Transcript for:
Understanding Behavioral Economics in Marketing

Now, I don't know how many people noticed, but about three weeks ago, a man called Richard Thaler won the Nobel Prize for Economics. I was glad that the Nobel Institute had recognised him, because we recognised him about nine years earlier, when we spotted his work in developing what's effectively behavioural economics, which is a very strange form of economics, which actually is economics which observes what people actually do in practice, as distinct from... developing elaborate mathematical formulae for what they should do in a completely imaginary parallel universe which doesn't exist.

So it's basically proper economics. It's ridiculous. As brilliantly Charlie Munger, I think it's Warren Buffett's business partner, said, if economics isn't behavioral, I don't know what the hell is.

The problem you face as marketers, and part of the point of this talk is to kind of explain why your finance department hates you. And the problem you face is that everybody in other parts of your business, particularly in operations in finance, everybody believes that what they do is a science and their job is to be completely rational. Now, they're not necessarily wrong within what they do. And the distinction, I don't know if anybody remembers the scene from the film Airplane, I meant to include the film this evening, where there's a pilot taken severely ill, and the only person on the plane who can fly the plane is one of the passengers, who's a deeply damaged...

Korean War veteran. And he's taking over controls of the plane. It's the job of air traffic control on the ground to actually talk him down safely onto the runway of the destination airport.

Unfortunately, the guy who's running air traffic controller's next military guy. And there's a wonderful line of dialogue, which is, shouldn't we turn on the runway lights? To which he replies, no.

That's exactly what they'll be expecting us to do. Now, there's actually, funnily enough, behind the joke, there's a deeply serious point, OK? There are areas of life where complete logic, where ignoring people, their subjectivity, their whims, their peculiarities, and simply developing a...

objective measures of reality and working on those makes perfect sense. I think logistics is one area. If you're doing finance, it's probably another. However, there are large areas of life where that's the worst thing you can do.

And the point about that joke is it's the distinction between how to run air traffic control and how to do military strategy. I don't know how many people know this, but if you do military strategy, the can't be is logical and efficient. You're thinking, why on earth is that? The answer is because if you do that, that's exactly what they're expecting you to do.

So there's actually probably an evolutionary reason why humans can't be completely logical and consistent, which is anybody who is logical and consistent would be predictable and therefore would be a sucker, a complete mug. You'd walk into every trap that was laid for you. So military strategy is one of those areas.

I'd also argue, for example, R&D. I'd argue marketing. marketing, I'd argue HR, are business disciplines which should stop sucking up to the finance department by pretending to be as logical as they are and simply say, what we do, it's different. And what I'll tell you here is several ways in which it's different.

I founded Ogilvy Change as a behavioural science specialism within Ogilvy. And one of the things we look for is what we call innovation. Now, I mentioned R&D and I mentioned marketing.

And intriguingly, in many ways, they're the same thing. You're thinking, how on earth can R&D and marketing be the same thing? Let me explain. There are two ways you can create new economic value. You can either find out what people want and work out a clever way of delivering it to them, or you can work out what you can deliver and find a clever way of making people want it.

And the economic value created by those two things, although they may be opposite sides of the same coin, the economic value is just as great either way. And what we talk about when we talk about innovation, you may know that Google, Alphabet as it's now called, the holding company, has a thing called Alphabet X. And they look for things called moonshots, where you take something and you change it by an order of magnitude. You make it ten times bigger.

faster, 10 times cheaper, 10 times safer. Their argument, by the way, the reason that the driverless car sits within alphabet X is because they believe that driverless car technology will reduce road fatalities by 90%. They call it a moonshot because the aim of the driverless car is to make the highways of the world ten times safer. Now, the only point I'd make is that there are areas where there is still room for moonshots.

It's getting harder and harder. It's very difficult to make a train ten times faster, to make an aircraft ten times faster. Improving objective reality by a factor of 10, you start to run up against the laws of physics.

My contention is that actually improving subjective experience by an order of magnitude might be a whole lot easier. Now I don't know if anybody's seen my TED talks. I achieved a kind of undeserved weird fame because of my suggestion back a few years ago.

When the UK spent six billion pounds building high speed rail tracks from St Pancras Station, to the coast of Kent to complete the high-speed line from Paris to London. I simply said, what's the creative opportunity cost here? You're trying to improve a journey by making it shorter.

In other words, by the objective use of engineering. What if you tried to make it 10 times more enjoyable? And I said, by the way, most of those trains still do not have Wi-Fi on them about 15 years later. I said, if you spent 1% of that money putting really good Wi-Fi on the trains, my contention is it would make more difference than reducing the journey time by 40 minutes at a fraction of the cost. And then there was the craziest suggestion.

Actually, if you've got a budget of 6 billion... You could just spend £1 billion hiring all of the world's top male and female supermodels, getting to walk up and down the train handing out free Chateau Petrus to all the passengers. You'd have saved yourself £5 billion and people would ask for the trains to be slowed down. And the strangest thing here is that psychological innovation, no one ever asks for it. It's automatically assumed as soon as government has a problem, if business has a problem, they go to McKinsey.

They'll go to one of the large consulting firms. They'll go to economists. They'll go to engineers. They'll go to scientists. They won't try and solve the problem psychologically until everything else has been tried and failed.

And yet my contention is for this very reason, psychological problems are easy. In that agency, I think, you know, and that also applies in a marketing department. In your marketing department, my hunch is that you have the mix of talent and consumer insight, which could solve ten times as many problems as the ones you're typically asked to solve. And being a marketer now, because finance kind of hates you, it's a bit like running a general hospital but you've got a sign outside that says cosmetic surgery. People assume not that you are capable of solving problems from the get-go, they see you as a place to add a little bit of little bit of magic dust to the important work that's already been done elsewhere.

There's a reason why they hate you, by the way. They've all done Economics 101. They haven't done behavioral economics. They've done, they've gone to business school, they've got an MBA, and part of that MBA is having to do with economics 101. How many of you did an economics course, by the way? A few of you have, yeah.

And what I think you realise as marketers is this is highly attractive and very beguiling because it's persuasive, but it's also complete crap. Because the assumption of economics, in order to make it look mathematically neat, they assume that every decision, every purchase, every exchange arises as a stand-alone individual utility-optimising transaction because... between two people in a state of perfect information and perfect trust. Now, because their models of the world assume perfect information and perfect trust, they naturally see marketing as an inefficiency, because in their weird fantasy model of the world, marketing wouldn't need to exist.

Everybody would already know exactly what they wanted to buy and how much they wanted to buy. they're prepared to pay for it. Now the good news for us is, one, those conditions never exist, okay, in reality. Two, even if you could create those conditions, our brains did not evolve to make decisions in that way.

We make decisions... decisions, we perceive the world in very, very different ways. And that's precisely because of that point I've made, which is that we've never, you know, in most of our evolutionary history, we never had more than 10% of the information we needed to make a perfect decision.

And our evolutionary instincts cause us to make a pretty reliable, quick, straightforward and non-disastrous decision. And all of you are descended from people who successfully did that up until the point in which they reproduced. Okay?

Now. this is the simple thing we can bring to it which is economics doesn't allow for context, it doesn't allow for trust, it doesn't understand perspective. It just assumes if you think about it, if you assume a world of perfect information, there's no context there's no perspective. everything is just what it is okay you know that when you buy a car in other words you wouldn't be interested in the brand you wouldn't be interested in the person selling you the car all you'd be interested in is the objective specifications of the car and that would be adequate information for the purposes of buying a car now What I find fascinating is that once you change perspective, in particular once you look at a consumer perspective, if you look at something through the eyes of the person themselves rather than looking at it through the eyes of a finance director, some things become very easy to solve. This is just an example I took to the Department for Transport in the UK.

We're currently in the UK spending about £60-70 billion on another high-speed rail line between London and Birmingham and Manchester, which will reduce the journey time to Manchester probably from about 2 hours 10 minutes, as it is at the present, to about 1 hour and 30, 1 hour 20. And I said, well, hold on a second. I said, why are you doing that? And they said, we want to reduce journey time and we want to increase capacity. I said, I can do that for you actually in six weeks and it'll cost about £200,000.

And they laughed. I said, well, wait a second. Every time I travel to Manchester, I buy what's called an advance ticket, because otherwise it costs a million pounds. So I book a ticket on a specific train, and I pay for it. And because I'm terrified of missing that train, because...

because all your money gets pissed up the wall if you miss the train, I turn up about 45 minutes early, leaving an insanely large margin of error to get to the station. In that 45 minutes, two earlier trains leave for Manchester, one five minutes after I've arrived, one 25 minutes after I've arrived. I'm not allowed to get on those.

I have to get on the one 45 minutes after I've arrived. I said, all you need is an app that just says, I'm here now at the station, and Virgin Trains, who are the only trains that are open, to operate the train to Manchester, say, pay five quid and you can actually have seat 30 in coach G, which is empty, and you can leave in five minutes rather than 45. You've now reduced my journey time by 40 minutes. You've also increased the capacity of the network because I don't know how much you know about yield management, but if you're an airline or a train, you should always allow people who turn up early to travel in the earlier seats because it gives you a second chance to sell the seat that they've vacated to someone who arrives later. So by moving people onto...

into available earlier capacity on earlier trains, you basically create more capacity. EasyJet do this. If they have three flights to London in an evening and you turn up a bit early, they'll let you get on the earlier one. Okay? So you can achieve exactly that same end without any engineering works at all with an app for £200,000.

All you've got to do is change the perspective through which you look at the problem. And one of the simplest things we can do, one of the great problems of business is people look at maths and as soon as anything's in numerical form, you've won the argument. Have you noticed that? That basically, if you're there as a marketer trying to use words and some other bastard...

turns up and they've got a spreadsheet, you've basically lost, haven't you? Right? Because the bastard with the spreadsheet always wins. The other thing is that if anybody suggests cost cutting, that's the easiest argument in business.

suggest spending more on anything. It involves months and months of justification. But cost-cutting, which can be just as dangerous as spending too much, is generally passed through on the not.

Because finance people trust savings, but they don't trust an increase in revenue, essentially. Now, a really interesting point, by the way, is that whenever you add numbers together, or you multiply numbers, you lose information. Because the only place where 1 times 7 equals 7 times 1 is in maths. When you're generally compiling data, most of the time that isn't true.

Let me just explain this. I've got a theory that Amazon as a company is hugely overvalued. And I think, by the way, Amazon currently has about 1% of American retail spend.

Walmart has about 7 or 8, yet Amazon is several times more valuable than Walmart. Despite the fact that Walmart is more efficient. Walmart's more efficient partly because when people shop at Walmart, they take the shit home themselves at their own cost, okay? They don't demand a van follows them home. But there's another reason which I don't think anybody's noticed, which is Amazon is a very, very good way for eight people to buy one thing, but I don't think it's a good way for one person to buy eight things.

And quite a lot of human retail activity involves one person buying many things. Now, once you look at aggregate sales, those two things are exactly the same. And there are loads and loads of areas where you can look at this question and go, hold on a second, train overcrowding. I've talked also to a railway company here. I said, you talk about train overcrowding, but your model of train overcrowding assumes that 10 people who have to stand 10% of the time are the same level of problem as one person who has to stand 100% of the time.

But they're not the same, are they? And there are loads and loads of cases in which this idea that things are commutative, that 1 times 7 equals 7 times 1, causes complete confusion. And yet, because it's maths, no one ever questions it.

If you want to solve train over crash... you've got to stand 10% of the time on your commute. That kind of shit happens.

We can cope with that, right? It's just a bit of a bummer. But it's not a serious problem worthy of expensive engineering. Take the people who've got annual season tickets and give them 21st class upgrades. upgrades a year that they can use, and also reserve a couple of carriages occasionally for annual season ticket holders only.

If you can solve the problem for those worst affected, you've basically solved the problem. Now, because they assume that a person standing is a person standing, they don't distinguish between the two, the only solution to train overcrowding involves billions spent on more trains, longer trains, lengthening platforms, running more frequent services, upgrading the signalling. You can solve the problem psychologically.

Nobody ever tries. Partly because it's seen as cheating. And one of the strangest things in medicine, the most powerful single thing in medicine, with a possible exception of antibiotics, is the placebo effect. But most scientists spend their time trying to minimise it, not trying to utilise it.

Because again, making someone better through psychological means is seen as cheating. No, you have to poison them. That's how medicine works. So I'm going to talk very quickly about three things which mean that one of the problems I think that's happening is as marketing becomes more and more obsessed with justifying its own existence, we're suffering from a kind of Stockholm syndrome where we're taking on the characteristics of our own abusers, where we're becoming like the finance function and going, it's OK, this is all terribly logical, which will be fine, except people aren't. Now, just to give you problem number one, which I think is partly insurmountable, if you...

If you want to, I mean, the weird thing about business is no one ever gets fired for pretending, for coming up with a logical answer. Now, logic doesn't mean, logical answer doesn't mean a good answer. It means an answer that's easy to defend. Okay? The brilliant, brilliant physicist, German physicist, who said, you're not thinking, you're merely being logical.

Okay? Logic is mainly used in business to provide a kind of alibi. by for your decision making so that you can't be fired if something goes wrong as a consequence of it.

It's much, much easier to get fired for being illogical than it is for being unimaginative. But psychophysics is the first one. This is why, effectively, it's impossible to be completely illogical as a marketer. And the simple reason is we don't see the world as it really is. Okay?

Simple as that. Now, because humans are at the top of the Kung Fu tree, we tend to assume we have the best visual and sensory mechanisms of any animal on the planet. Well, in many respects, our actual eyesight's terrible, by the way. You know, our sense of smell is appalling.

But nonetheless, because we're at the top of the tree, we tend to assume that what evolution did was to give us sensory mechanisms which gave us an ever closer approximation of reality. But the problem with that is that evolution doesn't give a shit about accuracy. It only cares about fitness.

And if evolution can distort reality and gain a survival advantage, that's exactly what it does. And it does it all the time. Okay?

So... This is the problem. Conventional science, by which I mean science in which humans aren't involved, basically said we'll ignore all human subjectivity, we'll ignore how humans perceive the world. If we want to build a bridge, the only thing that matters is does the bridge stand up?

And we'll develop measures of strength and tensile strength and all those things that will enable us to actually produce functioning working arches. And quite rightly, science, cosmology, etc., made a huge amount of progress by ignoring what people saw and how people perceived and by developing really good objective metrics of reality. And that's a great thing to do if you're an engineer or a cosmologist, because the only thing that matters is, does the bridge stand up?

Now, you'd assume that the same science would be used in designing a television, wouldn't you? Do you know the strangest thing about a television? It's a completely different sort of science because it's species specific. TVs are actually designed for humans. Now when you go into a Samsung shop it doesn't say optimised for higher primates on it.

that would be silly because nobody else buys televisions, that's completely true. Okay. Let me explain.

This TV, this screen here, is a complete hack. Okay? When you see, I'll give you an example.

This is just a point. Okay. When you see yellow on that screen, there are no yellow photons being produced.

The red, the green, and the blue, those are kind of telling the truth, because this screen is composed of billions and millions of pixels, each one of which can produce red and or green and or blue. Why just three? Colour mixing, where when the green and the red overlap, you get yellow, not a physical phenomenon. It's a biological one.

You're getting weirded out here, aren't you? If your dog or your cat or your pet parrot looked at that screen, looked at your television at home and saw a picture of a jungle, it wouldn't go, wow, that's a jungle just like the one I dream of flying in. It would say, that picture...

which will look shit. Okay? Now, the reason this works for humans is humans have three cones in their eyes. Okay? And that shows, this is kind of the light spectrum, and that shows the blue cones, as you might call them, are highly sensitised to light on the blue spectrum.

The red cones are mostly sensitive to red, but they have a strange little bump over there, complicated reasons. And assuming you're not red-green colour-blind, you also have green cones, which are sensitive to the middle of the spectrum. And for the relative strength of input of each of those three cones, your brain infers... what colour you're seeing.

Now, here's the interesting thing, OK? When you see yellow on that screen, there are no yellow photons. There are yellow photons.

They exist. They're on the spectrum from ultraviolet to infrared. There's yellow.

What your brain's seeing is a mixture of red and green, and it goes, ooh, I'm getting a mixture of red and green there. You can just see where the yellow is underneath. Well, OK, if I'm getting red and green, that's normally the sensation I experience when I see something that's yellow, so your brain produces yellow.

But the TV is completely specific to higher apes. If you wanted to produce a TV for a different species, you'd have to produce a completely different TV. Marketing is like that, OK?

There's no point in marketing things as if... you're building a bridge, okay, by using some sort of logical thing about, you know, well, what is the real price? All that matters is how do they perceive the price? Because that's all they can act on.

And if perception doesn't map to reality... perfectly, you might be researching completely the wrong thing. Let me just go a bit further, okay?

That's what we might see on a TV screen if it was made for a different species. That would particularly be a bird's TV because birds can detect ultraviolet. Weirder still, by the way, purple doesn't exist.

Do you know that? There are no purple photons. Doesn't exist on the light spectrum. It's entirely a psychological creation. So what happens is that if you get red and blue...

Now, normally what the brain should do is say, well, it's halfway between red and blue, so it must be green. I'm getting a lot of stimulus in the red. I'm getting quite a bit in the blue. Halfway between red and blue is green. Okay?

But you've also got a green sensor in the middle. And the green sensor, because it's picking up red and blue, isn't picking up anything at all. So the brain, I mean your brain could go fuzzy and say system error.

Because in one sense, in a physical sense, there are no purple photons, purple doesn't exist. It's entirely created in your head. What the brain does is it essentially has invented a colour purple.

which essentially represents not green. Okay? It's a colour to represent the weird, unexplained absence of green. But in physics, it doesn't exist.

So this is my point here, which is that... So most of what's done, and this worries me about big data, it assumes that you have objective reality on the left, humans see it, and they behave in that way. If they see that reality, they behave in that way. If they see that reality, they behave in that way.

It's a kind of perfect, neat mapping. But the problem is human perception is so weird, it doesn't work like that at all. You can have two things which are identical that look different. You remember the argument about that dress, right?

And nobody... could agree on what colour it was, and that was because the brain was compensating for the context in which the dress was displayed, the background colour. And different people's brains seemed to compensate in different ways.

The same thing, two different things, can produce an identical behaviour, just as there are colours we can't see and can't distinguish between. And your behaviour, you know, things can be produced in the head which don't exist in reality at all. Now, I know this sounds really weird and geeky and...

so forth. But it's a really important point because most of what people are trying to do when they develop all these kind of regression algorithms and they're looking at big data is they go, what happens when you drop the price? And they drop the price from £20 to £15.

They go, ah, look, there's new behaviour. The problem is if you are looking at an objective £15, the human doesn't see an objective £15. £15 is not the same price as £15 brackets reduced from £29.99.

£15 if you pay for it on a contactless card feels about 15% cheaper than if you pay for it with chip and PIN. If you have to pay for it with cash, it'll feel more expensive. So the idea that objective reality, i.e. price, maps onto behaviour without any intermediating sort of translation or context is basically a false assumption.

So we've got to be really, really careful about this stuff. So I'll cruise on very quickly just to show you how weird this effect is. Because obviously, you know, in some respects, you know, reality and perception, you know, they aren't completely randomly connected, obviously. You know, otherwise we live in a kind of surreal dream world.

And in some respects... they're similar enough to deceive us that what we see is objectively true. Actually, what's going on is much weirder than that. Wine tastes better when you pour it from a heavier bottle.

Painkillers are more effective if they're branded. Painkillers are more effective if you tell people they're expensive. Chocolate tastes better when you pour it from a heavier bottle.

You can't sweeter if the blocks of it are round rather than if they're square. Cadbury's got into a lot of trouble. Everybody claimed they'd changed their formulation. They just changed the shape of the blocks and the bar.

Your car drives better after you've had it cleaned. I don't just mean it's clean. it actually feels quieter, smoother, just a better car altogether. And that's because, weirdest of all, human perception is leaky. We think we can separate what we see from what we hear, from what we smell, from what we taste.

Nope, can't do it at all. I'm one of the few people, I really complain about the fact that you can't get expensive aspirin anymore. It's all this bloody generic crap, OK? But I haven't got a 79p headache, I've got a £3.90 headache, OK?

Secondly, if you want to get economists even more up, upset, you can increase demand by putting the price up. That economic assumption of everybody in economics that if something isn't selling, you drop the price. Well, that may well work. It works more often than putting the price up.

But it's a hell of a lot more costly. By the way, in price, 50% extra free seems a lot better value than 33% off, despite the fact that they're notionally the same. The way in which you give someone something, whether it's a bonus.

or a bribe, in economic terms, is indistinguishable. There's no difference between, I'll give you this if you buy that, and to thank you for buying that, I'm giving you this. The way humans perceive it is totally different. And so, if you just watch this film, you'll see just how weird the way the black box inside our head effectively represents all those things, just as purple is entirely created, basically, to fill a space in our head. This is what happens when what you see and what you hear conflict.

At any one moment, we are being bombarded by sensory information. Our brains do a remarkable job of making sense of it all. It seems easy enough to separate the sounds we hear from the sights we see. But there is one illusion that reveals this isn't always the case.

Baa, baa, baa. Have a look at this. What do you hear? Baa, baa, baa.

Baa, baa, baa. But look what happens when we change the picture. And yet, the sound hasn't changed. In every clip, you are only ever hearing Baa with a B.

It's an illusion known as the McGurk Effect. Take another look. Concentrate first on the right of the screen.

Now to the left of the screen. The illusion occurs because what you are seeing clashes with what you are hearing. In the illusion, what we see overrides what we hear.

So the mouth movements we see as we look at a face can actually... actually influence what we believe we're hearing. If we close our eyes, we actually hear the sound as it is.

If we open our eyes, we actually see how the mouth movements can influence what we're Now, in evolutionary terms, what matters, if you think about it, is having a decisive view of the world on which you can act. And so it's a bit like error correction in IT. We're hearing bar, but we're seeing far. Brain just goes beyond our control or our awareness. It just goes, well, it's more likely, I'm terribly sorry, that's probably me, is it?

I'm going to turn it off. That's not sorry. off, I'm so sorry.

Exactly. But I'll... What I'll...

There we are. That went off. I'll take that one just in case.

What actually happens, you see, is that it goes, it's more likely I've misheard than I've misseen. So I'll just overwrite that B sound with an F. And the brain's doing that all the time.

it looks at anything, it's effectively going, I'm just going to make a usable, decisive view of this thing. Contrast is much more important in survival, detecting a contrast between colours than actually having an absolute measure for colours. So you see those...

alternating spirals of green and blue, they're the same colour. They're both green. Okay?

They're actually both exactly the same colour. Now, they're the green that you see at the far right. But what the brain does is it exaggerates the difference in one direction or the other, because if you're trying to spot a predator or to find some prey, noticing a small difference and exaggerating it is much more important to our survival than actually carrying around a Pantone reference book in our heads.

If you look at this thing, it looks like a white thing hinged to a grey thing. Right? Now, if you hold up your fingers, bring them closer, two or three fingers, bring them closer to your eyes, so you cover up the join between the top and the bottom, what you'll see is that the top and the bottom of the thing are objectively exactly the same colour. They're exactly the same colour on the screen.

The difference is produced in your head. Now, in the same way, our perception of price is completely relative. If you've got an espresso machine, if you had to buy an espresso coffee in a jar like this, Nescafe, okay, for an equivalent kind of caffeine dosage, a jar of Nespresso coffee, should such a thing exist, will cost about 45 pounds, okay? And you look at that price, you go, that is totally insane, right?

But we don't know what an individual Nescafe costs. So when we put a 29p pod into our Nespresso machine, our frame of reference isn't Nescafe, it's Starbucks, or it's your local coffee shop. And you think, well, 29p for an Nespresso here, that would cost me two pounds 30. at Starbucks, this machine's practically making me money. Okay.

Rolls-Royce and Maserati stopped exhibiting their cars at car shows because they're expensive cars. So they started exhibiting them at yacht and aircraft shows. If you've been looking at Learjets all afternoon, a £300,000 car is an impulse buy. Okay. That's like putting the sweets next to the counter.

Right. I've decided not to buy a Learjet this year. I'll have a couple of those. right? Now the Greeks understood this it's a fascinating thing there is not a single straight line in the Parthenon and the floor bows upwards the columns are fatter in the middle than at the top and the bottom I'm sorry I turned that off sorry it was really annoying me sorry I'll speak to her if it happens again I think that's gone off now you the floor curves outwards it's not a pure rectangle that's because it's not designed to be perfect it's designed to look perfect so it counterbalances the distortions of human vision and actually creates something that looks perfect the Rolls Royce radiator grill does the same thing with the vertical spars they're actually it's called entasis they're fatter in the middle than at the top or the bottom in order to look parallel the chilli loads and loads of of plants are essentially hacking our perception.

There's nothing hot about chili. There's nothing cool about menthol. Yet if you go all the way around the world to people who speak different languages, who've never encountered chili before or menthol before, they'll describe menthol as cool and chili as hot.

Now the chili didn't want mammals to eat it. It likes parrots eating it because they actually spread the seeds further and the seeds germinate. It doesn't want rodents and other things to eat it.

Produced as a chemical called... capsaicin, or capsaicin, which creates the illusion of heat because it triggers sensors in our skin and sensors in our mouths, which are normally triggered by temperatures of 109 degrees or above, and this chemical effectively just hacks them. And so, here you have this fantastic thing where nature, for millions of years, has essentially been going, I can't actually produce a hot fruit, because that would be really, really difficult. But I don't need to. I don't need to produce an objectively hot fruit.

I just need to produce a fruit that feels hot. Okay? Now, that's the point, which is that there's the thing and there's the perception of the thing. And the only thing that matters in behavior is the perception of the thing, and the connection between the perception of the thing and the thing itself is not exact. This is the Austrian school economist and Austrian economist Ludwig...

von Mises, who makes this point. He is explicit. The Austrians are unusual.

Unlike conventional economists, Austrian school economists believe that value is entirely subjective, and therefore they're very well disposed to marketing and advertising. because they understand the value of it. Because his argument here, by the man who sweeps the floor, he means advertising and marketing.

There's the food itself, the objective thing, and there's the context in which it's consumed. If you have a Michelin-starred meal, but it's in a restaurant that smells slightly of sewage, no one will like the food. Okay?

And so there is no actual perceived objective thing in the human mind because everything you actually perceive is mediated by context and... environment and setting. Everything that's said is affected by who says it. Paying attention to something changes the nature of the thing.

And the kind of attention we pay to something changes the way we look at the thing. So the idea that you can have this kind of completely objective scientific marketing thing as though humans were effectively no different from weighing scales and light meters. is a complete false start. So let me just give an example of this.

I always wanted to prove that point by saying, what if you could take a brilliant product, which objectively is a fantastic product, and market it in a terrible way? Find a way, literally, and I thought, well, no one's going to agree to an experiment like that, are they? A brilliant product, but just call it the wrong thing.

There is one example. No one here from Philips, is there? There is, excellent. The Philips Air Fryer, I think, is one of the best products you've ever made, but you made the mistake of...

of calling it an air fryer, okay? Because, of course, it doesn't fry the food. It cooks the food as though it were fried, but it uses no fat at all.

Now, I asked, what's the solution to this? And someone said, it's really simple. If, you know, if you named that product in French and called it the air sauteurs, okay, people would have been queuing around the blocks. But by putting the word fryer in something, the very people who normally buy it go, well, people like us don't really eat fried food, do we, dear?

And it sits, by the way, in most of the retail outlets, it sits now. next to the deep fat fryers where the kind of people who'd want to buy it won't even look in the first place. But here's a much more extreme case of a case where however good the product is objectively, if you market it badly, it's worthless. Okay?

And it was magically performed by two Melbourne comedians. They get arguably the hottest musical act in the world, and then they market him terribly. And this is what happened.

Hello. Hi. Whee! Peep shows.

They have a pretty bad name. Normally associated with lewd content, but by definition, they don't have to be. So in an attempt to change that, we took one of the world's biggest performing artists, kept all his clothes on, and set up an Ed Sheeran peep show.

Would any... Does anyone dare to believe what was written outside and come in to our very dodgy looking venue? Oh you feel me?

I don't really know what's going on today. That was fair enough because we dressed Hamish as a fairly shady looking spruiker in charge of getting customers. Got your Sheeran? Anyone some Sheeran?

Alright, I can hear them. Do you think we'll get anyone? I don't think we'll get anyone. It's gonna be a brave soul.

I wouldn't come into... If there was a dude with a beard like that, I'd say I'd come in and see this. He was right. This was going to be tough. You want to peep at Ed Sheeran for two bucks?

Insurance? Do you want to peep at Ed Sheeran? You're lost. What do you reckon, big fella? Got Ed Sheeran in here.

Beautiful ginger hair man. Sitting on a stool. What do you reckon? Two bucks. Got Ed Sheeran.

Two bucks for a piece. Think about it. It's actually pretty good value. Despite trying, we had a total lack of interest for over 50 minutes. It's been some time.

We should have got you a more comfy chair, I think. Yeah, I'm alright. I'm alright.

You've only got a shearing you need in there, two bucks. What is it? All the end shearing you need.

What's what? End shearing. Alright. Is it a singer? Yeah?

Is that a yes? No? I think one of the...

One of the big problems is people think ensuring is a code word for a new drug. How's it going, you guys like ensuring? Two bucks, two bucks for a 30 second peep. What, like are they just saying no?

Yep. Cousin, you're right. Dirt sheet peep, dirt sheet peep, here we go, two bucks. Do you reckon we're pricing it too high and that's why we're not getting people coming in? That's pretty fair.

Here we go boys, it's a Friday, get you a cheering peep show, two bucks, sitting on a stool, play you a song. If someone actually does think it's a peep show, I like peeping. ...to give you the go-ahead to take off all your clothes, are you willing to do that?

Uh, I've been drinking a lot of beer recently. Oh, right. Yeah.

You know it? A couple of months ago, maybe, but yeah, I'm, uh... I meant shape, it's just the shape of a potato. Two hours... and Hamish was getting more desperate.

Ed Sheeran is literally sitting in there on the stage waiting for your two dollars. We were feeling it as well, but just when we thought this had been a giant waste of everyone's time. You guys like Ed Sheeran?

You like Ed Sheeran? Two bucks? He just got him sitting on stage in there. Oh, two bucks.

It's gonna cost you two bucks. You only get 30 seconds though. You wanna come in?

I don't believe you. Well, there's only one way to find out. We might be on here. Here we go. Ed Sheeran, BIM show.

He's there till midday. Alright, your choice. No, she did the smart thing and walked away. Listen, if you guys want...

I'm just saying, if you guys want to have a go, he's sitting there by himself and probably get busy later on. Two bucks, 30 seconds. I mean you both can come if you want, just two bucks a head.

Everything's about board, I can assure you. Am I going to get ****ed by that one? Oh nah, absolutely not. I can't guarantee what it'll do but yeah, pay you two bucks. And after two hours and 23 minutes, including some final hesitation, we finally found people...

brave enough to take a peek at me. Did you guys go to peep shows a lot or? No, I'm f***ed.

There you go mate. Keep your clothes on, stay on the seat. Behave yourselves.

Just listen to the announcement. Have a good one. Enjoy your peep.

Hello, welcome to the peep show your time is done Baby my heart still And I'm thinking about how people fall in love. Now, what's so interesting here is that, that by the way is pretty much what it's like being in the financial services industry. It doesn't matter how good your product is, no one trusts you. Okay?

So I mean, you know, that's more or less the default approach to a financial services offer. now is pretty much the same as someone on the street trying to hawk you something. And I think, by the way, it's interesting also to notice that the two things that finally got the couple in were behavioral science tricks, scarcity bias.

He's only there until midday, it's going to get pretty busy later on. you both can come if you like. You know that trick that airlines play, only four seats left at this price. Works every time, essentially.

And what's so interesting is if reality maps onto perception in completely messy ways, you can often create the same thing, the same emotional reaction with a different reality, and you can often have the same reality and create a different emotional reaction. Now, anybody here involved in an appointment setting with sort of engineers, gas... dashboard people.

So there's this huge debate about everybody wants one hour time slots for when the guy is going to come to install their broadband. And we said, you've actually got this wrong. Because first of all, it's really difficult and expensive to get engineers to turn up in a specific hour because they don't know how long the previous job is going to take. And we said, what you're doing here is you're looking at objective scientific metrics like duration of, in other words, time window available precisely...

Preciseness of appointment. And of course everyone in research, people in research, the thing about, you've got to remember in research is, if people are annoyed about something or upset about something, they're sincere about being upset. Their reasons for being upset are bullshit, okay?

They just reach off the shelf and go and find a plausible post-rationalisation for their emotional state. right okay people people have emotions and the reasons they give to explain those emotions they don't know themselves why they feel that way and they'll basically cobble together any plausible explanation to describe it it's amazing how many really bad trip advisor reviews of restaurants start with the words we had booked a table for my mother-in-law's birthday Right? OK, and the guy's in a really bad mood because he wanted to watch Champions League on the TV. Now it's his mother-in-law's birthday, so he's going to go out to a restaurant.

Because it's his mother-in-law, he'll have to go to a fancier restaurant than the one he would have chosen, and it's her birthday, so he's going to end up... paying. So he's in a really pissy mood, okay?

Then he has a bit of difficulty parking, right? Now, you're in a restaurant, you're in a bad mood. As far as you're concerned, it's a shit restaurant.

Nothing the restaurant has done has contributed to this emotional state, but you're you'll then leave and you'll leave a really grumpy review. Because we don't know. Evolution, when it supplied us with emotional reactions to things, like a fear of snakes, it wasn't necessary to actually furnish an explanation to go along with the actual emotional instinct. Secondly, evolution finds emotional reactions much more reliable than rational reactions. Why?

Because emotions can be inherited, whereas reasons have to be taught. So it's much safer from an evolutionary perspective just to make us hate snakes than to rely on every generation to teach its offspring to avoid green slithery things. But this is the really exciting opportunity for marketing.

So I said, if you're setting appointments, I said, you've got it wrong. Everybody's saying, I want one-hour appointments. Oh, I really hate it. You just say, I can come and install your broadband in the morning or the afternoon.

It means I've got to take a whole day off work. they say. Now, if you've got a small amount of cynicism in your brain, nothing ever occurred to you that people love taking a day off work, right?

If you've got an excuse to take a day off work, the idea that you go, oh, it's terrible, I've got to take a whole day off work, bullshit. People love that, right? What they're complaining about is a different thing.

And they don't voice it. They just go, I wish you had one hour. Just say you can come between 3 o'clock and 4 o'clock.

Don't need to do that. What they hate isn't the fact there isn't a one-hour delivery window. It's the uncertainty. Okay? If you said, we'll come sometime in the morning and we'll text you 45 minutes before we arrive, people will be just as happy as if you went to the huge expense of delivering a one-hour delivery window.

The problem with saying we'll come in the morning it's like being under house arrest. You can't have a shower, you can't go out and get a pint of milk, you can't do anything for five hours because you know the second you climb into the shower, that's when the guy's going to turn up, right? So you're essentially a prisoner for half the day. If the guy just says, do what you like as long as you're within 20 minutes to the house, I'll text you 45 minutes before I arrive, people are just as happy. The most successful thing London Underground did to improve passenger satisfaction wasn't faster, more frequent, more comfortable, later running trains.

It was dot matrix displays on the platform. People would rather wait nine minutes for a train knowing it's going to come in in nine minutes than wait four minutes for a train in a state of uncertainty. So the really exciting thing about the weirdness of human perception is you can create high levels of customer satisfaction without high levels of expenditure. You just need to know what really floats their emotional boat.

If you've been a literalist about this, you go to the research, they say, I want one hour delivery times, you'll end up, it'll cost you a fortune, okay, and it'll end up breaking the system, and the people will still be a bit pissed off, to be honest. So let me give you the simplest ever example of what I call an innovation, which is innovation not by changing physical reality, but by changing what's in the head, or by understanding what's in the head. So there's this company in the Midwest, and everybody's complaining of the lifts or the elevators. are too slow. So they go to Otis, the elevator company, who say that for a few million dollars we can replace the cabling, replace the winding gear, put in new motors and lift cars, and we can speed up your elevators.

And just before they're about to spend two million dollars, someone says Don't bother, they said. Before you do that, just try putting floor-to-ceiling mirrors between the lift doors, on the walls, on every floor. And everybody said, what the hell are you talking about?

I said, what they're saying is the lifts are too slow. What they really mean is, I get bored waiting for the lift. so they put floor to ceiling mirrors in between the doors and whereas before the same people who'd been jabbing impatiently at the button and getting furious, once they had mirrors the time was occupied in grooming or mild voyeurism and all the complaints stopped. Okay?

So this is what I mean by an innovation. Actually, psychological insight is just as valuable as technological advance. If you've got a better insight into what really moves the people and why they're doing what they're doing, it's a much more...

I would go further and say that actually most really successful companies, although they don't know it, are based on a really weird property of human perception. We forget this, but when Google started, every single tech company... thought you had to create a portal. Do you remember that?

You had to have sports scores and weather and news reports and everything else and a bit of search functionality. And Google comes along and all it is is a single bar with search and I'm feeling lucky. Right?

And the reason for that is that instinctively as humans, it's a bit like the jack-of-all-trades heuristic. We think that something that only does one thing is better at that thing than something that tries to do lots of things. It's an automatic human instinct.

So I'll give you a few other examples. examples, queuing. Okay?

What tends to happen in the world where everybody's obsessed with spreadsheets is they go, we need to have numbers because we can't make a decision without numbers. But they're only a certain proportion of the really important variables are actually available in numerical form. Yep, there's a numerical value of time, of waiting time, but there isn't a numerical value for lots of the other things that make a queue either enjoyable or annoying.

So let me give you a few examples of what makes a queue pleasant or annoying. If the end of the queue is out of sight, it is much more stressful than if the end of the queue is visible. Yes, it's true that shorter queues are less annoying than longer queues. I'm not saying it's completely different. But there are about three other factors.

End of the queue being out of sight, really maddening. okay? Disney very cleverly put little signs that say five minutes to go, four minutes to go, three minutes to go as a marker of progress.

That makes a queue, although objectively the length, the duration of queuing is exactly the same, it makes it much less frustrating. If you really want to make a queue really annoying, put another queue alongside that's moving faster than your queue. That drives people practically insane.

But there isn't a numerical measure for those things, there's just a measure for time. So everybody focus. focuses on the thing that's expressible mathematically and ignores all the other stuff because it's psychological and messy, even though it's cheaper to change the other stuff, as Disney does, than it is to actually reduce the queuing time. So by trying to improve your business objectively rather than subjectively, you may be spending a huge amount of money changing exactly the most difficult part of the equation to actually change. There are various other things with call centers around that as well.

I'll give you a fantastic example of how, again, understanding psychology can have huge effects. We had a client who had a call center where you had to choose between three options on the phone. And their kind of abandoned basket rate was immense.

We added a single human cue, which was, you can choose A, B, and C. Most people choose B, but if you like, you can have A and C. Once we added the single few words, most people choose B, the conversion rate went up about two and a half to three times.

Although we think we look at the thing and we choose, social proof is enormously important in human behaviour. By default, we love doing things that we think, well, I'm kind of a typical person. We use humans as the measure of... I mean, if you don't know much about cars, OK, and you go to buy a second-hand car, you don't actually solve the car problem, because that would take weeks and weeks or years of studying engineering. What you do is you substitute a different question, which is, do I trust the person who's selling me this car?

And so the way in which we choose is so different from the way in which economists and logical people think we should choose, that in many cases, you know, a lot of the things that economists think that humans do which are irrational are actually really, really clever. Because if you trust the guy who's selling you a car, car, it's probably not going to be that bad a car. Now, here are a few just other suggestions very quickly, okay? If you want people to finish their course of antibiotics, don't give them 24 white pills, give them 20 white pills and four blue ones and say, when you finish the white pills, take the blue ones.

The pills can be absolutely identical chemically, but more people will get to the end of the course. Do not do, understanding how human perception, Coca-Cola, did anybody notice this? For a time, they put red caps on Diet Coke.

If you're a regular Diet Coke drinker, the red cap makes the drink almost undrinkable. I said that, I actually rang the people who handle Coke at Ogilvy and said, can you please tell them they are being fucking insane, OK? And I said, it will only be a matter of months before they revert.

Because everything, basically, colour affects taste. It's as strong as that. Basically, someone who's been drinking Diet Coke for five or six years, Diet Coke with a red cap tastes disgusting. It's as extreme as that.

You can actually transform something from being bad to good. by changing what people pay attention to. I've been flying for years, and every time the plane was met by a bus, everybody on the plane had the same reaction.

Oh, shit, it's a bus, okay? You know, we paid for this. They can't even get us an air bridge. Where's going to be a bus? And then years of doing this, an easy jet pilot said, I've got bad news and good news, he said.

The bad news is we won't be able to get you an air bridge because there's a plane blocking the gate, but the good news is that the bus will take you all the way to passport control so you won't have far to walk with your bags. to each other. That's always been true, hasn't it?

But nobody ever told us. So we automatically just assumed by default, God, the bus is shit, isn't it? The second we realised there was actually an upside, we were going, oh, I'm quite glad there's a bus, actually.

There's a whole load of psychological stuff about if you... you give people a bad thing and mix it with a good thing, they will divert their attention voluntarily to the good thing to avoid experiencing regret. They'll do a whole lot of post-rationalization to go, actually, to be honest, I rather prefer this to that. Okay? And if If you've ever had your holiday moved slightly by a travel company, people will basically go, well, we were originally asked to go there and then they moved us here, but come to think of it, we're quite glad.

And that's done actually as a way of synthesising contentment and minimising regret. Uber, I mentioned the thing about the London Underground. Now, Uber is not a disruptive technology.

You've been able to use a phone to order a taxi since about 1903. The really significant thing is psychological, that waiting for a minicab when they claimed it's going to arrive arrive in ten minutes and it doesn't arrive is really, really frustrating. Watching a car approach on a screen. is really, really reassuring. Instead of going, is he out there now? Maybe he's already left.

Is that him parked around the corner? Which is an uncertain and undignified activity and unpleasant. You just go, oh, look, he's stuck at those traffic lights.

I'll have another pint. Whatever. Does anybody else do this, by the way, where you time your arrival on the pavement to coincide exactly with the car drawing up? Because it's a huge ego boost.

You feel like that guy at the end of the usual suspects, or like Louis XIV, you know, you walk out of a building and a car pulls up. The alternative, which is, is that my car over there? So Uber is, as I mentioned about Google, I can mention the same about about five other companies, a lot of their success is actually due to a really interesting psychological hack. Dyson, by the way, the fact that it's bagless isn't really an advantage.

It is, however, more satisfying cleaning a floor when you can see the dirt up. appearing in your thing, because you feel you're making progress. Now, you could have produced those things as bagless, high-suction vacuum cleaners.

If you'd made them beige and opaque, no one would have bought them, OK? He thinks it's engineering. It's more psychology than it is engineering. Now, you can also solve really big problems by understanding the properties of the human brain.

If you want to create a more diverse workforce, hire people in groups, and you'll automatically choose a far wider group of people than if you get different people hiring one person at a time. When somebody hires one person at a time, and I'll explain why this is later on, when someone hires one person at a time, their main preoccupation, it may not be sexism, racism, prejudice, actually, it's just the more boringly like me this person looks, more boringly like us this person looks, okay, the less I'll get blamed if something goes wrong. And we're always asking that question.

The main activity of business is arse covering, with value creation as a small secondary sideline, okay. And if you make a boring, logical, totally unremarkable decision, if something goes wrong, you're unlucky. If you make an eccentric decision, it may be a better decision in every way, but if something goes wrong, now it was your fault, because your decision was visible. It's really important that no one ever got fired for buying IBM, was the cleverest business-to-business advertising slogan of all time. That's why there are only four big accounting firms.

right? I'm sorry, they're probably in the room, are they? But you know, you appoint PwC or Ernst & Young, right? If anything goes wrong, everybody blames PwC.

Okay? If you appoint a small boutique accounting firm, it may be cheaper and better, but if anything goes wrong, now they blame you. Okay? So blame dispersal is a really strong thing. If you hire people in groups, people actually go, well, one of these ten isn't going to work out anyway.

So I'm not so paranoid now, so let's go a bit wider. If increase the variance. So anyway, essentially marketing, do not become more and more and more logical as a way to defend yourself against finance, because really marketing, and particularly marketing that gives you a competitive advantage, is the science of knowing what logic is wrong about, as this I think perfectly illustrates, right?

Now imagine, right, you're in a meeting and you want to compete with Coca-Cola, which for 140 years has been the most popular cold non-alcoholic drink in the world, right? What is everybody in the room going to say? They're going right, we need to produce a drink that costs less than Coke, tastes nicer than Coke, and comes in a really big can, so people get great value for money, aren't you?

And no one is ever going to get fired for suggesting that, because it's completely logical. The most successful attempt to compete with Coca-Cola in 150 years comes in a tiny... can, cost a fortune, and it tastes disgusting.

Okay? Sorry to the Austrian chat. I know it's your leading export, but I know. But nonetheless, there is something, that's psychology, by the way, that's species-specific perception.

And this attempt to be logical by creating rules that are not species-specific species-specific, as if it's physics, that's where it all goes wrong. Because everything in marketing depends on the perceptual mechanisms and emotional reactions of the species you're actually talking to. Why, by the way?

Why so successful? I think there's a really big reason. That if you want people to believe something has medicinal or psychotropic powers, it has to taste a bit weird.

Okay? Do you see what I mean? If someone told you that actually orange Fanta also gave you eternal life, you wouldn't believe them, right? Wheatgrass, yeah, that makes sense, because there's no other reason why I'm bloody drinking the stuff, is there?

Now, interestingly, in quite a lot of medicinal or tonic wines, the last ingredient they add is an unpleasant-tasting chemical. because people then believe it's actually medicine. You also, by the way, in order to make it believable, Diet Coke has to taste slightly less nice than Coke, because otherwise, if people don't perceive a sacrifice, they don't actually believe it.

I'll give you the strangest example where marketing and economics will be at complete loggerheads, right? Imagine you have two products, one better than the other, or objectively, apparently better than the other. It has more specifications, better spec. etc., and the better product is also cheaper. Now, to an economist, that is the easiest decision in the world.

Everybody will buy the better, cheaper product. In reality, people look at that and they go, that doesn't make sense. Anybody from Nestle here?

Nobody? They're selling two of the new... You know the new Nespresso-type machines where the pods rotate?

They're selling two of them, the manual and automatic version, all over Europe at the same price. Okay? Now, if you can't make sense of a choice, you can't make the choice. Because what would confuse people, if you had a better product and it was cheaper, people would go, this doesn't make sense, because if I had a better product, I'd charge more for it. So why would you have a superior product and charge less for it than an inferior product?

That doesn't make any sense, so I'm not going to buy either of them. That's why low-cost airlines, when they launched, had to make a lot of noise about what you didn't get. Do you remember that? You don't get... get a pre-allocated seat, you don't get checked in luggage, you don't get a meal, you've got to pay for your coffee, you know, you don't even, you know, and they made a load of noise about what you didn't get.

Now that sounds really weird, doesn't it, in marketing terms. Why would you make a lot of noise about your weaknesses? And the reason is, it makes the low cost believable. You go, I get it, I'm saving 40 quid on the other airlines because I don't get all these things, which I don't that much care about.

So now the whole decision makes sense. sense. If you'd said, if you'd launched Ryanair and said we're just as good as British Airways but we're half the price, people will go, no, that doesn't make sense.

That probably means you don't service your engines and your pilots are on day release from prison, okay? So sometimes the role of marketing isn't actually to justify a higher price, it's to de-stigmatise a low one. Now I realise I've taken a lot of your time.

Much easier to get fired for being illogical than for being imaginative. Economic logic assumes, and we all day by day pick up more of these assumptions, assumptions, assume that human behaviour is trusting, proportional, ergodic, I won't explain, it's complicated, status-free, context-free, individualistic, all of these things are different. Anybody here from the airline or travel industry?

Okay. Airline industry, you are killing yourself, and I'll explain why. The airline industry is being killed by a behavioral problem which needs to be solved, and I'll explain it very quickly.

If you run a restaurant, you want people who come into your restaurant to buy wine because wine is insanely profitable, far more profitable than food, far more profitable than beer, than spirits, than anything else. Why is it so profitable? Because no one knows what a bottle of wine is supposed to cost.

You can't charge 40 quid for a glass of Johnny Walker because people know what a bottle of that costs in the shop. But you can buy in a case of Chateau d'Obscur 1995 for sort of six euros a bottle, sell it at 70 and everybody goes with a marvelous hint of blackberries, right? So you can see if you sell people wine you can scam them rotten, right?

This is how restaurants sell you wine. You go into the restaurant. There are already wine glasses on the table.

That sets the social expectation that you're supposed to drink wine here. Then they bring you a drinks list, but it isn't called the drinks list, is it? It's called the wine list.

Now, if you look at the choice architecture of the wine list, there are about 460 different kinds of wine, and then there's that really sad back page for the people who'd actually prefer to drink beer, which is a better drink in my opinion, or gin and tonic, which is also a better drink in my opinion. Anyway, okay? But then they do something even cleverer still, which I only noticed. I noticed a few years ago.

If they're really clever, they only bring one wine list, and they hand it to one person at the head of the table. Now, what is so clever about that is there is only one alcoholic drink you can share. So if there's only one wine list, what does the guy at the head of the table do?

He turns to the table and he says, red or white. At which point it's game over for anybody who wants to drink anything else. Now you think you've chosen to drink wine.

In fact, you've been maliciously hacked into doing it by a whole series of really, really dodgy engineered choices, which, I mean, I suppose you could say tequila slammers all round, but with that single exception, if you've only got one drinks menu, there's only one drink you can have. That's how crafty it is. By contrast, the airline industry has done a disastrous thing. Well, it's not really their fault entirely.

All airline comparison websites... only allow you to choose on price. And so the only discriminator between one flight or another flight becomes how much it costs.

Now, what you've got to start doing is to do other things like saying, this one's the least crowded flight of the day, and then put the price up. I was saying one of the flights I went on, it was the cheapest flight of the day, but it was a brand new 787. I said, you've just spent £150 million on an aircraft, okay, and you don't even tell your customers that they can choose it. So when the only variable is price, people, even rich people, right? Now, I've done this where I choose the bloody 7am flight because it's £5 cheaper per person than the blasted flight that goes at noon. Because when all you can choose on is price, you choose the lowest price.

I then realized two days before we have to travel, there's no way I'm going to get the kids out of bed at four o'clock in the morning. We end up bloody staying in a hotel the night before, wiping out five times the saving that I made with this pathetic ticket. But something's got to be done about this because essentially...

it's killing the airline industry because it makes it too easy to choose by price and too difficult to choose. Now, interestingly, we don't book hotels that way. You know, we don't go, I want a weekend in Barcelona. What's the cheapest hotel in Barcelona?

Because you'd end up in a rat in a rat. infested shithole, right? But flights, we effectively are forced to adopt the behaviour because there's no other information to encourage you to choose differently. And it's really, really damaging.

I think there are things, by the way, I mean, don't always make it money. Take a flight and say something like, kids go half price. Try different offers, something else. But if you just make it price, it's really, really, because then everybody else will want to go on the other flights, of course.

But if you just make it price, it's really, really hard to choose. choose by any other dimension. And people who don't care about five quid will still take the cheaper one.

So that means you have to discount more to change behavior than you would do if you used information instead. Free Wi-Fi on this flight, for example, keep the price the same. That sort of stuff. Anyway, how long have we got?

About four minutes, five minutes? Okay, two other things you need to know. I've talked about psychophysics, that we don't perceive the world objectively, and that actually you can create the same emotion with different real things, or you can create different emotions from the same thing. Okay? Things aren't even good or bad.

independent of how they're perceived. That's how extreme it is. If you buy a Ferrari, okay, you have two choices, apparently.

They'll either deliver your Ferrari to your local Ferrari dealership, which is free, okay, or you can pay 500 pounds, fly down to Maranello at your own expense, have a tour of the factory, and drive the car home. Now, I don't know if you noticed that, but by framing it as tour of the factory, they've gone... got you to pay them for collecting your own bloody car.

Okay? So depending on how we look at things, the same thing can be good or bad, entirely depending on the context in which it's framed. Now, a few very quick things I'll just make a point about.

Most decision people assume that a decision is like darts, that by aiming for the higher score, you're also going further from the low score. There's no strategy, sorry, in archery. In archery, there is no strategy except aim for the bullseye, aim for the middle. That's why archery is a very boring televised sport. If you imagine what it's like being an archery commentator, so what do you think he's going to do now, Barry?

I think he's going to aim for the bullseye like he's done on all previous 4,000 previous fucking occasions. It's not a very interesting sport to actually commentate. Real life decisions, and these are the decisions we've evolved to make, are much more like darts. Now, I'm really apologetic to any French people here, because I gave this presentation a few weeks ago in France, only to discover that France, though it has many fine qualities, is not a great darting nation, it has to be said.

Their understanding of darts is basically zero. So anyway, anybody here totally baffled, I'm really sorry if you are. Anyway, the best score on the board is triple 20, but right next to it is the worst score on the board, which is one.

If you're not very good at darts, you do something which in decision science is called satire. you aim for 19. Because 19 is nearly as good as 20, but if you go for the southwestern quadrant of the board, you might miss badly and get 16, which is still pretty good. So all decisions that are made by real-life humans who are making a real decision, that's a real decision where they actually have to suffer the consequences, not a theoretical decision, involve two dimensions, not one.

It's not what is the best score I can get because the best score is the best. It's what's the what's what's this decision like this consequence like on average because a higher average is better but what's the degree of variance. Do you get what I mean by the distinction?

Which is a very simple explanation, okay? You know, that's a low variance, that's a high variance, okay? So something might be much better on average, but has the chance of being terrible. I started restaurants pretty much like that.

I mean, you know, you might have the best meal you've ever had in your life, but you can equally go to them and actually they're really, really crap. Has anybody done that? I mean, just totally disappointing and rubbish. Or, you know, you eat something that's disgusting.

Now... What we're wired to do in evolutionary terms is to avoid disaster more assiduously than we seek perfection. So we're always asking this question, when in doubt, play it safe. When in doubt, minimise the variance. Now, just to give an example, you can do this at home with your cat if you want to.

Put a cucumber just behind your cat, outside its field of view, and wait for it to notice. Now, if you think about this, the cat doesn't really think it's a snake, but it thinks, why take the risk? Okay? Because cats that didn't do that tended to exit the gene pool.

The cats which went, gosh, look at the lovely cucumber, oh shit, it's a snake, they didn't leave many descendants. So most cats are descended from paranoid cats. And this is what they do. Okay.

Now, Just to be clear about that, what's the worst that can happen? I know as a Brit I'm in no position to lecture on taking penalties and so forth. But when players take penalties, even to decide a World Cup final, semi-final, quarter-final, they will be more likely to score if several of the players actually kick the ball straight down the middle, to where the goalkeeper's standing in the middle.

Because the goalkeeper nearly always dives left or right. Very, very few players do it. Now, the reason isn't that they're less likely to score. They're more likely to score. No, the reason they don't do it is you look much stupider if you fail.

If you kick the ball left and the goalkeeper goes that way, you look unlucky. Kick the ball right and the goalkeeper saves it by diving that way. You've been unlucky.

Kick the ball straight down the middle. He's less likely to save the shot. You're more likely to hit the target. But if he happens to save it, you look really crap. Okay?

So understanding that thing that everybody's asking two questions. They're asking questions. kind of the question which is, what's this going to be like on average, but also how bad could it be if things went really wrong? It's a thing to understand that there's often a trade-off. I'm telling a very politically incorrect you will apologise for this, very politically incorrect, like marrying a redhead.

It's probably better on average but if things go wrong, you come home and find your house is on fire. You know what I mean? You know, there are things which are actually pretty good nearly all the time.

So, in evolutionary terms, we have to make this trade-off because you could climb another 100 feet up the tree to get better fruit, but if it comes with a 3% chance of death, it's probably not worth the improvement. On average, yes, it's going to be better, but actually, if the worst-case scenario is really bad. Now, I've got a contention, by the way, which is quite interesting. McDonald's is the classic case of low average, low variance. McDonald's is the most successful restaurant in the world because it's very, very good at not being terrible.

Okay, now you can criticise it as much as you like, but the fact is you're never disappointed. That's because the food is always identical, okay? So you're never disappointed, you're never ripped off, you never feel cheated, but most important of all, you never get ill, okay? So essentially, it's food with an amazingly small number of downsides.

Lower average than a Michelin-starred restaurant, but much, much lower variance. My contention is, is that first of all, this explains why people copy other people. do what everybody else does, it may not be the best thing to do, but it's unlikely to be terrible.

If you think, you see what I mean? If you had to move to Jamaica tomorrow and you needed to buy a car without knowing what's the single best question you can ask is probably what's the best-selling car in Jamaica? Now, it may not be exactly the car you want, but the fact is the best-selling car in Jamaica is going to be a pretty good car to have in Jamaica, okay?

Not the best necessarily, but it won't be awful, okay? Now, similar, that explains why we heard together, that also explains why we... we tend to be influenced by habit. These things are deep evolutionary instinct which make no sense if, like an economist, you assume that people are trying to optimize. They make fantastic sense if you discover that what people are trying to do is to actually minimize the variance, minimize the chance of an extreme disappointment.

Now, my contention is that's mainly why people pay for brands. Okay? You pay $200 extra for a Samsung TV compared to a television from someone you've never heard of, not because you think the television is actually better, but because you think it's less likely to be crap. Instinctively, you know that someone who has a lot of reputational skin in the game has much more to lose from selling a bad product than someone who you've never heard of. And that's why reputation, money spent on advertising, all those things, essentially allow you to command a price premium because it's actually a form of insurance.

When you insure your house, it doesn't make it a better house. What it does is it reduces the chance that your life is made awful because the house burns down to the ground. And when you buy a brand, you're not necessarily getting an objectively better product, but you're reducing the probability that you end up with one of those, you know, a television where everything goes wrong, or, as a friend of mine had, a television where if you lose the remote control, it becomes completely unusable. Has anybody else had that? when you buy a Samsung, you kind of know that shit isn't going to happen.

And I think understanding that people buy brands more for reassurance and variance reduction than for the belief that they're absolutely perfect is just a really useful way to explain and justify brand preference. Just to explain that instinct even more, one of our insights into it is that when people are asking what's the worst that can happen, working with Diageo, no man will ever order a cocktail in a bar unless the drinks menu contains a picture or illustration of the glass in which it's sold. Because if the male brain thinks there's a 0.01% chance it turns up in a pineapple, he'll order a beer instead. Now, this understanding, by the way, explains the difference.

why nobody ever moves bank. Yes, on average, you'd be much better off moving a bank current account, but there's a 1% chance it's a living hell. We avoid those things all the time. Someone came to us with a very interesting company called Blah Blah Car, which is a kind of car sharing thing.

And again, I said, the problem you've got there most of the time is that people go, it's a brilliant idea because I can have someone in my car who shares the cost of the petrol with me. It's actually cheaper than going by train or bus and I get to go in a car. Everything about it is brilliant, except for that. about 2% of what's the worst that can happen.

And anybody who's seen the film Hitcher is probably aware of that, right? Finally, I'll end on this. I wish I had more time, but there are always limitations. It's not true to say that seven people buying one thing are the same as one person buying seven things one after the other. Procurement, one of the things procurement doesn't understand is they don't understand time.

Procurement thinks that seven optimised transactions, in other words, a series of seven optimised transactions is an optimal series of transactions. It isn't. When we engage in relationships with people, with every subsequent transaction, the nature of the relationship changes. And our whole approach towards the people we do business with, both on a personal level and on a business level, depends on to what extent we think the relationship will be enduring and repeated. Okay?

So if you think about it, this is game theory. If you believe that you're going to be doing business with each other a lot, you will be highly cooperative. You'll add value in ways that were unasked for because it's an investment in the long-term relationship.

If you think the contract comes up for tender... every two years and your past performance has no influence on your likelihood of having your relationship extended, you'll basically start to behave like a crook or a psychopath. Okay?

And I mean, in some cases, I think dodgy behavior by suppliers is partly explained by the fact that why would you... I mean, there's no point in doing a favour for an amnesiac, right? You know, if the person hasn't got the memory or the capability to reciprocate.

Now, in an advertising context, for example, the most valuable things you can do for your clients are often unasked for and not even paid for. The reason you do those things is because you see it... You see the reward coming in the extension of the relationship, the prolonging of the relationship. If that isn't possible on the part of the person you're doing business with, you stop doing those nice things.

So long-term selfishness is almost indistinguishable from cooperation. Short-term selfishness is almost indistinguishable from conflict. Okay?

The extent to which we play fair and we're decent and we add value depends on the probability of repetition. Does that make sense? So the distinction would be, if you're a tourist restaurant before TripAdvisor came along, your best strategy was to rip people off, basically, because they were never going to come back. anyway, were they? Okay?

They'd had their meal overlooking the Parthenon. They're going to fly back to Luton Airport the next day. What was the point of giving them, you know, a load of extra, you know, treats or free chocolates?

There wasn't. The best approach was to overcharge them a bit and hope they survived long enough to write the cheque, right? If you're a local restaurant where you rely on repeat business, you patently have to be generous.

Because if you tried that strategy, your business would be dead because there aren't a new flow of suckers coming along every minute. So I'm working with evolutionary biologists on this, which is anything a business does that signals investment in a relationship tends to inspire trust. And so...

Continuation probability is what evolutionary biologists call it. Let me just explain a few things. That is basically an advertisement. An engagement ring is upfront expense as proof of long-term commitment. Because it's a reliable signal to the person you're proposing to marry that you have genuine faith in the endurance of a relationship is the extent to which you're prepared to spend money on that kind of thing.

Okay? Because if you're just expecting a one-night stand, and... you know, it wouldn't really pay. Okay? So it's a reliable signal of serious long-term intent.

And I think a hell of a lot of marketing activity, the extra fries they give you at Five Guys, has anybody experienced that? When you've already paid for the thing and they give you an extra scoop of fries that is, they've filled up your cup of fries already, but they give you an extra scoop that you don't even have to pay for. Anything a bit, now, the problem with those things is they're the hardest things to measure because they happen after...

the transaction's been paid. And I think there's a danger that when companies start to engage in kind of highly automated behaviour, what they'll start doing is they do the really easy stuff before the purchase, because it's easy to justify, because the feedback loop is really, really closed and quick, whereas acts of generosity, a fantastic example is the upmarket retailer in the UK, Selfridges, where you've ordered the stuff, and for all you know, it could just arrive in a plain cardboard box. I mean, there's no... obligation on them to do anything better than that. And it arrives wrapped like this.

Now it only costs them about probably 20 pence more to do this. But the fact that you do it. Now this all comes from a whole area of science called costly signalling theory.

Has anybody come across signalling theory? The essential thing is that the commitment this is where we've got to be really careful about digital marketing. Because the thing that makes digital marketing so appealing to...

finance people is the fact that it's cheap. What we fail to realise is that the fact that it's cheap and the fact that it's known to be cheap may make it ineffective. Now, the sincerity of an engagement ring depends to some extent on the cost, on what it costs you to buy. Now, cost needn't be financial. It could be time, effort, talent, you know, or whatever.

When you send a wedding invitation, the most efficient way to convey the information would be by email. But I don't think anybody sent a wedding invitation. No one would go anyway. They'd assume there was going to be a cash bar.

right? So when you send a wedding invitation, you not only send the information about so-and-so requests the presence of X at such and such a place, you put it on card, you put a first-class stamp on it, you put it in really thick paper envelopes. Because the seriousness of the intent, now people perceive the importance of a message as not just to be about what it says, but how much it costs you to say it.

Because something that's costly to say is sincere, and something that's easy to say may not be. And no one's looked nearly enough at this question that one of the reasons why television is still 40% of ad spend, you know, 20, what is it, 25 years ago it was 40%, today it's 40%, is because TV achieved something by dint of being perceived to be expensive. So think about it, okay, if you've got a friend who owns a racehorse and they say to you, you say, what's your horse going to do on Saturday?

And they go, it's going to win, definitely. That's meaningless, isn't it? Because they haven't got skin in the game.

Everybody says that. If they say, come along with me, and they put 5,000... on their own horse at the bookmakers, you know they expect that horse to win.

To a gambler, that's serious information because it's actually backed with a bet. Advertising that costs money is a reliable signal in the manufacturer's confidence in their product because if they didn't think the product was going to be repeatedly and widely popular, they wouldn't risk the money. Digital advertising, I don't think, does that. And so there's a huge danger that by thinking of advertising as merely messaging, not signalling, in other words, we just think it's all about the content and not about the cost of delivery, we fail to understand how advertising really creates confidence. It's a really important point.

I worked with a very good account man called Steve Barton once, and he said, we want to do a great creative idea for this very big product launch to a very small number of people, and we really want these people to think this is the most significant IT event to happen all year. He said, come up with a brilliant idea if you can, and make it pretty expensive. If you can't come up with a brilliant idea, here's what we're going to do.

We're going to write a nice letter, and we're going to send it out by FedEx. And he understood this completely. Do you see what I mean? If something arrives by FedEx, you cannot discount it because something that has cost someone £8 to say patently needs to be said. An email that you might get in your...

spam filter every morning can be safely discarded. And we attach importance and also conviction to messages in proportion to the difficulty, expense, or cost of communicating them. And that's why a wedding invitation looks like that. that, it doesn't look like an email.

And the danger of all these algorithms is it misses this effect entirely. So I think that's me. My final bit of advice. The great value of this stuff is a lot of it doesn't appear to make sense at first.

It's only when you're adding an unpleasant tasting chemical to a drink, right? Doesn't seem to make sense. Putting the price up when something isn't selling doesn't appear to make sense. You know, making the last four pills blue doesn't appear to make sense.

But the great advantage of testing things that don't make sense is you're Competitors aren't doing those things. So when you find out one of them that works, you've got a real source of competitive advantage. Be weirder and don't let the finance people insist that everything you do is logical because everybody else is doing logical things.

That's exactly what they'd expect you to do, as the man said. Thanks very much indeed. Thank you.