Rory Sutherland — This Thing For Which We Have No Name

"Whatever you think about McDonald's—it's really, really good at not being bad."
“Whatever you think about McDonald’s—it’s really, really good at not being bad.”

I could listen to and chat with Rory Sutherland, the Vice-Chairman of Ogilvy & Mather, for hours. This video, from edge.org, shows you why.

Here are some excerpts.

Game Theory is the Key

… The other problem in overcoming the disproportionate influence of economics is that to understand why conventional economic approaches are wrong—and to understand what is needed to replace them—you possibly don’t have to understand one thing, you have to understand about five or six different things. You probably need a bit of game theory, a bit of evolutionary psychology, a bit of behavioral economics, a bit of complexity theory. Now, the problem then is if you have a case where in order to reject the consensus you need people who know a bit about six different things, then simply by statistical averages, the number of people who appreciate all of those five or six different things is going to be a hell of a lot smaller. And that’s genuinely the case.

There are some good social scientists—Jon Elster in Explaining Social Behavior, for one—who make this point: that unless you really understand game theory, you can’t begin to actually understand human behavior.

We love brands

Whatever you think about McDonald’s—it’s really, really good at not being bad. If you understand satisficing—which would be another concept hugely important to the understanding of human behavior—we think we maximize and we describe our behavior as if we’re maximizing but most of the time we go “I want something that’s pretty good and definitely isn’t awful.” Why do we go to McDonald’s? Is it the best food in town? Probably not. The search cost of finding the best place to eat in town, given that we’ve only got one shot at having a meal in a strange town, would be pretty high. But also when you go into McDonald’s you know you’re not going to be ripped off, you’re almost certainly not going to be ill. By contrast I’ve become ill after eating at Michelin-Starred restaurants quite frequently. Once you understand the perfectly sensible evolutionary instinct to satisfice, then the preference for brands is not irrational at all: I will pay a premium as a form of insurance for the reduced likelihood that this product is appalling. Is that called a minimax approach? Someone help me out here.

Sunk Cost Bias

It’s quite a useful thing. “Sunk cost bias” is a very useful concept. Understanding it is very useful because you can correct it in yourself. One of the single moments where I realized this stuff is really useful is when I first tore up a pair of air tickets. My wife and I had some nonrefundable air tickets to go to Paris for the weekend and the day before we were due to travel, both of us went down with flu and were feeling appalling. We were there packing, thinking, we’ve bought these tickets, they’re nonrefundable, we have to go to Paris. And I suddenly said, “Hold on, we’re now going to spend another 300 or 400 pounds on hotels, art galleries, and everything else in order to feel crap in a hotel room rather than feeling mildly ill at home.” The moment when I tore up those travel tickets that was almost a little Damascus Road experience where I realized some of this thinking is practically useful in everyday life.

Stochastic Tinkering

It is true of quite a lot of progress in human life that businesses, in their blundering way, sometimes discover things before academics do. This is true of the steam engine. People developed steam engines before anybody knew how they worked. It’s true of the jet engine, true of aspirin, and so forth. People discover through trial and error—what Nassim Taleb calls “stochastic tinkering.” People make progress on their own without really understanding how it works. At that point, academics come along, explain how what works works and to some extent take the credit for it. “Teaching birds to fly” is the phrase that Taleb uses.

Loss Aversion

“No one ever got fired for buying IBM” is a wonderful example of understanding loss aversion or “defensive decision making”. The advertising and marketing industry kind of acted as if it knew this stuff—but where we were disgracefully bad is that no one really attempted to sit down and codify it. When I discovered Nudge by Richard Thaler and Cass Sunstein, and the whole other corpus on Behavioral Economics…. when I started discovering there was a whole field of literature about “this thing for which we have no name” …. these powerful forces which no one properly understood—that was incredibly exciting. And the effect of these changes can be an order of magnitude. This is the important thing. Really small interventions can have huge effects.

Progress …

Most of the progress that’s made in business is made through a kind of trial and error where you accidentally stumble on something that’s successful. Of course, the way business works quite well is that things that are unsuccessful get killed off fairly quickly and things which are accidentally successful get invested in; a very crude feedback system but it kind of works, broadly speaking.