The two categories of retailer who have weathered the global economic instability best in recent years are those at the top end of the price spectrum and those at the bottom. Some of this is a result of widening wealth inequality, but a glance at the demography of shoppers shows that it is not quite that simple; for instance, the bargain department store TK Maxx has a customer base that perfectly matches the UK population.* In fact, we derive pleasure from ‘expensive treats’ and also enjoy finding ‘bargains’. By contrast, the mid-range retailer offers far less of an emotional hit; you don’t get a dopamine rush from mid-market purchases.
I was reminded of this idea recently when my wife and I were buying bed linen. After wandering around a department store for half an hour, I explained that there were only two sums of money I was prepared to spend in the store: ‘zero’ or ‘a lot’. Zero would be good, as we could keep our existing linen and spend the money on other things. A lot of money was also acceptable, as I could then become excited by thread counts, tog ratings and exotic goose down. By contrast, spending something in between would have given me neither of these two emotional rewards.
The success of the brilliant engineer-alchemist James Dyson in selling vacuum cleaners seems to arise from a similar mental disparity. Vacuum cleaners used to be a grudge buy that was only necessary when your old one had broken. Dyson added a degree of excitement to the transaction. Before he invented them, there was no public clamour for ‘really expensive vacuum cleaners that look really cool’, any more than people before Starbucks were begging cafés to sell really expensive coffee.
Context Is Everything
People are highly contradictory. The situation or place in which we find ourselves may completely change our perception and judgement. As a good illustration of this, one reliable way to lose money is to go on holiday to some exotic locale, fall in love with the local speciality alcoholic drink and decide to import it to your home country. I once heard of someone who fell in love with a banana liqueur in the Caribbean and bought the right to sell it in the UK. On returning home with his suitcase half full of the stuff, he opened a bottle in his kitchen, hoping to impress his friends with his astute decision. Everyone, including him, found the drink practically vomit-inducing; it had only tasted good when he was in the Caribbean.*
Our very perception of the world is affected by context, which is why the rational attempt to contrive universal, context-free laws for human behaviour may be largely doomed.* Even our politics seems to be context-dependent. For instance, ostensibly right-wing people will engage – at a local level – in behaviour that is effectively socialist. A Pall Mall club in London is typically full of rich, right-wing people, yet everyone pays equal membership fees, even though they use the club in wildly different ways. Goldman Sachs, as the author and philosopher Nassim Nicholas Taleb points out, is surprisingly socialistic internally: people distribute their gains among a partnership. However, no one there proposes a profit share with JP Morgan; in one context people are happy to share and redistribute wealth, but in another, they definitely aren’t.
Why is this? In his book Skin in the Game (2018), Taleb includes what might be the most interesting quotation on an individual’s politics I have ever read. Someone* explains how, depending on context, he has entirely different political preferences: ‘At the federal level I am a Libertarian. At the state level, I am a Republican. At the town level, I am a Democrat. In my family I am a socialist. And with my dog I am a Marxist – from each according to his abilities, to each according to his needs.’
In solving political disputes ‘rationally’ we are assuming that people interact with all other people in the same way, independent of context, but we don’t. Economic exchanges are heavily affected by context and attempts to shoehorn human behaviour into a single, one-size-fits-all straitjacket are flawed from the outset – they are driven by our dangerous love of certainty: However, this can only come from theory, which by its very universal nature doesn’t take context into account.
Adam Smith, the father of economics – but also, in a way, the father of behavioural economics* – clearly spotted this fallacy over two centuries ago. He warned against the ‘man of system’, who:
‘is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it . . . He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse [sic] to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder.’
The irony is that the ‘man of system’ in the early twenty-first century is all too likely to be an economist, but what we need more of today is men and women who are not wedded to an overbearing system of thought. This book is an attempt not only to create them, but also to give them permission to act and speak more freely. I hope it will free you slightly from the modern rationalist straitjacket, and help you understand that many problems might be solved if we abandoned the rationalist obsession with universal, context-free laws. Once free of this constraint, you might have the freedom to generate magical ideas, some of which may be silly but of which others will be invaluable.
Unfortunately, many of your friends and colleagues, and most of all your finance director or your bank manager, won’t like any of these new non-sensical ideas, even the valuable ones. That’s not because they are expensive – most of them are very cheap indeed. No, he* will hate them because they don’t sit comfortably with his narrow, reductive worldview. But that’s the whole point – his narrow economic worldview has dominated decision-making for far too long.
With just a few lessons from behavioural economics and a bit of evolutionary psychology, you’ll soon see where this logical worldview comes dangerously unstuck. Meanwhile your finance director, lovely guy though he may be, hates experiments involving alchemy because alchemy works erratically; he prefers small certain gains to those which on average will be higher but where the payoff is hard to calculate in advance.*
However, this natural human love of certainty may also prevent businesses from making more valuable discoveries. After all, no big business idea makes sense at first. I mean, just imagine proposing the following ideas to a group of sceptical investors:
‘What people want is a really cool vacuum cleaner.’ (Dyson)
‘. . . and the best part of all this is that people will write the entire thing for free!’ (Wikipedia)
‘. . . and so I confidently predict that the great enduring fashion of the next century will be a coarse, uncomfortable fabric which fades unpleasantly and which takes ages to dry. To date, it has been largely popular with indigent labourers.’ (Jeans)
‘. . . and people will be forced to choose between three or four items.’ (McDonald’s)
‘And, best of all, the drink has a taste which consumers say they hate.’ (Red Bull)
‘. . . and just watch as perfectly sane people pay $5 for a drink they can make at home for a few pence.’ (Starbucks)*
No sane person would have invested a penny in these schemes. The problem that bedevils organisations once they reach a certain size* is that narrow, conventional logic is the natural mode of thinking for the risk-averse bureaucrat or executive. There is a simple reason for this: you can never be
fired for being logical. If your reasoning is sound and unimaginative, even if you fail, it is unlikely you will attract much blame. It is much easier to be fired for being illogical than it is for being unimaginative.
The fatal issue is that logic always gets you to exactly the same place as your competitors. At Ogilvy, I founded a division that employs psychology graduates to look at behavioural change problems through a new lens. Our mantra is ‘Test counterintuitive things, because no one else ever does.’ Why is this necessary? In short, the world runs on two operating systems. The much smaller of them runs on conventional logic. If you are building a bridge or building a road, there is a definition of success that is independent of perception. Will it safely take the weight of X vehicles weighing Y kg and travelling at Z mph? Success can be defined entirely in terms of objective scientific units, with no allowance for human subjectivity.*
This may be true when you are building a road, but it is not true when you are painting the lines on it. Here, you have to consider the more complex component of how people respond to informational cues in their environment. For instance, if you want vehicles to slow down, painting parallel lines across the road in the approach to a junction at increasingly smaller intervals will help, since the narrowing gaps between the lines will create the sensation that the car is slowing less than it really is.
Americans aren’t terribly good at designing roundabouts, or ‘traffic circles’ as they call them, simply because they don’t have much practice.* In one instance, a British team was able to reduce the incidence of accidents on a traffic circle in Florida by 95 per cent by placing the painted lines differently. In one Dutch town traffic experts improved traffic safety by removing road markings altogether.*
So there are logical problems, such as building a bridge. And there are psycho-logical ones: whether to paint the lines on the road or not. The rules for solving both are different; just as I make a distinction between nonsense and non-sense, I also use a hyphen to distinguish between logical and psycho-logical thinking. The logical and the psycho-logical approaches run on different operating systems and require different software, and we need to understand both. Psycho-logic isn’t wrong, but it cares about different things and works in a different way to logic. Because logic is self-explanatory, our preference is to use it in all social and institutional settings, even where it has no place. The result is that we end up using inappropriate software for the operating system, neglecting the psycho-logical approach.
Copyright © Ken Sides
The initial roundabout design in Clearwater was not helped by placing a vast decorative fountain in the middle of it. A later redesign reduced the accident rate significantly.
The Four S-es
There are five main reasons why we have evolved to behave in seemingly illogical ways, and they conveniently all begin with the letter S.* They are: Signalling, Subconscious hacking, Satisficing and Psychophysics. Without an understanding of these concepts, rational people will be condemned to spend their lives baffled and confounded by the behaviour of others; with a grasp of these principles, some of the oddities of human behaviour will start to fall into place.
Why We Should Ignore Our GPS
The radio navigation system known as GPS is a masterpiece of logic, but it is psycho-logically dumb: what you want and what your GPS device thinks you want don’t always coincide. GPS defines your task in mathematical, logical terms – getting to your destination as quickly as possible. Granted, distance may be a secondary variable – drivers may be annoyed (and financially worse off) if their GPS device saves 30 seconds on a journey by directing them to take a route via a faster road which is 20 miles longer, so there is a formulation to prevent this. But, other than projected average speed and distance, no other variables are considered.
GPS navigation is certainly a miraculous device and a triumph of logical thinking. A network of US military satellites more than 10,000 miles above the surface of the Earth, each broadcasting a signal with little more power than a 100-watt light bulb, enables a device in your car or phone to triangulate your location to within seven yards or so,* which means your phone or GPS can, after factoring in prior and real-time traffic information, calculate the quickest route to any destination with an astonishing degree of precision.
Despite this, I still ignore the advice from my GPS quite a lot, especially if the journey is one of which I have prior experience, or if my psycho-logical priorities differ from its logical ones. This is because GPS is both incredibly clever but at the same time dogmatic and presumptuous.* It will confidently instruct you to take a particular route, based on a perfect understanding of a very narrow set of data points and a simplistic model of your motivation. It exhibits no sensitivity to context or to the varying priorities you may have. GPS devices know everything about what they know and nothing about anything else.
Furthermore, all navigation applications assume you are trying to reach your destination as quickly as possible, but I am not a piece of freight – if I am on holiday, I may wish to take a longer, more scenic route. If I am commuting home, I may prefer a slower route that avoids traffic jams. (Humans, unlike GPS devices, would rather keep moving slowly than get stuck in stop-start traffic.) GPS devices also have no notion of trade-offs, in particular relating to optimising ‘average, expected journey time’ and minimising ‘variance’ – the difference between the best and the worst journey time for a given route.
For instance, whenever I drive to the airport, I often ignore my GPS. This is because what I need when I’m catching a flight is not the fastest average journey, but the one with the lowest variance in journey time – the one with the ‘least-bad worst-case scenario’. The satnav always recommends that I travel there by motorway, whereas I mostly use the back roads. My journey via A-roads usually takes 15 minutes longer than going via the M25, but I am happy to accept this, because a 15-minute delay will still see me arrive in plenty of time; it is preferable to the small-but-significant risk of spending an hour and a half stationary on a gridlocked M25, which would cause me to miss my flight.*
The GPS knows only what it knows, and is blind to solutions outside its frame of reference. It is completely unaware of the existence of public transport, and so will suggest that I drive into central London at eight o’clock in the morning, a journey only a lunatic would undertake. By contrast, my Transport for London app is completely unaware of the invention of the automobile. And on Google Maps, once I click the ‘public transport’ button, it assumes I own no car (a very Californian assumption) and will confidently recommend that I travel to my nearby train station – an easy drive of no more than 15 minutes – by an elaborate combination of bus routes that will take an hour and a quarter.
To understand this book you have to realise that there is a duality in the human brain that is rather similar to the relationship between the logic of the GPS and the wider wisdom of the driver, between logic and psycho-logic. There is the unambiguously ‘right’ answer, where certainty is achieved by limiting the number of data points considered. The downside of this is that, in the wrong context, it can be hopelessly wrong. Then there is the pretty good judgement of psycho-logic, which considers a far wider range of factors to arrive at a not-perfect-but-rarely-stupid conclusion.
The credibility we should attach to these two modes of thinking varies according to context. Sometimes it is best to obey your GPS slavishly, but at other times you should ignore it completely and use the wider parameters of judgement. Once again, the reason we don’t always obey our GPS is not because we are wrong: it is because there are important factors in our journey-planning that the GPS is completely ignorant of. A lot of supposed ‘irrationality’ can be explained by this.
The reason we don’t always behave in a way which corresponds with conventional ideas of rationality is not because we are silly: it is because we know more than we know we know. I did not decide to travel to the airport by back roads because I had calculated the level of variance in journey time
– I did it instinctively, and was only aware of my unconscious reasoning in retrospect. ‘The heart has reasons of which reason knows nothing,’ as Pascal put it.*
However, in some cases, our conscious and unconscious decision-making coincide: on the way home from the airport, when I have no time pressure, I will generally follow my GPS. At other times we make reason take a back seat. If I were travelling down the Loire Valley, I would probably turn off my GPS and consult a decent guidebook instead; my GPS, if possessed of consciousness, would think I was a complete idiot, crawling down slow roads and crossing narrow bridges past various chateaux, when there was an autoroute just a few miles away.
In fact, my GPS goes bonkers even if I pull off the main road to fill up with fuel – ‘Make a U-turn . . . Make a U-turn . . . MAKE A U-TURN!’ It has a very narrow conception of what I am trying to do. But driving down the Loire, I would attach a low priority to the speed at which I reach my destination – a GPS simply cannot understand a motivation like this. It understands time, speed and distance, but it doesn’t really have any metrics for architectural magnificence.
Just as your GPS has not yet been configured to understand a wider set of human motivations, our conscious brain has not evolved to be aware of many of the instinctive factors that drive our actions. A fascinating theory, first proposed by the evolutionary biologist Robert Trivers and later supported by the evolutionary psychologist Robert Kurzban, explains that we do not have full access to the reasons behind our decision-making because, in evolutionary terms, we are better off not knowing; we have evolved to deceive ourselves, in order that we are better at deceiving others. Just as there are words that are best left unspoken, so there are feelings that are best left unthought.* The theory is that if all our unconscious motivations were to impinge on our consciousness, subtle cues in our behaviour might reveal our true motivation, which would limit our social and reproductive prospects.
Alchemy Page 4