Behavioural Science Club Meets: Session 1: Rory Sutherland (Part Two)

Rory Sutherland, the Vice Chairman of Ogilvy and the author of Alchemy: The Surprising Power of Ideas That Don’t Make Sense joined us on 18th July 2020 as the very first guest of the Behavioural Science Club. What was a joyful and exciting event ran to nearly two hours, as Rory expounded on all matters and for this reason, the talk has been cut into several bite-sized articles (Part One is here https://louisebehsciclub.medium.com/behavioural-science-club-meets-session-1-rory-sutherland-part-one-fca88235ad3e )

What’s so interesting in direct marketing is you very quickly realise that in order to sell things to people, and in order to innovate, and in order to get people to adopt new products, the battle is as much psychological as it is technological and I always argue that, in the whole process of innovation and improvement the component of innovation that gets the lowest level of attention is really marketing that gets someone to stop doing something they did before. I would make a case that there are businesses where unless you actually include psychology in marketing there are insufficient reasons to explain their success.

Starbucks would be an interesting case in point. If you looked at the US coffee market in 1990, Starbucks got started in the late eighties, early nineties but it got big roughly in 1992-93. If you’d gone around then asking Americans would they pay three dollars for a cup of coffee, 95 per cent of them would have said no and the other five per cent of them would have said no, but in even ruder terms! If you looked at what people paid for coffee then, you would probably have seen a kind of normal distribution, a bell curve that suggested yes, there were some weirdos that would spend three dollars on a coffee, but it was in really exclusive hotels and it was right at the fringes of what people would do. You would have seen the mainstream coffee market was probably around the $1.50 mark or something back then, so there’s no evidence to suggest that that market existed in the United States before 1990 and what I think changes everything is that, if you have a store that only sells coffee what we’ll pay is fundamentally different versus when we’re buying coffee from a place that also sells food.”

Nespresso, Starbucks Dyson, Zoom, Uber; there are a whole host of new and hugely successful products where their success, in reality, is more because they stumbled on a psychological quirk of human nature. Uber’s great quirk is the fact that people find it inordinately less painful waiting for a taxi if they can see the taxi approaching on them on the map and that actually it’s not the duration that hurts us about a wait, it’s uncertainty. I call it a ‘quirk’ and not a ‘bias’ by the way. I think ‘quirk’ is a much better word because bias presumes that economic theory is right and human behaviour is wrong. That’s a very, very unsafe assumption because the economic theory doesn’t understand the wider context in which people are operating or the evolutionary forces that led to particular preferences. They’re quirks because we don’t even expect them in ourselves in many cases and yes, it’s reframing biases, but in a way that the word bias is automatically pejorative and I think it’s also automatically defensive when used by economists because what you’re doing is you’re assuming that the economic model is correct and that any deviation from it is something to be corrected. I would argue simply that any deviation from the economic model that’s widespread is something that needs to be understood and that it may suggest a necessity to refine the model.

For example, the ergodicity area of inquiry in mathematics which Ole Peters is leading in London, argues that if you look at expectation and probability correctly, ‘prospect theory’, ‘loss aversion’, even ‘sunk-cost bias’ is not irrational. So it’s completely wrong to call them a ‘bias’. And you might call them an ‘apparent anomaly’, or you could call them something a bit silly, like a ‘quirk’, but actually, if evolution’s right and economics is wrong, using the word ‘bias’ to describe human behaviour when really the bias lies in the economic model because it’s got its maths wrong, that’s a very dangerous misuse of language. Mental accounting makes sense and apportioning of separate things also makes sense in a non-ergodic environment. I’d long suspected that I’m a bit odd on this one because I think the phrase ‘sunk-cost bias’ is useful and I think the phrase ‘sunk-cost effect’ is certainly useful because on one or two occasions I’ve found myself on the point of doing something stupid because of sunk-cost bias.

An example of this is before Covid, I had booked non-refundable air tickets and the day before we were ill with flu. We were planning to go anyway, because we bought the goddamn tickets and I said, “hold on a second! We’re going to spend money on hotels, museum visits and all the while we will be less happy than if we were merely staying at home overdosing on Lemsip and wrapping up in a continental quilt!” In evolutionary terms and in non-ergodic terms there are reasons why continuing to invest in something that’s non-recoverable from your past makes disproportionate success. This should be considered an equal debate between good mathematics, an evolutionary understanding and observation of behaviour, where we don’t go into this battle presuming that one of them’s more intelligent than the other. There’s often a phrase among evolutionary psychologists that evolution is cleverer than all of us and the product of a few million years of embedded wisdom shouldn’t be discarded that readily.

I was at a government meeting and they said “how do we encourage young people to get more pensions?” and I told them there were lots of ways to make pensions less repellent to young people, not least Benatzi and Richard Thaler’s idea of the ‘Save More Tomorrow’ pension (https://www.jstor.org/stable/10.1086/380085) which would very successfully for young people who are cash-constrained and something that reduces future gains rather than reducing present income is going to have more appeal. I think that for young people you need to make pensions recoverable because you’d feel an idiot if you’re unable to go on the best holiday of your life with your mates while you had twenty or thirty thousand pounds sitting in a pension which you weren’t going to see for another thirty-five years. Or worse still, you couldn’t repair your car and therefore you couldn’t get to work because you had twenty thousand pounds in a pension, that would be stupid. So you need to make the first ten thousand pounds of a pension drawdown-able at any point for the first ten years, that’s a really significant point which no one spotted.

But my final advice to the cabinet office was not to expect people in their twenties to invest in pensions at the rate (the government) think is rational, because at the age of twenty to thirty-five maybe, people’s prime priority is finding a high-quality life partner okay in Darwinian terms not optimizing long-term savings. I said, “now I don’t want to be rude, but I’m willing to bet, and I’ve never been on Tinder because I was married before it existed, but I’m pretty confident not many people start their profile by describing their pension provision”. As I once said, if rationality were all that valuable in evolutionary terms, accountants would be sexy, and for some reason, in evolution, we don’t find rationality and sensibleness entirely attractive in the opposite sex. If we did male strippers would dress as accountants and not firemen. If you’re trying to optimize your attractiveness, unless you’re trying to date someone who’s really weird, a big pension has very little appeal. And if you went on a date with someone who said, “well first, before I talk about you, let me talk about my 401K”, I think your reaction would be, “where did I leave them a coat?” to be absolutely honest. So you have to factor in [that]we have different priorities at different life stages.”

--

--

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store