that's surprisingly common, particularly when you have a decision in a menu environment where we partly use price to navigate. I'd argue that people go to fast food restaurants, if you like, for two slightly opposite reasons. One of them is in search of a bargain, and the other one's in search of a treat; and if you price something right in the middle, it fulfills neither of those two criteria. Okay. So you can make the mistake of pricing something too low.
Now, an economist would never even look there because dogma suggests that that's impossible. And so I've always argued that all maps--and the map is not the territory, as we all know--all maps through overuse create distortions in behavior. And the opportunity may come in actually saying: What's really interesting here isn't while it's on the map, it's to look at what the map leaves out because that's where the market opportunity lies.
Russ Roberts: Well, that's a very nice insight. I want to come back to your South London point though, which is that the natural economist's response to that is, you're suggesting--and the jargon for this in economics, which I'm sure you know--is there's an arbitrage opportunity. That's another way to summarize your point: that there's some potential gain that has been unexploited. And of course, it's another way of saying there's a $20 bill laying around. You're arguing that there's housing in South London that is relatively inexpensive--relative to its value, relative to its proximity to things people value--which of course could be true. It would be certainly true if everyone used the Metro Map--the Tube Map--and they were unaware of that other set of--simply unaware. Which could be. It's not that they don't--
Rory Sutherland: Well, I can more or less prove that, in fact, because there was a case where they took a set of railway lines, which had existed for about 25 years and had been called Silver Link Metro. And they made it into a kind of circle, and they called it the Overground, and they added it to the London Underground Map.
Russ Roberts: Oh, nice.
Rory Sutherland: When those lines appeared on the London Underground Map, usage went up by 400% in the first month alone. So, what you've done was absolutely extraordinary, if you think about it. You've created something like three billion pounds' worth of infrastructure, mostly with ink or with the digital equivalent.
And so there is an extraordinary opportunity, I think in many cases, to look at choice architecture, to say at what point is a choice creating--I'll give you a lovely example of this, actually. There's a website called seat61.com, where a man who's more enthusiastic about railways than is strictly healthy gives you advice on how to make rail journeys across Europe. And one of the reasons this website is so vital is because he gives you advice from a human perspective, whereas an algorithm gives you advice where it assumes that time minimization is the greatest objective.
Russ Roberts: The only thing you care about.
Rory Sutherland: The only thing that matters. And so nearly every single website will tell you to get to Bordeaux from London by going into Paris and out again. This means you've got to change stations, get a taxi, which isn't easy in Paris for various reasons, and also you've got to get all your luggage into a cab and haul it to another station. You can change at Lille, which involves a 1-hour 20-minute wait and a slightly slower train, but that involves a walk of maybe 50 to a hundred yards. Now, the reason his website is so essential is he tells you that. Whereas, the algorithm never will.
And so one of the things that really worries me is that: Are markets partly intelligent because human decision-making is messy, and markets can then aggregate preferences from a whole bunch of people who've come up with problems from a different angle? When you actually make choice uniform by dint of forcing everybody to go through the same set of questions in the same order, do you actually make markets stupider--because the distortions of the question-asking process become more and more widespread? And I have argued that the London Tube Map should actually vary at random every couple of years to encourage people to experiment with different journeys.
There are huge behavioral biases there because--you know, there is a really interesting point there, which is that I've heard that you can't sell a house in the United Kingdom for £825,000. And that's because the property websites have increments of 50,000 at that point in the price range, and people will either search at £850,000 and go high-low, or they might be starting at £800,000 and going low-high, but neither of those people will discover an £825,000 house. So you've ended up not with a price demand curve but with a price demand ziggurat--
Russ Roberts: Yeah. Well, that's quite interesting--
Rory Sutherland: which is kind of weird. And actually, what you actually need, is you need different property websites which encourage you to choose property using--I live in this extraordinary kind of grade-one listed house partly because architectural quality comes very low down the list of parameters people use when searching for property. So, I see that as a kind of decision-making arbitrage, essentially.
Russ Roberts: Well, I think the general point, which I think is quite interesting, is that we get into grooves of habits, certainly on the web and certainly in real life, grooves of habits of--I would call them, you use the word algorithm, right? Some algorithms are specified and some are just habits--the things I do in a natural order without thinking about it for a second after a while. And you're suggesting that sometimes you want to shake that up. Sometimes those habits need shaking up, and there are gains to be had. They are not necessarily--if the algorithm is created from the top-down, it may ignore some crucial parts of the human experience that might emerge from the bottom-up.
Rory Sutherland: Yeah. So I have two ways in which I'd improve the property market. One of them would be, I'd demand that property websites threw up random wildcards which didn't always meet your criteria precisely, but forced you to compare in a slightly more weird and random way. In a sense, mimicking what used to happen. Because, how did you find a house in 1978? Well, there were no websites.
Russ Roberts: You drove around.
Rory Sutherland: You drove around, you looked for signs, or you went into a town and you happened to see a property in the window of a realtor--I hope I've got the vocab right there--an estate agent, as we call them.
Russ Roberts: We call them a realtor.
Rory Sutherland: Or you might've discovered from a friend that some guy called Dave was thinking of selling his house. But there were all sorts of ways in which you discovered it. And weirdly, the market composed of lots of messy decisions may be a better market overall than one that's made up of a lot of neat but uniform decisions.
Russ Roberts: Yeah. Another way to think about this is the role of filters, right? We're so used to filters on the--an obvious example is Airbnb. I'll choose how many bedrooms I want, whether I want to share with someone or not share, have the whole house to myself, etc. And that's a very normal way to simplify the 80,000 choices that are available at Starbucks or elsewhere. Milk/no milk; white/dark; sweet/not sweet. Etc.
But what you're saying, one way to say what you're saying is, is that sometimes there's things we care about that we don't have a filter for or they can't be objectively listed.
Rory Sutherland: No; I mean, there isn't a Parker Score for architecture as there is in wine, for example. And so as a result, this quantification bias--I think it's sometimes called, isn't it, after the minister of defense in the Vietnam War?--
Russ Roberts: McNamara.
Rory Sutherland: McNamara. The McNamara effect, where you obsess about what happens to be measurable--in that case, the kill count--and you design a wholly inappropriate, in fact, counterproductive target, simply because it's the thing that you can measure not because it's the thing that matters. And I can see that happening more and more, and it concerns me a little bit--
Russ Roberts: Yeah, I know. Great point--
Rory Sutherland: because you can be left thinking you've made a wonderfully intelligent decision because at every point in the journey, you made what seemed like a decision that reflected your preferences. But the real preferences you may have were never even asked about it in the first place. And so it's rather like if you could imagine a market in which cars--let's say there was a formula for buying a car which we all used, which would be something like, fuel economy divided by acceleration multiplied by whatever it might be --number of seats.
Russ Roberts: Number of cup holders.
Rory Sutherland: That is the American heuristic, emphatically.
Now, if you have that, actually what would happen is: in the first few years, it might be quite a useful mechanism. Over time, car manufacturers would game the system and cars would become terrible, because the cars would increasingly reflect the algorithm or formula that was used to decide not the myriad and various preferences of car owners, which encompass everything from aesthetics to comfort to goodness as what[?]. And so cars would be truly awful under such a situation.
It always bothers me actually, because economists, because they have this efficiency fetish, they love turning things into commodities. And I hate commodities. So commodities actually, totally inhibit innovation. They destroy brands and they also destroy trust. Because if you think about, part of the value of a brand is that you have reputational skin in the game that's attached to the thing you make.
Russ Roberts: Carry on.
Rory Sutherland: And as a result, once you actually have certified beef, for example, it's in everybody's interest--I mean, this is what the Soviet Union discovered to a great extent, where they had targets for factories. And the Soviet Union resisted having any kind of branding because they thought it was un-Marxist. And so, essentially, every rivet-making factory was targeted only by the quantity of rivets it made. So the incentives--since all these rivets were being poured into a central warehouse--the incentive was to make as many rivets as you possibly could while at as low a quality as possible. Stalin himself actually complained about the metrics problem because all the chandeliers in the Soviet Union were absurdly--indeed, dangerously--heavy because lighting factories were actually measured on output by weight, not by any other useful kind of measure.
And so I think in our urge to computerize things, we're actually turning businesses and markets into something a little bit quasi-communist, in that we're attempting to measure the quality of something using objective means. And, the problem of that is that the objective means, first of all, make the system easy to game. And secondly, they create a kind of stasis, a kind of stagnant uniformity, because once something is certified beef, what incentive do I have to produce better beef or indeed beyond the meat? Okay?
Now, if I'm a brand, I produce better beef and I'm rewarded, because people enjoyed the beef last time and they seek out Sutherland's Beef second time round. If we're all buying certified beef, economists love that because it looks so gloriously efficient and you have those lovely economies of scale.
But actually the consumer interest is being lost, as is the incentive to innovate, as is also the fear of cheating.
Russ Roberts: Yeah, that's a huge point that you make in the book very well.
Rory Sutherland: Actually, it's precisely because my name is attached to something. Samsung cannot afford to make a terrible television, okay, because the cost to their reputation and their ability to charge a premium would outweigh the short term gain of selling televisions to a few gullible people. Once you destroy that feedback loop in the interest of scale--I mean, one of the reasons why banking was so trustworthy in the 1950s, if you take the era of It's a Wonderful Life, okay? Not only did the bank manager know all his customers and all his customers know him, there's a missing link there, which is: All his customers knew each other because he served a local area. And he knew that he only had to cheat one person or maybe two, but I give him the benefit of the doubt with one, but he only had to get caught out cheating two fairly trivial customers and his reputation was toast throughout the town. Game over. Okay?
Now, we don't understand this because economics basically assumes away trust. No one looks at the dynamics of trust and how they really work.
So: One, the value of intermediaries is completely disparaged by economics because you see them as an inefficiency.
In fact, in informational terms, intermediaries serve a very important purpose because there's a difference between 10 people buying from someone once and one person buying 10 times over time. And so the intermediary knows that his long-term interest is served by square-dealing with the customer.
Now, that doesn't apply if you--this was the extraordinary thing that happened, I think, in the Marseille Fish Market where they tried to replace fish dealers with a centralized auction system. Now, the fish dealers opposed this, unsurprisingly. But so did the buyers. The restaurants didn't want it either. They wanted to buy from their guy, repeatedly, in a series of ongoing mutually beneficial exchanges rather than buying centrally something that was certified stake. Or self-skate, rather. You see what I mean?
Russ Roberts: Absolutely. And let's--
Rory Sutherland: Because they realized that actually, over time, relationships have a value. Because, you are essentially seeking to maximize over time the positive-sum game of the relationship. Once you make everything a one-shot transaction, it looks more efficient than an economic model, but actually once you factor in the informational costs, it's not a good idea at all.
Russ Roberts: Well, let's close and talk about advertising in general. I grew up mostly in the 1960s and 1970s as a young person, and we were told, of course, that advertising was wasteful. It was deceptive, and it was a horrible business. It was obviously a way that we tricked people--people like you--tricked others into buying things they didn't need.
And I've never accepted that idea. Certainly, as an economist, I always assumed it had some value, and one of the values, of course, we've talked a lot about, which is the brand, and that creates a trust a worthiness.
But, the other part that you emphasize in your book, which I love, is that--and you alluded to it earlier when talking about the restaurant and the sign and the menu--is that the advertising doesn't just tell people the product exists. It tells us something about the product. It's not just information: it changes the way we experience the product. So, talk about that.
Rory Sutherland: Yeah. So, I mean, in the book, I use this phrase, which I assume someone must've used before, but it appears they haven't, at least I've Googled it, which is--advertising is very, very old. I mean, a flower is effectively a weed with a marketing budget. And the reason that advertising is necessary by plants is that the bee can only discover whether there's a worthwhile supply of nectar available in the plant by actually visiting it, and there is a mechanism that is necessary that delivers a reliable signal of promise of the presence of nectar, of which large petals and a variety of other signaling tools, are merely one form. And so the very fact that advertising is an upfront cost is a reliable indicator of seller confidence, because if the flower wasn't expecting the bees to come back for a second visit, it wouldn't pay it to grow these huge great petals. The investment in petals only make sense in the context of widespread repeat visits.
Actually, before I talk a bit more about that, I mean, I'll give a big shout out and high five to Robert H. Frank for this, which is, I think there's a really important question, which is that looking at economics through the eyes of an engineer is a rather dangerous practice, but actually looking at human economic behavior through the eyes of a naturalist is a much more valuable frame of mind; it's a much more useful paradigm, I think, to understand complex human behavior. And Robert Frank, I think, his book, The Economic Naturalist, was a real eye-opener for me in this because it taught me there's more than one way of looking at these things.
And it's worth noting, by the way, that if you think about it, if you are attempting to create an economics that's like physics, which has universal context-independent, time-unchanged laws--okay, now, that only works in a very narrow field of human activity. If you're designing an aircraft, to some extent, that approach, where the definition of success is not remotely dependent on human perception or human interpretation, okay, then that approach kind of makes sense.
Now, I'd argue that it's an incredibly dangerous approach to try and overlay on anything where humans are involved. For one thing, if you take my point about rising property prices in London, people can respond to the fact that their house price is going up and up and up in London in one of two ways. They can either take the gains and move out, or they can stay put in the hope of future gains but also for fear that if they do move out, they'll never be able to move back. And I think you see basically both opposite behaviors manifested in London in response to, I didn't say, an increase in property and rent prices.
Now, if you genuinely have a stimulus which can lead to opposite behaviors in human beings, then your hope of actually--the very project of economics is fundamentally doomed, I would argue. Because--now, here's an interesting case. Okay. I imagine--I don't know enough about meteorology to make this claim definitively--but if there were some sort of step change in the climate or--what do they call it in complexity theory?--they call it, it goes through a phase transition. Okay. And if something happened about the movement of, for example, the Gulf Stream changed in the Atlantic, right, meteorologists would change their models in response. I think that's probably right, isn't it? Okay. What they previously knew and were confident about would have to change.
And I would argue that any science of economics has to acknowledge the fact that actually, depending on context, circumstances and indeed the habits and the behavior of other people, models actually have to adapt and change all the time simply because, in different circumstances, people behave differently.
And so, it seems to me--I mean, I'm taking a very extreme view here--but I'm not sure that economics isn't trying to model itself on the wrong kind of science entirely. All together, I nearly said, but that could have been an airplane gag, so I'll park that.
Russ Roberts: Well, I happen to agree with you, but except--there's a big 'except' there. So, I accept the fact that economics is wrong to pattern itself after Newtonian physics; I think it's wrong to see itself as a science. And I'm glad you mentioned Robert Frank's book, The Economic Naturalist, which, there's an episode, goes back quite a ways, but you can find it in the archives and we'll put a link up for it to this episode. That books about puzzles. Why are things the way they are? Why is women's dry cleaning more expensive than men's? And there are different answers to that. Some people think women are exploited by market powerful dry-cleaners who are sexist. As an economist, I find that to be an unacceptable answer and I think there are other answers. But, even those other answers, that as blouses are made of different material than men's, they are more prone to damage, they might take longer. There's other answers about the size of the thing that the pressing is done on: It turns out that a woman's blouse is not dry-cleaned in the same way that a man's shirt is. There's a lot of--it gets extremely complicated--
Rory Sutherland: And of course, to men, 90% of their clothes are semi-disposable.
Russ Roberts: Yeah, compared, say, to a woman. Well, there's 1,000 differences, and what the economist tends to home in on, correctly or not, is incentives and the opportunity costs of various choices.
Now, a good economist understands that monetary incentives aren't the only thing that matters. There are pride, ego, reputation. A bad economist just says, 'Well,' as you point out and you give the example in the book, 'Well, we'll just bribe people to do what we want. We'll just lower the price.' Now, we also understand as economists that if I insult the guy who's trying to buy my house, I'd be an idiot if I said, 'Oh, it won't matter because I'll just lower the price and that will compensate for the insult.' A lot of people, when you insult them, just say, 'I'm not buying that house at any price.' And that's not irrational.
Rory Sutherland: I've got a case exactly like that.
Russ Roberts: Of course.
Rory Sutherland: I didn't buy a house because the guy tried to rook me for the fridge.
Russ Roberts: So, it would be foolish to apply economics as a Newtonian science, like in Newtonian physics. At the same time--so it's an art. And it's an art that's complicated by the context, culture, ego, will, all kinds of phenomena, agency, responsibility, pride, reputation. But, it's still a good idea to keep incentives in mind.
So it's foolish to apply economics blindly, but it'd be foolish to not ever look at it, if we define economics as that sort of incentive-driven thing. But I want to come back--
Rory Sutherland: So--
Well, you can respond to that. Go ahead.
Rory Sutherland: No; I mean, there is a vital thing which is what people care about. I just gave a little tip the other day, which I said, 'If you run a small coffee shop, close at 5:00, but hover by the door for three or four minutes. If someone runs up desperate for a coffee, make a big show of unlocking the door and let them in and serve them, and you've got a customer for life.'
Russ Roberts: Yeah, exactly.
Rory Sutherland: Equally, if you allow someone into your shop at two minutes past 5:00 or even two minutes to 5:00 and then say, 'Sorry, we're closed,' you've probably lost someone for the next 10 years. I've boycotted two shops for precisely that reason.
And so, the thing is that humans respond to emotion. Emotion is derived from meaning, and meaning is derived from context as much as it's derived from any kind of objective measure of circumstance. And so, the same thing can be both an act of generosity or an insult.
Bourdieu, the anthropologist, makes this point: that if you give someone a present, it's generally considered to be generous. It can be so generous a present that people are actually wary of accepting it because of the obligation it imposes to reciprocate. Equally, if you return a present, it's not actually a gift, it's a massive insult.
And so, we're so context sensitive in terms of our behavior that the attempt to create, what you might call, a single line mapping between the environment and behavior, seems to me to be doomed.
And yet--I want to clarify once again--what I am saying is that where advertising can be magical is in the same way that a television is magical, which is: TV manufacturers don't bother to produce the whole spectrum of colors because they know that human or higher primate vision is only sensitive to three. We have three types of cone in our eye, and by stimulating those three types of cone at different ratios, you can generate the whole visible spectrum of color in the human head in addition to, by the way, colors that don't exist in physics--of, like, magenta--which don't exist in reality.
And so, since what we care about and what determines our behavior is a product of perception, and since perception, for evolutionary reasons, has not evolved to give us anything like a close approximation of reality or objectivity, then designing things around stories is as important as designing things. If you [?] the story you're attached to something is as important in giving it value as the thing itself. Does that make sense?
Russ Roberts: Yeah. I love that.
Rory Sutherland: I love Raj Chetty's work on what happened in Denmark when they reduced the tax break for pension saving. And, what it revealed is that the majority of people just carried on saving as before. There was a small group of people who didn't, but they were super rich people with financial advisors who, let's face it, didn't need help from the government anyway.
And so understanding those things is, I think, is--understanding that actually objective reality passes through kind of black box process before it starts affecting our behavior. And therefore, understanding, partly through experimentation, partly through theory, what is going on in the black box--which I think is what someone like Uber, as we mentioned earlier, did--is as much a source of value as necessarily trying to have more cabs on the street so they arrive sooner.
And yet strangely, two things are strange, we tend to regard any kind of perceptual hack as cheating--
Russ Roberts: Not real--
Rory Sutherland: It's not real, it's not valid. Okay. The second thing, which is stranger still, is that government in particular will resort to economic incentives or law--i.e, compulsion or bribery or fines--before they'll even try persuasion.
So, what I'm emphatically not--I'm not going to go up anywhere and say incentives don't matter. I mean, the central lesson of economics is that incentives matter and they affect behavior, and I wouldn't for a second want to go into any behavioral change challenge without having incentives as part of my armory. Okay. But at the same time, what's strange is the order in which people of varying expertise are allowed to both define problems and then propose solutions to them.
Now, I always argue that persuasion is the one you should try first; then you should probably try incentives, and then you should try compulsion. But government, by dint of the particular armory it has and the fact that, as Richard Thaler said, I think, 'Washington is essentially a place run by lawyers who occasionally take advice from economists.'
Now, here's a very philosophical way of looking at things. There's a wonderful thing about persuasion, which is: If you have a good reason not to be persuaded, you can ignore persuasion.
Now, I for a long time believed that it's silly--we should encourage people, just as a general behavior, to put their dishwashers, washing machines and tumble dryers on late at night where it produces less carbon than if you did it during the day or in the early evening. Okay? Right. By the way: there's an interesting parallel here, which is the American reluctance to dry their clothes out of doors, even in really hot climates, is a weird one to me, but it has social stigma attached as well--
Russ Roberts: Yes, it does.
Rory Sutherland: I've been told. Yeah. Yeah. So it seems a bit weird to me that people in Phoenix are putting their dump clothing in a tumble dryer in the first place. But let's park that for now. Okay?
Now, interestingly, if you try and use law or incentives, they're going to be a blunt tool. Let's say you vary the price, so you make it very expensive to put your tumble dryer on at, let's say, 6:00 in the evening and it's quite cheap at 1:00 in the morning. Same for the washing machine, same for everything else.
Now, the problem there, which is there will always be a group of people who have perfectly good reasons not to comply--in that case, people who work the night shift. You don't want people leaving their home at 10:00, leaving a tumble dryer on, which might catch fire. Similarly, people who live in an apartment where their neighbors sleep directly below their washing machine won't be making any friends if their washing machine goes into the spin cycle at 3:00 AM, okay? It's a behavior you'd like lots of people to adopt but not people who have a good reason not to.
Now, the second you legislate, unless you legislate in an incredibly complicated way, okay, you're going to unfairly penalize people who have a perfectly good reason not to comply. The second you add that to the price mechanism, so that people who work nights suddenly find themselves paying double to dry their clothes--
Russ Roberts: It's unfair--
Rory Sutherland: it's unfair. Okay?
Now, the glorious thing about persuasion and indeed, social norms is that people who have a good reason not to comply don't get vilified. It's perfectly well accepted and you're free to continue as before.
On the other hand, people who have a very good reason--I try to encourage the tax system to work where you're nudged to donate some of your tax rebate back, because my argument is, it's much easier to get people to actually take less of a windfall than it is to get them to actually write a check for some extra money.
Now, the nice thing about that system, okay, is, let's say if you were to--I don't know what your tax rebate is, but let's say your tax rebate is a few thousand dollars, and your children have left home, and you're a reasonably prosperous tenured professor, as I hope you are. Okay?
Russ Roberts: Sorry, I'm not a tenured professor. But that's okay. I'm a mere Fellow at the Hoover Institution. But I have a good deal.
Rory Sutherland: That's fine. Roughly speaking. If you could have a car sticker where you said, 'I gave 50% of my tax rebate back to,'--in the United Kingdom, it might be the health service, for example, okay--there will be slight pressure on, I think, the wealthier members of society with fewer calls on their money to do that. There will be no pressure on a 25-year-old with three kids to do that.
Russ Roberts: And it would depend--you wouldn't expect to see it on a minivan in the United States.
Rory Sutherland: No, in a battered minivan--you wouldn't expect that person to have rebated a significant amount. Nor would you reasonably demand it of them. But equally, if you just come back from your fifth cruise of the year, I think we might say, 'To be honest, I think Russ could have given a tiny bit of his tax rebate back to something.'
Russ Roberts: Well, first of all, you have to know that in America, the taxes don't work the way they do in the United Kingdom--
Rory Sutherland: No, I know.
Russ Roberts: so it's a little bit trickier. But the significance of your rebate, of your tax refund is a little different.
But I think what I would do in that case, I'd just put my tax return on my car and then people could see not only how much I earned but how much I actually paid so they wouldn't feel so angry about my not giving the rebate.
But the point is--I think the more interesting point you're making is this idea that norms have a flexibility that legislation doesn't. And it's an unappreciated point.
Rory Sutherland: So, I mean, as I said, I suppose you're probably right, which is that the whole book is really about Chestertonian fences in that it's about behaviors which actually may have a value even though it's very difficult to make sense of them when looked at through a very narrow lens. And so in a sense, I suppose, it's a conservative book in that sense, in that it believes that you should pay regard for long established things--
Russ Roberts: Traditions--
Rory Sutherland: even if you don't fully understand them. Don't chop people's appendixes out willy-nilly because there probably is a function, as they later discovered.
Russ Roberts: My guest today has been Rory Sutherland. His book is Alchemy. Rory, thanks for being part of EconTalk.
Rory Sutherland: It's been a pleasure. Thank you very much indeed.