November 25, 2020

Rory Sutherland: Human Behavior, Innovation, and Alchemy (EP.16) | Infinite Loops Podcast with Jim O’Shaughnessy

Check out the Infinite Loops Podcast Page & Episode Notes

Key Takeaways

• “The trouble with market research is that people don’t think what they feel, they don’t say what they think and they don’t do what they say” David Ogilvy
• The role of Marketing in Innovation
  • You need the marketing function along the product function to spread innovations
    • A huge part in spreading the use of vaccines was convincing people to change their behaviors and get vaccinated
    • The technology of Nespresso did not take off until it was popularized as a lifestyle brand by George Clooney
    • Steve Jobs was a great marketer
• In corporations, people often make decisions with the aim of avoiding blame
  • Quality of reasoning becomes more important than the outcome
• “Math can give us a lot of confidence in our own wrongness” – Rory Sutherland
• The way you frame a product totally changes consumers perception and behavior
• Great marketers know that tiny improvements can achieve tremendous results

Key Products Mentioned

• Rory’s book: Alchemy: The Dark Art and Curious Science of Creating Magic in Brands, Business, and Life
• Zen and the Art of Motorcycle Maintenance by Robert Pirsig in regard to Pirsig’s quest to find “What Quality Is” and how it relates to Rory’s book
• Rory was inspired to look at the economy as a naturalist by Robert Frank’s books The Economic Naturalist: In Search of Explanations for Everyday Enigmas and The Darwin Economy: Liberty, Competition, and the Common Good
• Jim mentioned Talking to Strangers by Malcolm Gladwell while talking about the Amanda Knox case

Intro

• Rory Sutherland (@rorysutherland) is a best-selling author and Vice Chairman of Ogilvy Group, one of the largest advertising agencies in the World
• Host – Jim O’Shaughnessy (@jposhaughnessy)
• In this chat, Rory discusses the importance of marketing in innovation and the insights he learned by studying human psychology

Market Research and Human Behavior

• You cannot rely on logic or on what people say for your market research
  • “The trouble with market research is that people don’t think what they feel, they don’t say what they think and they don’t do what they say” David Ogilvy
  • Many billion-dollar businesses targeted markets that could have never been thought of by asking customers
    • Examples of Starbucks, Nespresso, Dyson, Uber
• We think we can predict how we will behave, but we are wrong
  • Our behavior is mostly driven by our emotions
    • We don’t have accurate introspection about our emotions, but we think that we do
    • The brain thinks it is making decisions while it is only rationalizing them after the fact
      • It thinks it’s the President issuing executive orders
      • In reality, it is the Press Secretary confabulating plausible-sounding explanations for decisions taken somewhere else

Reason, Innovation and Marketing

• In corporations, people often make decisions with the aim of avoiding blame
  • Quality of reasoning becomes more important than the outcome
    • You can’t be blamed if your decision was “reasonable”
  • This makes it impossible (except for entrepreneurs) to experiment with counter-intuitive solutions
    • In complex systems answers often are counter-intuitive
    • This explains why entrepreneurial companies innovate more
• Innovation is a backward-process
  • Practitioners make the progress, which later is codified by scientists and academics
• The role of Marketing in Innovation
  • You need the marketing function along the product function to spread innovations
    • A huge part in spreading the use of vaccines was convincing people to change their behaviors and get vaccinated
    • The technology of Nespresso did not take off until it was popularized as a lifestyle brand by George Clooney
    • Steve Jobs was a great marketer

Leveraging Selfish Reasons for Community Benefit

• One of the main improvements in public health was that people wash regularly
  • Soap advertisements never encouraged people to wash themselves to prevent community disease
    • The message was that people who didn’t use soap would smell and be lonely
      • It doesn’t matter that people used soap for selfish reasons, it achieved the socially beneficial objective
• Pure altruistic reasons sometimes get in the way of the success of social movements
  • They work on a few individuals but they don’t scale
• Tesla cars appeal to people who don’t care about the environment

Human Have a Need for Certainty

• We get very dissatisfied when we know we don’t have information
  • People feel less upset when you tell them their flight was delayed by 90 minutes, then if you just say it was delayed
    • Knowing how long they have to wait, they can arrange their time
• Uber’s success leveraged our need for certainty
  • With Uber, you know exactly where your driver is and when it will pick you up

Framing Is Everything

• The way you frame a product totally changes consumers perception and behavior
  • It’s a way to arbitrage human nature
• Nespresso was able to sell because it made customers compare it to Starbucks, not home coffee
• To convince his dad to buy Cable TV, Rory compared it to his daily newspaper expenditure
  • Once he showed that Cable would cost $0.66/day, against the $2 his dad was spending on newspapers, buying cable became a no-brainer

Beyond Determinism there’s Magic

• “We are deterministic beings living in a probabilistic world” – Jim O’Shaughnessy
  • Aristotle’s influence contributed to making us so deterministic
    • Everything is either yes/no, on/off, black/white
      • But that’s not how the real world works
• By being so deterministic, we lose the possibility for magic
  • We assume that to improve travel we must make the journey faster
    • Great marketers know that tiny improvements can achieve tremendous results
      • Virgin gained an edge by introducing the entertaining system for coach passengers
        • It was a small cost for the airline, but it totally shifted consumers’ perspective
• Advertising may look least effective when it’s doing the most work
  • It takes time to change social norms
  • Early on, advertising may look like it’s not bringing results, while it is shifting people’s attitudes
    • Later advertising may look more effective
    • But its effectiveness may depend on the earlier campaigns

Why Business Decisions are More Affected by Bias

• In personal decision-making, you don’t have to justify all your decisions
  • You can rely on heuristics and intuition which you don’t fully understand
• In a business environment, we are forced to justify every decision on a spreadsheet
• Learning to become comfortable with uncertainty allows you to take advantage of massive opportunities that you otherwise couldn’t pursue
  • “Doubt is certainly not a pleasant condition, but certainty is absurd” Voltaire

The Economy and Innovation

• Unintentionally, markets allow for creativity to continue indefinitely
  • Many of the products we love the most sounded crazy before they were brought to market
    • Who could have thought that people would pay $700 for a Dyson vacuum cleaner?
    • Who could have predicted that Zoom could emerge against some of the biggest tech companies in the world (Google, Microsoft)?
• “Capitalism is the world’s best-funded social science experiment” – Rory Sutherland
  • You should look at markets not as an economist, but as a naturalist
    • Ask: why does Dyson exist?
  • Rory was inspired in this by Robert Frank’s books The Economic Naturalist: In Search of Explanations for Everyday Enigmas and The Darwin Economy: Liberty, Competition, and the Common Good

Stated Preferences and Virtue Signaling

• **By virtue-signaling, people tend to not reveal their true preferences **
  • In the 2016 US election polls, many people didn’t reveal their preference for Donald Trump
  • People tend to adopt the most visible “environmentally friendly” measures to show-off
    • While they don’t adopt other important measures that can’t be easily seen from the outside
  • “Don’t tell me what you think, show me what’s in your portfolio” Nassim Taleb
• The most passionate devotees of a cause tend to hurt it more than help it
  • They virtue-signal so much, they become an obstacle to the cause
    • Super-strict vegans make veganism less attainable for other people
      • Doing so they put off moderates and end up hurting their cause

Tweaking the Tax System to Reveal Preferences

• Rory suggests turning tax cuts into optional tax rebates
  • People could decide whether to accept the full rebate or to donate part of it to a particular cause
    • This would increase donations because it’s easier to forego a benefit than to make a loss
  • Making the names of those who donate publicly available would create ‘skin in the game’ and reveal true preferences

On the Dangers of Math

• “Math can give us a lot of confidence in our own wrongness” – Rory Sutherland
  • You can pick a certain statistic and state it out of context, and it can be presented as an undeniable fact
    • In reality, without more complete information, that fact may be incredibly misleading
• The number of people who think they understand statistics is much larger than those who actually do
  • Most politicians are not experts in mathematics or statistics
• “Inflation is the sneakiest tax in the world, because people don’t understand it” – Jim O’Shaughnessy

Additional Notes

• We are mimetically driven
  • If you leave people to their own devices, they will copy other people
  • That’s why Zoom was so slow to take off until the pandemic
    • Everybody else was having physical meetings, virtual ones were considered “unusual”

Infinite Loops : innovation, marketing, psychology
Notes By Giorgio Parlato