Highlights: Alchemy

I recently gave his book to a friend of mine which was a good opportunity for me to write up Rory’s insights that stuck with me over the years (I’m a giant fan). The book is a good recap of many of Rory’s findings over 30 years of studying modern consumerism – “the Galapagos Islands of human weirdness” – but I’m also including stuff from his talks, articles etc.

Rory’s core insight

Reductionist logic has proven so reliable in the physical sciences, we now believe it must be applicable everywhere – even in the much messier field of human affairs.

Modern consumerism is the best-funded social science experiment in the world, the Galapagos Islands of human weirdness.

Why we have evolved to behave in seemingly illogical ways:

  • Signaling
  • Subconscious hacking
  • Satisficing
  • Psychophysics

These summaries don’t really capture it – we have to get into examples (they’re also much more fun)

The GPS

The GPS is blind to solutions outside of its frame of reference.

  • When looking for a route to catch my flight I want to minimise variance not maximise for average speed
  • If you select public transport, it will assume I don’t own a car, but maybe I want to do a mix of car / public transport
  • Doesn’t recommend routes for scenary, eg if I’m on holiday

Buying bed linen

I was reminded of this recently when my wife and I were buying bed linen. After wondering 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 emotional rewards.

Having to fit the ideas of the dominent cabal

  • In the 18th century, John Harrison – a self-taught clock-maker – was the first to establish longitude to within half a degree of a journey from England to the West Indies, for which a large prize was to be awarded. He wasn’t awarded the prize because only astronomers were on the committee – they were expecting a solution based on celestial measurement not clocks!
  • When the Wright brothers – bicycle shop owners from Ohio – flew their manned heavier-than air device on North Carolina’s Outer Banks, the US government refused to acknowledge it.
  • In 1847, when Ignaz Semmelweis decisively proved that hand-washing by doctors would cut the incidence of puerperal fever, a condition that could be fatal during childbirth, he was spurned.

It seems safer to create an artificial model that allows one logical solution and to claim that the decision was driven by ‘facts’ rather than opinion: remember that what often matters most to those making a decision in business or government is not a successful outcome, but their ability to defend their decision, whatever the outcome may be.

Packaging

Nassim Taleb applies this rule to choosing a doctor: you don’t want the smooth, silver-haired patrician who looks straight out of central casting – you want his slightly overweight, less patrician but equally senior colleague in the ill-fitting suit. The former has become successful partly as a result of his appearance, the latter despite of it.

Economist options

Adding the middle option led to a massive increase in subs for the bottom option.

Deploy the ‘Goldilocks effect’ – the natural human bias that means that, when presented with three options, we are most likely to choose the one in the middle. Washing detergent manufacturers use language that normalises the lower and middle usage of the product, while implicitly stigmatising overdosing. For example, ‘Half a capful for light–normal wash’; ‘One capful for a full or heavy wash’; ‘Two capfuls for extreme soiling.’ This creates the impression that one would only use more than one capful if they had committed some brutal crime: as a result, even overdosers will likely use only one cap.

The danger of technocratic elites

A good guess which stands up to observation is still science

Food labelling

  • Frederick the Great wanting the country to cultivate more potatoes to be more resilient to famine, but no one wanted to eat it (not mentioned in the Bible, dogs don’t eat it, etc). He declared it a Royal Vegetable, started growing it with guards securing the plot, but with instructions not to secure too well. Guards showed to peasants the value and lots of people started growing it!
  • Renaming the Patagonian toothfish to Chilean sea bass, became a luxury fish
  • Goosefish -> Monkfish
  • Pilchards renamed to Cornish Sardines, sales rocketed and it saved a lot of the Cornish fishing industry

Why less is sometimes more

  • Google is Yahoo without all the extraneous crap
  • Twitter raison d’etre is the character limit
  • McDonald’s deleted 99% of traditional diner menu
  • Low-cost airlines competed on the basis of what you didn’t get (price looks too good to be true otherwise)

Black cabs & signaling

  • Passing The Knowledge is a huge signaling show. You trust this person a lot more than someone who just rented a Prius and a Tom-tom.

Longevity of business relationship

  • The “tourist restaurant” approach: try to make as much money as possible from a single visit
  • The “local pub” approach, where you will profit more over time by encouraging them to come back

One of the reasons customer service is such a strong indicator of how we judge a company is because we are aware that it costs time and money to provide.

Signaling has to be expensive.

Placebo

  • Placebo works
  • “Closed door” buttons in elevators (or “wait” signs at pedestrian crossings) often do nothing. They are, in effect, a civilised alternative to a punching bag.
  • Delivery apps showing you all the steps of the creation / delivery process, a lot probably automated, effectively telling you “relax, we haven’t forgotten about you”
  • Red Bull needs to taste a bit shit for it to work
  • Night Nurse medicine needs to tell you you can’t take it for 4 nights in a row

Satisficing

The idea, most simply expressed, is this: ‘People do not choose Brand A over Brand B because they think Brand A is better, but because they are more certain that it is good.’

  • “No one gets fired for buying IBM”
  • Your assistant won’t book you to Newark Airport (which is objectively better) instead of JFK because JFK is the default popular choice, and if something goes wrong she’d be in trouble for not taking the mainstream choice

Psychophysics

You may have never heard the term ‘psychophysics’, which is essentially the study of how the neurobiology of perception varies among different species, and how what we see, hear, taste and feel differs from ‘objective’ reality. For instance, different species, as I will soon explain, perceive colour very differently, since receptors in the eyes are sensitised to different parts of the light spectrum. More importantly, our different senses – though we don’t realise this – act in concert; what we see affects what we hear, and what we feel affects what we taste.

A few years ago, the British chocolate manufacturer Cadbury’s received a large number of customer complaints, claiming that they had changed the taste of their Dairy Milk brand. They were at first baffled, because the formulation hadn’t been altered for years. However, what they had done was change the shapes of the blocks you would break off a bar, rounding their corners. And smoother shapes taste sweeter. Truly.

Why discounts work

Every day, companies or governments wrongly make highly simplistic assumptions about what people care about. Two major US retailers, JCPenney and Macy’s, both fell foul of this misunderstanding when they tried to reduce their reliance on couponing and sales, and instead simply reduced their permanent prices. In both cases, the strategy was a commercial disaster. People didn’t want low prices – they wanted concrete savings. One possible explanation for this is that we are psychologically rivalrous, and like to feel we are getting a better deal than other people. If everyone can pay a low price, the thrill of having won out over other people disappears; a quantifiable saving makes one feel smart, while paying the same low prices as everyone else just makes us feel like cheapskates. Another possible explanation is that a low price, unlike a discount, does not allow people any scope to write a more cheerful narrative about a purchase after the event – ‘I saved £33’, rather than ‘I spent £45’.

“Just add an egg”, IKEA self-assembly, Meal Kits

In the 1950s, the General Mills food company launched a line of cake mixes under the Betty Crocker brand that included all the dry ingredients, including milk and eggs. All you needed to do was add water, mix and stick the pan in the oven – what could go wrong? However, despite the many benefits of this miracle product, it did not sell well, and even the Betty Crocker name could not convince anyone to buy it. General Mills brought in a team of psychologists to find out why consumers were avoiding it. One of their explanations was guilt: the product was so damned easy to make compared to traditional baking that people felt they were cheating. The fact that the cake tasted excellent and received plaudits didn’t help – this simply meant that the ‘cook’ felt awkward about getting more credit than they had earned. In response to these results, General Mills added a little psycho-logical alchemy – or ‘benign bullshit’. They revised the instructions on the packaging to make baking less convenient: as well as water, the housewife was charged with adding ‘a real egg’ to the ingredients. When they relaunched the range with the slogan ‘Just Add an Egg’, sales shot up. The psychologists believed that doing a little more work made women feel less guilty, while still saving time, but making just enough effort to give the sense of having contributed to the cake’s creation.

There is a name for the addition of consumer effort to increase someone’s estimation of value. It should perhaps be called the Betty Crocker effect, since they spotted it first, but it’s instead known as the IKEA effect, because the furniture chain’s eccentric billionaire founder Ingvar Kamprad was convinced that the effort invested in buying and assembling his company’s furniture added to its perceived value. When working with IKEA I was once advised: ‘Do not, under any circumstances, suggest ways of making the IKEA experience more convenient. If you do, we shall fire you on the spot.’

The surprising brilliance of meal kits – Spectator column

Admitting Downside

Robert Cialdini has observed that, as you are closing a sale, the admission of a downside oddly adds persuasive power: ‘Yes, it is expensive, but you’ll soon find it’s worth it,’ seems to be a strangely persuasive construction – explicitly mentioning a product’s weakness enables people to downplay its importance and accept the trade-off, rather than endlessly worrying about the potential downside. If you are introducing a new product, it might pay to bear this in mind.

The $300m button

“Continue as guest” was actually just a reframing of options that were already available.

The first-time users were annoyed they had to register to complete their purchase: “I’m not here to be in a relationship. I just want to buy something.” The repeat users were also annoyed. Most of them couldn’t remember their login and password.

The improvement they tested was simple. They replaced the “Register” button with “Continue as Guest”, and included some reassuring copy on what would happen next:

The results were eye-popping: the number of ordering users shot up by 45%, resulting in an extra $300M that first year. Even better, 90% of the ordering users ended up creating an account as part of the checkout completion process. 

(From this post but also referenced in Alchemy)

Still or Sparkling?

I won’t be inviting you to a party at my place … Red or white? That’s not a choice. That’s two things I don’t like where I just get to choose the colour. It’s like that still or sparkling thing with water, basically the restaurant says: “you’re going to buy some expensive water you bastard, but you can choose whether it has bubbles in it or not.”

Rory’s TED talks

(2009)

(2012)

  • When cigarettes were banned indoors, you lost the key feature of being able to be by yourself outside at a party. e-cigarettes have brought this back
  • £6b spent to reduce the Eurostar journey time by 40%. For 10% of the money you could have employed supermodels to walk up and down the train and offer Champagne to passengers
  • Biggest win per pound spent of passenger satisfaction on the Underground was adding display boards with time to next train. Changes the nature of the wait
  • Royal Mail investing loads to improve 1st class mail next day delivery rates from 98% to 99% – completely wrong use of money. Like improving the food in a restaurant that stinks
  • Analgesics that are branded are more effective at reducing pain than those that aren’t. “Perception is leaky”

Interview with JCal (2020)

Lots of stuff is repeated but still worth it for new examples.

Rory’s Podcast

In which he interviews various interesting people (mostly business people) and discusses psychological solutions to many of their market’s problems

https://play.acast.com/s/on-brand-with-rory-sutherland

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